Biodiversity and ecosystem collapse rank as the 4th major global risk, with a focus on sustainability analysis.
Ecosystem services generate $44 trillion annually but have suffered significant depletion, especially in commodities industries.
The Taskforce on Nature-Related Financial Disclosures (TFND) launched its framework and it is gaining traction in addressing this risk.
Policymakers are enacting global and regional agreements to conserve nature, including the Kunming Framework and UN efforts on plastic waste.
Financial risk experts play a vital role in ensuring accurate biodiversity reporting and standards for responsible investing.
Biodiversity and ecosystem collapse is the 4th biggest global risk in the next 10 years according to World Economic Forum's Global Risks Report 2023. Andrew Wetzel’s F.L. Putnam's newsletter highlighted these risks, noting that “Economists, investors, regulators, and other stakeholder groups are all increasingly focusing on natural capital and biodiversity as the next frontier in sustainability analysis.”
Ecosystem services generate a staggering $44 trillion of value per year according to a May 2023 Kepler Cheuvreux report. Despite this tremendous value, we have lost 40 percent of our natural capital per person, 33 percent of our forests, and 60 percent of our vertebrate species. Commodities industries dependent on these ecosystem services have the largest negative impact.
With the recent release of the Taskforce on Nature-Related Financial Disclosures (TFND) final recommendations, Central and commercial banks seem to finally grasp the need to address this issue as a significant risk to economic, financial, and social stability. Those that adhere to the TFND framework disclose based on the nature-related material impacts of their “direct, upstream, downstream, and financed operations (specifically for financial institutions).”
Furthermore, policymakers have begun to act, instituting international and regional agreements such as the Convention on Biological Diversity, the Kunming-Montreal Global Biodiversity Framework, the EU Regulation on Deforestation-Free Goods (EUDR) and country-specific legislation. The Kunming Framework commits governments to conserving nearly a third of Earth for nature by 2030, while respecting indigenous and traditional territories in the expansion of new protected areas. Some governments have reached an agreement to protect the high seas, paving the way for the creation of more marine protected areas. UN INC-2 is creating a legally binding treaty to regulate plastic waste, which is one of the main drivers of biodiversity loss. Some countries are working with the private sector to enter into "debt-for-nature swaps”. Blue bonds and other similar instruments are expanding.
Many private sector led stakeholder groups are developing yet often do not engage the Earth’s best stewards, such as Indigenous Peoples, First Nations and professional ecologists.
That is beginning to change. In August, 186 countries launched the Global Biodiversity Framework Fund (GBFF). It allocates 20 percent of raised funds dedicated to preserving biodiversity (now at $159.38 million) to indigenous groups. Small Island Developing States and Least Developed Countries will receive a third of raised funds. These allocations, originally proposed by Brazil and Colombia, were well received by present Global South countries. China committed to integrating its funds into ongoing national initiatives.
Where do financial risk experts come in? Given the reputational and financial risk around depleting natural capital, rigorous natural capital reporting standards ensure accurate information for investors and prevent greenwashing. Prominent organizations creating standards for measuring and protecting biodiversity include the TNFD, The United Nations Environmental Programme Finance Initiative (UNEPFI), The International Corporate Governance Network (ICGN), The International Union for Conservation of Nature (IUCN), Science Based Targets Network (SBTN), and the Capitals Coalition.
Investors beware. As biodiversity protection becomes increasingly popular, metrics for measuring impact are being rolled out to stakeholders. A long list of metrics which are not biodiversity measures including carbon emissions, acidification, eutrophication, water use, chemicals are being packaged as such. This is leaving actual biodiversity indicators, such as focus of small species (e.g. birds, pollinators, mammals), large orders of high importance (e.g. insects), measures of genetic diversity (e.g. from eDNA and fecal samples), impacted ecosystem extent and condition to the wayside. Institutions should be careful to employ financial risk experts with professional ecologists who utilize current and reputed biodiversity standards.
Responsible Alpha guides companies through the critical, complex, and growing regulatory landscape with our team of financial and ecological experts.
Gabriel Thoumi, CFA, FRM, Certified Ecologist
Travis Knoll, PhD