Connecting ESG & Financial Markets II
BIODIVERSITY LOSS | UN CONFERENCE ON BIODIVERSITY
The markets are currently focused on trying to fight inflation, supply chain disruptions, and a pandemic. However, these issues are just some of the challenges they will have to face. Both climate change and the biodiversity loss are also relevant issues as well as targets that need to be met as part of the Paris Agreement.
What does the UN conference on biodiversity mean for investors?
During the last 3 years there has been a slightly growing interest on biodiversity as more than half of global GDP is dependent on nature. The WEF evaluated that climate change won’t be resolved without taking nature into account. Biodiversity conservation is a way to tackle climate change and its destruction is a threat to it. Nevertheless, most targets have not been met. At the COP15 argets to protect land, freshwater and oceans were drafted as well as others to avoid the disappearance of species such as fully eliminating plastic waste discharge and the use of pesticides.
The biodiversity momentum comes from France, the UK and the Netherlands. The EU’s biodiversity strategy is the most ambitious policy witnessed so far but its pledge to nature has seen more than 20 heads of state joining.
Which companies are going to fall into this category first?
Food production companies and agriculture activity are responsible for 80 percent of natural land conversion. The latter requires more than 70 percent of water sources to produce. The food industry emits over a quarter of CO2 emissions and produces waste and water pollutants. This, in addition to the use of pesticides, fertilizers and plastics, is not only polluting the seas and other ecosystems but also contributing to biodiversity loss.
Article 29 in France, for example, makes it compulsory for corporations to disclose their biodiversity risks, how they plan to decrease their impact and how that aligns with international law and treaties.
How ready are food producers for new regulations?
Few companies have alredy implemented measures to tackle their emissions, their use of water or their polluting activities.
Another aspect to consider is the company’s food product portfolio. We consume more animal proteins that our daily intake should be — according to that suggested by health regulatory bodies. We have been shifting towards more vegetables and fruits-based diets, which little by little reduce some of the negative impact.
Transparency in both traceability and sources is key for companies to identify the biodiversity hotspot and carry out the necessary actions to mitigate their negative impact. Food production, however, cannot be easily pivoted away.
So what will happen now?
Governments will start looking into subsidies for food production, making them harder to achieve or even revoking them. It might also open opportunities for other companies that comply with this international agreements and national regulations. For investors, this issue creates higher risk when it comes to investment returns. Some companies might get fined due to performing activities that harm the environment.
Moreover, ‘Investors are exposed to financial risk stemming from potential disruption of an investee’s operations, resulting from environmental problems. Investees’ failure to address environmental issues will jeopardise business operations and therefore potentially represent an investment risk for the investors supporting these companies’ (Foll, 2019).
VALUABLE DATA
According to estimates, ecosystems and biodiversity have an economic value that is between 10 and 100 times greater than the costs associated with conservation. Cumulative welfare losses could amount to 7% of annual consumption in 2050 (Gómez-Baggethun & Martín-López).
Biodiversity is vital to the healthy functioning of ecosystems. Healthy ecosystems provide a flow of valuable services including the provision of food, fuel and medicines, the regulation of water and air quality, nutrient cycling and many other services from which we benefit directly or indirectly.
Whilst human-made changes to ecosystems have often generated large economic gains, biodiversity loss damages the functioning of ecosystems and leads to a decline in essential services, which may have severe economic consequences, particularly in the longer term (European Commission, n.d).
Our economies depend on our natural ecosystems:
The agricultural sector on pollination services: USD 235–577 billion (US dollars) worth of annual global food production relies on the direct contribution of pollinators (IPBES, 2016).
The timber, pulp and paper sectors on forestry: forest products account for USD 247 billion in global trade exports (FAOSTAT-Forestry database, 2017).
Multiple sectors on sustainable water supply across their supply chains: the garment and footwear sector is responsible for around 20% of global wastewater use (UNECE, 2018).
The ecotourism sector on well-functioning coral reefs, which generate USD 36 billion in global tourism value per year (Spalding et al., 2017).
Our biodiversity matters.
What are your thoughts? Would you add something else?
