Protecting nature

As our collective understanding of the importance of biodiversity and the benefits we derive from nature has rapidly improved, there is increasing global attention on driving action to conserve nature. Not only for the long-term viability of the planet but to enable economic development to progress in a more sustainable way.

This is demonstrated by the efforts of COP15 and other UN initiatives as well as the contribution to the literature on natural capital for policymakers by the likes of the World Bank and the WEF. Previously, such conversations were led by scientists and environmental activists.

With biodiversity and natural capital closely intertwined with climate change, global efforts to address the latter will further accelerate public policy efforts to not only integrate considerations of nature in broader decision making, but to drive action for its protection.

Actions will go beyond halting degradation of what remains to also include efforts to reverse damage already done to ecosystems and biodiversity loss. Doing so will require a range of responses – from the regulatory and market-based, to those driven by technological advances and local communities.

Responding as an investor

Given nature’s links to human wellbeing and the economy, biodiversity loss and damage to natural ecosystems is an investment risk. Concurrently, the need to address these negative impacts creates significant investment opportunities in the conservation and sustainable use of nature.

While this is inherently a systematic issue, investors can still consider the company-specific implications of biodiversity and natural capital. At Paradice, we have begun thinking about how we can assess nature-based risks and pursue investment opportunities to protect and enhance returns for our clients.

Assessing risk

Assessing a company’s exposure to biodiversity loss and ecosystem services requires consideration of the impact a company’s operations or products have upon the environment, as well as the extent to which it is dependent on natural capital or ecosystem services.

If a company’s activities drive significant biodiversity loss or contribute to other environmental harms they will be increasingly at risk of reputational damage, regulatory restrictions and legal liabilities. Environmental impact assessments and obligations around mine site rehabilitation obligations have been in place for the resources sector for many years. Investors have long been cognisant of sectors which produce significant amounts of waste or air pollutants in the production process (e.g. chemicals) or contribute to land clearing (e.g. agriculture).

The next frontier is understanding how companies have considered and are responding to their impact on biodiversity specifically. This requires new forms of assessment which go beyond traditional environmental impact assessments. For example, surveying proximity to protected ecosystems, the make-up of local wildlife (especially if it includes endangered species) and the extent to which operations may impact animals’ migratory patterns.

Investors are increasingly looking for evidence in company disclosures that such analysis has been done and the company is mitigating impacts as appropriate. Further, that biodiversity is increasingly being integrated into business considerations, such as specific location of sites (accommodating local ecosystems) or adoption of alternative processes (e.g. lower impact pesticides in agriculture).

Now attention is moving to other sectors where such impacts have been under-considered, such as those which occur further down the value chain. Single-use plastics and packaging is one such example, where environmental impacts of the production site may be limited but throughout the products’ lifecycle it could significantly impact biodiversity.

The other key angle for assessment relates to a company’s dependencies, given availability of natural resources and ecosystem services is at risk. Water provides an essential ecosystem service, upon which many industries heavily rely during production processes. Investors have long considered location-specific water availability, especially in regions more susceptible to drought. However, there are other ecosystem services upon which many companies rely, such as the provision of raw materials or genetic resources.

Dependencies can be local and direct (grazing land for livestock) or throughout the supply chain. Investors are increasingly looking for companies to consider what nature-based inputs are required for their key components, and to what extent these are at risk from biodiversity loss and ecosystem degradation. Further, whether risks can be mitigated, such as through geographic diversification throughout the supply chain or substituting for more sustainable materials.

Pursuing opportunities

While some may think nature-related investment opportunities are most readily available to investors in private equity and real assets, there are many publicly listed companies whose products or services offer solutions relevant to more sustainable use of resources and enabling greater protection of nature. These companies will be well positioned to benefit as global action to address biodiversity loss and protection of nature accelerates.

Many opportunities are closely linked to driving more efficient use of natural resources, especially water, land and non-regenerative resources. For example, in the agricultural sector – where the world is also seeking to address food security for a growing population – efficiencies are particularly important. Innovation and technological advances have enabled precision agriculture and vertical farming, which minimise water use and maximise crop yields.

Another set of opportunities relates to those products or services which enable reduced environmental impacts. Some solutions are more targeted, such as green pesticides for crops which reduce chemicals leaching into surrounding waterways, while others contribute to addressing system-wide issues, for instance recycling infrastructure and alternatives to single-use plastics.

Given the scale of the challenge, which requires multi-varied changes to occur throughout the global economy, we believe the opportunities in this space will only increase. The key will be for companies to provide sufficient disclosures around the environmental benefits of their products or services to secure investors’ capital.