Biodiversity is becoming the next key driver of ESG
Nature is the backbone of life on Earth, maintaining the planet’s ecosystems and keeping our economies ticking. It provides valuable services, from ensuring our food supply to supplying lifesaving pharmaceuticals. Investors are becoming increasingly aware of companies’ positive and negative impacts and are starting to allocate capital accordingly.
The fortunes of many businesses are tightly entwined with nature and biodiversity. As Frank Elderson, member of the Executive Board of the European Central Bank, says: "Destroy nature, and you destroy the economy” (European Central Bank, 2023).
Services provided by biodiversity contribute more than $150 trillion to the global economy (Boston Consulting Group, 2021). The benefits range from pollinating crops and providing them with micronutrients to offering unique molecules for medicines, sustaining livelihoods in tourism, and supporting human wellbeing.
Nature is under threat from multiple angles including habitat destruction, pollution, and climatic change. And when businesses ignore their impact on biodiversity it can put them directly at risk, damaging their reputation and exposing them to legal challenges. Investors are now waking up to these risks.
Investors are also spying on opportunities. If businesses make nature conservation a priority, they could generate $10.1trn in business opportunities annually and create 395 million jobs by 2030 (World Economic Forum, 2022).
In Europe, the assets under management of funds targeting biodiversity have quadrupled in the year to September (Reuters, 2023). The sector is replicating the trajectory of climate-targeting funds, which had been the primary driver of the environmental, social, and governance (“ESG”) movement over the last decade. The overall ESG sector softened during 2022 but biodiversity funds appear set to drive its resurgence.
While European markets are unsurprisingly at the vanguard of the biodiversity trend, it is highly likely that other developed markets will follow closely behind. The COP15 biodiversity summit culminated in 190 countries signing up to the 30/30 pledge, to protect 30% of ecosystems by 2030. Investor groups are also gaining substantial momentum, such as the Finance for Biodiversity Foundation that has attracted 153 signatories across 24 countries, collectively managing €21.4 trillion (Finance for Biodiversity Foundation, 2023).
Regulation will be an essential supporting pillar for biodiversity funds. The United Nation’s Global Biodiversity Framework was signed by 196 nations in December last year (United Nations, 2023) so we can expect regulation to proliferate globally. Meanwhile, the Taskforce on Nature-related Financial Disclosures (“TNFD”) rolled out its framework and guidelines in September, following in the footsteps of the successful climate-related equivalent, the Task Force on Climate-related Financial Disclosures.
The TNFD framework
The TNFD recommendations and guidelines help businesses navigate nature-related financial risks and opportunities (TNFD, 2023). The TNFD framework urges companies to:
- Notice and assess their nature-related risks and opportunities.
- Craft and execute strategies to effectively address these inherent risks and identify opportunities.
- Disclose their nature-related risks and opportunities transparently, providing crucial insights for investors and stakeholders.
By weaving in the conservation of biodiversity into their operational and strategic blueprints, businesses can gain substantial benefits. These include reducing costs, heightening resilience to environmental changes, and enhancing their reputation (McKinsey & Company, 2019). Initiatives such as water preservation, establishing eco-tourism, and embracing nature-based solutions could simultaneously bolster global biodiversity, ignite innovation, and drive growth.
Benefits for business
Following the TNFD guidelines and sharing nature-related risks and opportunities transparently offers several substantial benefits:
- Biodiversity conservation and enhanced risk management: Proactively assessing nature-related risks empowers businesses to effectively manage vulnerabilities.
- Financial stability and fostering innovation: The TNFD framework fosters innovation by activating the development of nature-positive solutions, products, and services that align seamlessly with sustainability goals.
- Competitive advantage: Transparent reporting of nature-related impacts sets businesses apart, attracting environmentally conscious customers, investors, and partners.
- Enhanced access to capital: Companies that divulge their nature-related performance may gain improved access to capital and enjoy reduced borrowing costs.
Embracing biodiversity when the movement is in its early stages allows asset managers to benefit from an investment trend that may be as powerful over the coming decade as climate action was over the previous one. While it presents formidable challenges for companies otherwise focused on creating wealth for their clients, with appropriate advice, data, and support, any such obstacles can be overcome.
We're here to help
Our ESG teams combine passion with practical solutions. We can help you turn sustainable ambitions into actionable strategies. If you need a hand with these initiatives, our experienced team is ready to assist. Embracing biodiversity through the TNFD framework doesn't just fortify your business; it safeguards our planet's diverse ecosystems and offers clear business opportunities.
To find out more, please contact the team
Attwell, W (2023) Why biodiversity is about to go mainstream in ESG investing. Reuters. Available at: https://www.reuters.com/sustainability/land-use-biodiversity/comment-why-biodiversity-is-about-go-mainstream-esg-investing-2023-10-26/
European Central Bank (2023) Interview with the Financial Times. Available at: https://www.ecb.europa.eu/press/inter/date/2023/html/ecb.in230608~7247c0aaca.en.html
Finance for Biodiversity Foundation (2023) Finance for biodiversity pledge reaches 153 signatories, 14 new financial institutions announced at EBNS. Available at: https://www.financeforbiodiversity.org/finance-for-biodiversity-pledge-reaches-153-signatories-14-new-financial-institutions-announced-at-ebns/
Kurth, T., Meyer zum Felde, A., Portafaix, A., Wübbels, G. and Zielcke, S. (2021) The Biodiversity Crisis Is a Business Crisis. Boston Consulting Group. Available at: https://www.bcg.com/publications/2021/biodiversity-loss-business-implications-responses
McKinsey & Company (2019) Five ways that ESG creates value. Available at: https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Strategy%20and%20Corporate%20Finance/Our%20Insights/Five%20ways%20that%20ESG%20creates%20value/Five-ways-that-ESG-creates-value.ashx
Taskforce on Nature-related Financial Disclosures (2023) Taskforce on Nature-related Financial Disclosures (TNFD) Recommendations. Available at: https://tnfd.global/publication/recommendations-of-the-taskforce-on-nature-related-financial-disclosures/
United Nations Environment Programme (2023) The Global Biodiversity Framework – what’s next for financial policy and regulation? Available at: https://www.unepfi.org/themes/ecosystems/the-global-biodiversity-framework-whats-next-for-financial-policy-and-regulation/
World Economic Forum (2022) Scaling Investments in Nature: The Next Critical Frontier for Private Sector Leadership. Available at: https://www3.weforum.org/docs/WEF_Scaling_Investments_in_Nature_2022.pdf