How to tackle biodiversity risk in investments
When it comes to sustainability, climate change is now front of mind for companies and their investors. But markets are also starting to wake up to what has long been a major blind spot: biodiversity loss.
The destruction of living things is occurring faster than ever. Wildlife populations have declined by an average 69 percent 1 over the past 50 years and around 1 million2 species are now threatened with extinction. At the same time, 75 percent3 of the earth’s land surface has been significantly altered by humans — rarely for the better.
This biodiversity crisis not only threatens plants and animals, but directly impacts issues from food production to water resources, air quality and the climate itself. The resulting risks for companies and their investors are significant, ranging from lower production to higher costs and supply chain disruption.
The problem: opaque supply chains
The World Bank estimates that the collapse of some ecosystem services provided by nature — such as wild pollination, food from marine fisheries and timber from native forests — could cause an annual loss of $2.7tn4 in global GDP by 2030. Yet in the UK, for example, only three percent5 of businesses actively monitor nature and biodiversity risks. This disconnect raises an obvious question: how can investors protect themselves from these systemic risks?
The biggest issue facing investors coming to grips with biodiversity loss is a lack of data, as well as the understanding of where it can be found. Much of a company’s impact on nature is invisible within its direct operations and requires digging deep into supply chains.
Take land use change: deforestation driven by agriculture is one of the largest drivers of biodiversity loss — making it an easy lever to pull for investors to reduce their risk exposure.
At Cardano, we have specifically scrutinised supply chains for palm oil, a high-yielding crop widely used in food and consumer products. Its efficiency provides a strong economic incentive to clear natural forests for palm oil plantations in countries such as Malaysia and Indonesia, destroying critical habitat for countless species. Aside from biodiversity loss, the knock-on effects of forest clearance range from soil erosion to water pollution — which, in turn, impact future productivity from the land and thus drive even more deforestation.
But many large companies are far removed from the source of these environmental impacts: a major food producer will source its palm oil from a trader, who works with a local refinery, which buys from individual plantation owners.
The solution: empowered engagement
This tangled supply chain presents a major hurdle for public markets’ most effective tool: engagement. Without concrete proof of exposure to risks such as deforestation in its supply chain, it can be hard to get a company to closely examine, and address, nature-related financial risks.
The simple answer to this problem is better data. But with publicly available data hard to come by, the only way to effectively hold businesses to account involves privately funding the necessary supply chain intelligence.
To assess these nature-related risks, we are using satellite data and asset-based analytics, provided by Satelligence, to monitor the expansion of palm oil plantations and quantify the resulting loss in vegetation and forests. Crucially, this includes tying those impacts to specific businesses.
The deeper insights gained from this intelligence gives us the ability to engage much more effectively with major companies in which we invest, such as Carrefour, Danone and Pepsi, and pressure them to address biodiversity-related impacts throughout their own supply chains.
In one example, using Satelligence reports helped us launch a dialogue with Danone to compare how the incidents we found matched up with those flagged by the company’s own grievance monitoring, and whether any palm oil mills linked to deforestation were still present in its supply chain. The reports demonstrated how Danone implements its zero-deforestation policies in practice. We found out that incidents tied to its supply chain were either addressed or the palm oil mills were removed from their sourcing list.
The range of solutions we are discussing with other companies include regenerative agriculture techniques and landscape programmes, plant-based beef alternatives and financing targets.
We are also expanding this initiative beyond palm oil to other commodities including soy and cocoa. Soy grown as a food product and feed for cattle has driven deforestation in the Amazon, for example6. Quantifying the extent of the biodiversity loss will help us drive a conversation with major soy producers and others exposed to soy supply chains.
As well as using this data to engage with investee companies, we urge them to adopt similar techniques in their own supply chain management. Many have now integrated satellite monitoring, with faster detection of deforestation incidents allowing them to more effectively scrutinise their suppliers.
The future: enhanced accountability
After pinpointing a company’s biodiversity impacts, and pushing management to address them, another issue quickly arises: how to measure efforts to reduce environmental impact?
Obtaining reliable data and real-time insights can be a challenge — but solutions are increasingly available. Since 2022, we have worked with Green Praxis, a start-up that provides solutions for natural asset management, to conduct a bioacoustic study for measuring the biodiversity of various forest habitats.
The concept is simple: microphones are used to record animal sounds in an intact forest, a working plantation and a reforested area. The results, collected during a pilot study in Indonesia, clearly show vastly improved species abundance in conservation areas, even if they lag behind unspoiled areas. This will help us to better demonstrate the effectiveness of remedial action, and inform how we engage with our investees.
In practice, our findings could be used to demonstrate the effectiveness of wildlife corridors, for example. Reforesting connected areas can be a major boost to biodiversity, while also reducing crop damage and human conflict with animals: a win-win situation.
This project is still the research phase, but we believe cutting-edge solutions, such as bioacoustics will be valuable tools to help hold companies to account beyond their commitments for change and track how effective their supply chain initiatives are on the ground.
Beyond traditional engagement
An increasing number of investor groups are lending weight to biodiversity stewardship. Cardano leads on investor engagement with several companies as part of the Principles for Responsible Investment’s Spring stewardship initiative and Nature Action 100, which both contribute towards the global goal of halting and reversing biodiversity loss by 2030.
Greater disclosures around supply chains and stronger reporting of nature-related impacts are crucial to enhance investors’ ability to assess these risks and engage in the first place. To this end, we are also early adopters of the Taskforce on Nature-related Financial Disclosures to help drive deeper integration of nature into decision-making.
To be as effective as possible when engaging with companies, however, our own experience shows that asset managers need to look beyond simply pushing companies to assess their impacts and risk exposure. Investing into data solutions to improve our own due diligence has made us better stewards across the board.
For trustees, the best way to make a difference is to appoint an asset manager who is deeply committed to having a real-world impact: who will invest in gathering the necessary data, initiate the right conversations and hold companies to account when needed.
After all, effective engagement also requires a consistent approach to raise the pressure when companies fail to respond after a respectful dialogue. In practice, that means a manager willing to co-file shareholder resolutions, vote against directors and management, and, as a last resort, divest from the company. Trustees should ask to see evidence of such activities from their asset managers.
Gaining the data to meaningfully engage with companies on their impact, and then using it to help develop a strategy to reduce biodiversity loss, has fundamentally changed our conversations with the companies in which we invest. With the right tools, we hope that more investors can turn biodiversity from a risky blind spot into an opportunity to drive meaningful change.
1https://www.weforum.org/agenda/2022/10/nature-loss-biodiversity-wwf/#
2https://www.ipbes.net/news/Media-Release-Global-Assessment
