Geneva, February 13th, 2023
Author: Dries Cornilly, CAIA, Investment Manager, Asteria Obviam
It is human nature to overestimate one’s capabilities and underestimate the time required to finish a project. The difficulties only increase when complexity is added, rendering planning extremely fragile. Of the 20 targets[1] set in 2010 by the UN’s Convention on Biological Diversity to try and slow down (and later halt) the loss of biodiversity, none have been fully achieved and only 6 were ‘partially achieved’[2].
Biodiversity is the natural world around us, the variety of all kinds of organisms, how they live together in delicately balanced and connected ecosystems and how they maintain and support life on earth. Without biodiversity, our entire system would collapse. We rely on nature for clean air and water, food, carbon absorption, reducing flooding risk, protecting our coastlines, and so much more. Even many medicines and complex chemicals originate from plants.
However, there might be some light at the end of the tunnel. The Task Force for Nature-Related Financial Disclosures (TNFD) is a new global initiative which aims to give financial institutions and companies a complete picture of environmental risks. 2023 is the year they plan to deliver a framework for organisations to report and act on evolving nature-related risks, to support a shift in global financial flows away from nature-negative outcomes and toward nature-positive outcomes. If the TCFD, the TNFD’s climate-related older sibling, is anything to go by, it will take several years until investors can expect standardized nature-related data. Similarly, the Sustainable Finance Disclosure Regulation (SFDR) includes a metric related to a companies’ activities negatively affecting biodiversity-sensitive areas. In May 2021, a French decree[3] requires all financial institutions to declare biodiversity- and climate-related risks and disclose their strategy for reducing biodiversity impacts. COP15 ended in December 2022 with an agreement[4] to guide global action on nature through 2030.
All these initiatives are one thing, action is another. In the meantime, lack of disclosed and reliable data gives an excuse to investors to do nothing and ignore the issue for the time being. Or worse, attract fee-generating funds through fancy over-promising marketing material, inevitably leading to nature- or biodiversity-washing future scandals. The good thing is, for motivated participants, there is already ample data and opportunity to model and estimate biodiversity impacts using physical assets data combined satellite images or detailed revenue splits by activity and geography. Granted, quality and coverage are far from optimal, but nevertheless it is possible to distinguish between different companies impacts.
Given the difficulty sometimes to distinguish real insights from wishful thinking based on marketing materials alone, there is an incentive for honest and transparent reporting. Investors should remain sceptical and avoid being oversold the current state-of-the-art. Nature-related metrics will play an increasingly important way to mitigate hidden risks for investors. We believe that being aware of its effects helps to position portfolios to avoid such risks or even benefit from a re-orientation of the economy in the long run.
[1] See https://www.cbd.int/sp/targets/
[2] Please read the full progress report for a comprehensive picture of the situation at https://www.cbd.int/gbo/gbo5/publication/gbo-5-en.pdf
[3] See https://www.legifrance.gouv.fr/jorf/id/JORFTEXT000043541738
[4] See https://www.unep.org/news-and-stories/story/cop15-ends-landmark-biodiversity-agreement
