Why is biodiversity important?
Biodiversity is the variety of all living species on Earth. It helps maintain healthy, life supporting ecosystems, including food and clean water, as well as invisible life-sustaining functions, such as flood protection, nutrient cycling, water filtration and pollination. Biodiversity is fundamental to maintaining high-quality natural capital, which is the world’s stock of natural assets, including soil, air, water and all living things. A good example of biodiversity is a single English oak tree, which is estimated to support 2,300 different species of insects, fungi, plant life and birds.
The financial impact of biodiversity
Our relationship with nature can be a delicate balance, to say the least. Businesses that directly impact or depend upon nature are typically the most exposed to nature-related risks. These risks may create disruption in companies’ activities or value chains, ultimately affecting their risk-return profile as investible assets and challenging their long-term survival.
Agriculture is a good example of potentially impacted businesses. Decreased rainfall and increased vulnerability to pests are physical risks that could threaten crop yields and reduce land value. Increased costs from switching to alternative farming methods and new drought and disease-resistant crops highlight the risk associated with transitioning to sustainable practices. And potential fines or damages due to fertilizer runoff impacting ground-water quality could expose businesses to liability risk.
The next frontier of sustainability
Constraining nature-related biodiversity risks will require significant investment in solutions, such as reforestation, regenerative agriculture and wetland restoration. According to the UN’s State of Finance for Nature report of June 20, 2023, U.S. $4.1 trillion in financing for nature protection must be bridged by 2050 to limit global warming, stop biodiversity loss and achieve land degradation neutrality.
The funding gap is seismic, however. More commitment is needed from the private sector to be effective. Currently, only 17 percent — or U.S. $26 billion per year — of total global investment in nature-based solutions comes from private industry.
As biodiversity and nature loss increase in priority, investors will need to assess the potential impacts across portfolios. Investors could potentially help to safeguard natural capital, contribute to sustainable development and mitigate financial risk by supporting companies with robust biodiversity management practices. Additionally, prioritizing products that promote sustainable land use and conservation will also be beneficial.
Spring is a great time to be earth-conscious and think about responsible investing. Contact your financial advisor to create a strategy that meets your investment goals.