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09 Oct 2022

Biodiversity quickly rises up the ESG investing agenda

Biodiversity quickly rises up the ESG investing agenda

Two recent deals by one of Britain’s top asset managers point to the next big theme in responsible investing: biodiversity, without which the planet has “no route to net zero”. Schroders, which manages £770bn in assets, last year bought a minority stake in data provider Natural Capital Research and then, in July, entered into a partnership with Conservation International to invest in “natural capital” across south-east Asia.

The deals reflect a belief that what gets measured gets managed — and client demand for investments that have a positive impact on the environment while also making a financial return. “I’ve made natural capital a big priority for us,” says Peter Harrison, chief executive of Schroders. “I think you’re going to see a very significant amount of money flow into natural capital as people figure out that nature is a very large proportion of the answer to decarbonisation.

There is no route to net zero without biodiversity.” Biodiversity is the living component of natural capital — a term for the stock of renewable and non­renewable natural resources such as carbon, water, soils, species, communities, habitats and landscapes. It refers to species but also ecosystems, such as forests and coral reefs, which perform functions such as crop pollination, carbon sequestration, climate regulation, and flood protection.

However, scientists believe human mismanagement of the environment — notably through resource extraction, intensive agriculture, and climate change — is precipitating a sixth great extinction of plants and animals in Earth’s history. And coronavirus has further focused attention on mankind’s relationship with nature, after the wet market in the Chinese city of Wuhan, where both live and dead animals were sold for human consumption, emerged as the likely origin of the pandemic.

Loss of biodiversity is now considered as serious as climate change, and investors are increasingly realising that they have an important role to play in conserving it. The urgency is acute: “An ongoing, catastrophic loss of biodiversity is among the world’s major environmental challenges,” says sustainable investment house Generation Investment Management, co-founded in 2004 by former US vice-president Al Gore and financier David Blood.

As a result, biodiversity is “now the fastest developing ESG theme in global capital markets,” notes Catherine Howarth, chief executive at responsible-investment group ShareAction. “In just three years, the issue has moved from being virtually ignored by mainstream institutional investors to being acknowledged by all.” Investors are addressing it in two ways: raising capital to put towards nature-based economic opportunities, and trying to analyse how portfolio companies are contributing to, or vulnerable to, biodiversity loss.

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