Take the Natural Path to Long-term Value
Michele Calcaterra, ECPI Director at Confluence and Senior Lecturer at SDA Bocconi, says managing biodiversity risks is a critical component of a resilient investment strategy.
Over half of global GDP – more than US$44 trillion in economic value – relies on nature and its services. Biodiversity loss is not just a concern for environmentalists; it is a critical factor in the stability and growth of global financial markets. Asset managers must recognise that degrading ecosystems directly impact markets, supply chains, and long-term returns.
As environmental conditions deteriorate, sectors such as agriculture, forestry, and fisheries face growing disruptions, translating into financial losses, operational instability, and declining asset values. These risks are escalating rapidly, requiring investors to proactively integrate biodiversity considerations into their decision-making.
Managing biodiversity risks is not just a ‘nice to do’ but a critical component of a resilient investment strategy. Ignoring these risks can lead to misjudged exposures, while a proactive approach can unlock long-term opportunities and sustainable value creation.
Understanding biodiversity risks
Ignoring biodiversity in investment strategies can lead to misjudged risks and missed opportunities. In fact, asset managers must recognise it as essential to financial resilience and long-term value creation.
Prominent industries such as agriculture, forestry, and fisheries, are particularly vulnerable. These sectors lose an estimated US$10 trillion annually due to ecosystem collapse.
For example, in agriculture, pollinator loss threatens crop yields, valued at over US$235 billion annually. For pharmaceuticals, nearly 25% of all modern medicines are derived from natural sources, and biodiversity loss jeopardises the discovery of new treatments. Within the insurance industry, disasters linked to ecosystem degradation, such as floods and wildfires, cost insurers over US$120 billion annually.
The developing regulatory landscape must also be understood and monitored closely. The ESG regulatory landscape is continuously evolving, and this should be a key consideration for asset managers. Non-compliant companies put themselves at risk of hefty fines or worse.
On top of the risk of fines, reputation could also be at risk. Consumers increasingly favour companies committed to sustainability and firms that are shown to obstruct environmental goals could be exposed to negative publicity – this can have dramatic financial implications.
On the contrary, for firms that prioritise biodiversity, long-term opportunities can be unlocked.
Financial opportunities
Addressing biodiversity can lead to tangible financial benefits for companies and investors alike.
Firms with robust biodiversity practices attract ESG-focused capital. ESG-related assets under management are projected to exceed US$50 trillion in 2025, reflecting the growing demand for sustainable investments.
Companies involved in reforestation, wetland restoration, and carbon credit programmes are experiencing growing demand and profitability. These nature-based solutions not only contribute to environmental conservation but also offer new revenue streams.
Sustainable supply chain practices reduce reliance on volatile resources, lowering long-term operational expenses. For example, companies that implement regenerative agriculture practices can decrease input costs while enhancing soil health and productivity.
Additionally, historical evidence shows that long-term investments in biodiversity have proven resilient during economic crises.
For example, during the Covid-19 pandemic, companies with strong ESG strategies, including biodiversity, outperformed their peers during the market downturn.
In March 2016, the National Treasury Management Agency issued Ireland’s first 100-year bond, through Ireland’s euro medium-term note programme. The issuance of ultra-long bonds tied to biodiversity conservation attracted substantial investor interest, demonstrating confidence in sustainable financial instruments.
The long-term benefits offer appealing opportunities as biodiversity presents itself as the backbone of successful and secure investment strategies.
Integrating biodiversity into investment strategies
How can asset managers actively integrate biodiversity into investment strategies? They should implement several steps to unlock long-term value by proactively considering biodiversity.
Incorporating biodiversity considerations into strategic planning processes to align business objectives with environmental sustainability goals is essential.
Biodiversity-related risks such as regulatory compliance, reputational damage and supply chain disruptions must always be considered and mitigated, and careful planning will allow for this to be achieved.
Asset managers can assess biodiversity-related risks using tools like the ENCORE platform, which identifies how businesses depend on and impact natural ecosystems. The Taskforce on Nature-related Financial Disclosures (TNFD) also provides frameworks to measure and manage nature-related risks.
Investors should also play an active role in influencing companies to adopt biodiversity-friendly practices through shareholder activism. This includes demanding biodiversity disclosures and encouraging the adoption of science-based targets for nature. Active engagement not only mitigates risks but also enhances corporate transparency and accountability.
Industry tools offer investors the ability to choose more than one index as a biodiversity benchmark, allowing for more robust and flexible comparisons of biodiversity-related investments, for example Confluence’s ESG thematic benchmarking. By investing in companies with nature-positive strategies, asset managers can hedge against biodiversity risks while generating returns aligned with sustainability goals.
Investing for the future
Biodiversity is not just an environmental issue but a critical factor in financial decision-making and sustainable investing. By understanding and managing biodiversity risks, asset owners and managers can unlock long-term value, align with evolving regulations, and attract sustainability-focused investors. Proactive engagement, strategic diversification, and adherence to regulatory guidelines will ensure portfolios are resilient and positioned for sustainable growth.
As the financial sector increasingly recognises the importance of biodiversity, the risks of inaction are clear: increased operational costs, stranded assets, and diminished portfolio performance. However, for those who embrace biodiversity as part of their investment strategy, the opportunities for growth, resilience, and innovation are unparalleled.
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