Biodiversity – why it matters and how to make your portfolio nature positive

Biodiversity is declining at an alarming rate and preventing this is becoming a new frontier in sustainable investment.

Biodiversity is all the different kinds of living organisms in one area. From the variety of animals to plants, fungi, and even microorganisms like bacteria that make up our natural world.

The World Wildlife Fund’s 2022 Living Planet Index revealed that mammals, birds, amphibians, reptiles, and fish have declined by an average of 69% since 1970. The report identifies several key drivers of biodiversity decline including habitat loss, species overexploitation, invasive species, pollution, climate change and diseases.

This is calling for governments and businesses globally to assess how they can strive to be ‘nature positive’, as well as ‘net zero’.

While net zero encourages companies to reduce their greenhouse gas emissions, nature positive means enhancing the resilience of our planet and societies to halt and reverse nature loss. This involves reducing our negative impact on nature and biodiversity, and proactively taking action to restore and replenish.

Biodiversity loss presents a great challenge to society, which also brings investment opportunities. We look at why biodiversity is important to investors and how you can include this in your portfolio.

This article isn’t financial advice. If you're not sure if an investment is right for you, ask for financial advice. All investments can fall as well as rise in value, so you could get back less than you invest.

Why is biodiversity important for investors?

Biosphere integrity is one of the nine planetary boundaries. These represent the limits within which human civilisation can safely operate. Crossing these boundaries increases the risk of generating large-scale abrupt or irreversible environmental changes, and the biosphere integrity boundary has already been crossed leading to biodiversity loss and extinction.

This doesn’t mean it’s too late to act, but brings preserving biodiversity to the top of the world’s list of priorities.

What’s more, healthy ecosystems and biodiversity are the backbone of many communities’ livelihoods. Biodiversity supports our food, clean water, medicine, shelter, and economy. In fact, half of the world’s GDP depends on nature and 75% of the world’s poor rely on agriculture for their livelihood.

Without healthy biodiversity, we can’t have a healthy economy.

What are governments doing?

The UN Biodiversity Conference (COP 15) takes place in December in Canada. It will be the biggest biodiversity conference in a decade.

The conference should result in an increase in funding for nature and a dedicated portion of climate finance for biodiversity. And as half the planet’s habitable land surface is used for agriculture, it’s expected there will be a focus on land use.

The UK government’s pledged ‘30 by 30’ – to protect 30% of land and ocean by 2030. However, lots of campaigners have stressed that the country isn’t on course to meet this target. Two years on from the commitment, only 3% of England’s land is effectively protected and managed.

With Rishi Sunak now in office, he has assured the cabinet that he will run an ‘environmentally focused government’. Time will tell whether the UK will protect and restore biodiversity at the rates necessary.

What are companies doing?

Biodiversity loss awareness might be growing, but there’s still some uncertainty around how companies can assess their impact on nature.

The Taskforce on Nature-related Financial Disclosures (TNFD) is due to release their framework next year. The global initiative aims to outline how companies can assess how they positively or negatively impact nature, and how nature impacts the company’s financial performance or long-term risks.

This means investors will be able to assess companies’ TNFD reports, as they can with companies that have disclosed against the Taskforce on Climate-related Financial Disclosures.

What are fund managers doing?

Lots of fund managers don’t want to risk being behind the curve with biodiversity, as many have been with climate change. This is why lots of the managers we talk to are incorporating biodiversity metrics into their wider ESG assessment. But also engaging on biodiversity-related topics with the companies they invest in.

Deirdre Cooper and Graeme Baker, lead managers of the Ninety One Global Environment Fund, aim to deliver ‘sustainability with substance’ through deep analyses on companies’ services and products. This helps the team understand how the companies and their suppliers impact biodiversity.

Biodiversity also features as a core engagement theme for the fund. For example, they’ve been engaging with Croda, a leading bio-based chemical producer, on its decarbonisation efforts. This year they’ve expanded their discussions with the company to include its broader impacts on our natural capital. They’ve set an engagement goal to encourage the company to set targets and report on land use and biodiversity.

Legal & General is another fund group championing biodiversity. Their biodiversity policy outlines their belief that it’s vital companies pro-actively consider and address issues of biodiversity to generate sustainable outcomes and value for all stakeholders. This broader commitment to hold companies to account means they now consider biodiversity as a core metric in their ESG scoring.

For the Legal & General’s Future World ESG Developed Index Fund, this ESG score dictates the capital allocation of the fund. The fund will invest more in companies that score higher, and those scoring low will most likely be underweighted.

Most responsible funds produce a Sustainability, ESG or Impact Report. This often outlines their approach to ESG integration and priorities for engagement. You can find these on individual fund groups’ websites.

Learn more about different approaches to responsible investment

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