Foreword
The past 30 years have seen a bigger improvement in human prosperity than all of the past centuries combined.
We have built more roads, buildings and machines than ever before. More people are living longer and healthier lives and access to education has never been better. The average GDP per capita has grown 15-fold since 1820. More than 95 per cent of newborns now make it to their 15th birthday, as opposed to just one in three in the 19th century.Our World in Data, accessed at 14.10.2022
However, such progress has come at a great cost. As humanity has thrived, nature has suffered.
Humans are driving animal and plant species to extinction and destroying their habitats to feed an ever-increasing population. And for some decades now, they have been consuming more natural resources than the Earth can naturally replenish in a 12-month period, drawing down on what’s available for future generations.Global Footprint Network, accessed at 14.10.2022
Putting an end to this unsustainable relationship demands a deeper understanding of the biosphere’s impact on human well-being and its contribution to economic growth. Policymakers now consider biodiversity protection as urgent a priority as halting global warming.
Laurent Ramsey, Managing Partner of Pictet Group; Professor Beatrice Crona, SRC's Deputy Science Director and Senior Scientific Advisor to the FinBio programme
The UN COP15 biodiversity summit in Montreal in December 2022 reached a landmark agreement to halt biodiversity loss by the end of the decade and achieve recovery and restoration by mid-century. This is a framework that could prove as transformative for environmental investing as the Paris climate accord eight years ago.
But such efforts should not be confined to the policy arena. The financial industry, too, must play a more active role. As a steward of global capital, it is uniquely positioned to help build an economy that works with, rather than against, nature.
It can facilitate a nature-positive transition, by transforming the way it allocates capital and developing new models to price biodiversity risks and opportunities more accurately.
It is worth noting that by channelling investment to companies developing advanced environmental technology and services, the financial industry has helped improve efficiency in everything from energy use, agriculture, trade and transport.
For example, thanks to the development of agri-tech, the world can produce almost three times as much cereal from a given land as it did in 1961..Our World in Data, accessed at 14.10.2022
The rate of improvement in the average cereal yield has outpaced that of the population growth. However, the bulk of mainstream investments flows to incumbent economic activities that cause environmental and social harm.
The finance industry, therefore, must add its heft to the global effort to reduce the damage, while also enhancing nature's recovery.
All of this explains why Pictet Asset Management has become a founding partner in a new four-year global research programme geared to helping the financial industry develop strategies to protect natural capital and halt biodiversity loss.
The Finance to Revive Biodiversity (FinBio) programme, which will be overseen by the Stockholm Resilience Centre at the University of Stockholm, aims to develop valuable research that should help the finance industry transform current practices – which reward growth at the expense of biodiversity – to a new model which accurately captures – and attaches an economic value to – the nature-positive quality of a business.
Funded by the Swedish Foundation for Strategic Environmental Research (Mistra), the programme will break new ground by bringing together a diverse consortium of academic researchers that rarely interact, as well as financial- sector partners.
The consortium has set itself ambitious targets. The first task is to translate biodiversity and natural capital data into metrics that asset managers and asset owners can understand and use.
The second objective is to establish a financial framework that will facilitate the development of a new class of nature-aligned securities, capital that can be harnessed to achieve biodiversity goals and build a genuinely sustainable economy.
The financial industry – banks, asset managers and asset owners – has for too long ignored the threat biodiversity loss presents to human prosperity and growth. It must now acknowledge the crucial role it has to play in repairing the biosphere and placing the economy on a more sustainable footing.
Pricing nature: ecosystem services
In prioritising economic development, humanity has caused considerable damage to the natural world and its ecosystems. Yet a degraded biosphere will have a direct impact on growth and human welfare over the next several decades.
Global capital stocks per capita, 1992-2014
Source: Managi and Kumar (2018) Note: Produced capital refers to roads, ports, cables, buildings, machines, equipment and other physical infrastructures. Human capital refers to education and longevity. Natural capital is calculated with renewable and non-renewable resources including agricultural land, forests as sources of timber, fisheries, minerals and fossil fuels
How to account for nature’s role in the economy has become the defining challenge of our age. If we can better understand the complex relationship between economic development and the natural world and, ultimately, find a way to attach a value to the ecosystem services we currently receive for free, a genuinely sustainable economy is within reach.
Source: UN Millennium Ecosystem Assessment, Pictet Asset Management, accessed at 14.10.2022.
Policy changes and emerging risks for companies and investors
Protecting the world’s biodiversity and natural capital has become a priority for policymakers and regulators.
The UN Summit in Montreal in December 2022 reached a landmark agreement to halt biodiversity loss by the end of the decade and achieve recovery and restoration by mid-century. This Global Biodiversity Framework (GBF) could have the same transformative effect as the Paris Accord on climate change in 2016.
Number of biodiversity-related taxes
Source: OECD PINE database, accessed at 14.10.2022. Note: 33 biodiversity-relevant taxes are not included in this figure as starting dates are not available.
Regulators and policymakers are likely to introduce more biodiversity-related taxes, permits and offsets, and incorporate natural capital into national economic statistics such as GDP. By understanding different threats biodiversity loss poses to businesses, investors can begin to correctly price such risks, identify gaps in the current ESG framework and discover new ways to invest in natural capital.
Biodiversity finance
Even if businesses and investors advance their understanding of how they impact and are impacted by biodiversity loss, such efforts will come to nothing without an accompanying revolution in biodiversity-related capital.
Historically, biodiversity finance has tended to focus on raising money for conservation activities. More recently, however, there has been a steady increase in biodiversity and natural capital investment, including securities that explicitly aim to minimise biodiversity loss and capitalise on the potential for long-term capital growth.
There have been high-profile launches of funds investing in companies specialised in biodiversity restoration and ecosystem services in the past couple of years, with nine out of eleven such funds having debuted since 2020. Assets under management in this group have more than doubled to USD1.3 billion from just USD525 million at the start of the decade.Source: Broadridge and Pictet Asset Management, data as of 31.07.2022
"Transformation in current food and land use in favour of regenerative practices has potential to create a biodiversity and nature market worth USD4.5 trillion by 2030."
Funds investing in biodiversity and natural capital aim to help embed more sustainable and regenerative business practices across a whole value chain, involving industries such as agriculture, forestry, IT, fishery, materials, real estate, consumer discretionary and staples, utilities and pharmaceuticals.
The OECD estimates that investments aimed at protecting biodiversity stand at less than USD100 billion a year. That’s a paltry sum, particularly when compared with what climate change attracts (USD632 billion).
A 2019 report by the Food and Land Use CoalitionSource: Food and Land Use Coalition, September 2019, https://www.foodandlandusecoalition.org/wp-content/uploads/2019/09/FOLU-GrowingBetter-GlobalReport.pdf, for instance, has found efforts to transform current food and land use in favour of regenerative, productive and circular practices will open up new value chains and business models. The report estimates that such transformation has potential to create a biodiversity and nature market worth USD4.5 trillion by 2030.
Conclusion: designing a nature-positive financial system
For more than 10,000 years, human prosperity has centred on the drawing down of natural capital – the world’s stock of food, clean air, water and fertile soil.
But in recent decades, those resources have been used at a faster rate than they can be replenished.
This unsustainable approach to economic development has had a devastating effect on ecosystems; it also carries risks for growth and human welfare well into the future.
Encouragingly, momentum is building among policymakers and regulators to establish a new, legally binding global accord to reduce biodiversity loss. More than 200 countries are now signatories to the Global Biodiversity Framework which has established ambitious goals to reduce biodiversity loss.
Already, scores of countries are incentivising businesses to protect biodiversity and promote the sustainable use of natural resources through a variety of taxes, fees, charges and permits; the number of biodiversity-related measures should grow in the coming years.
Adding further momentum to these efforts is the ground-breaking proposal by the US to include the value of nature capital and ecosystem services in its national accounts by 2036.
Attempts by governments and regulators to measure – and attach a value to – nature’s contribution to the economy represent considerable progress.
As the renowned management consultant Peter Drucker said: “what gets measured gets improved”. But policymakers cannot turn the tide on their own.
The corporate and financial sector must also do more to place the world on a path to sustainable growth.
To begin with, businesses and investors require a clearer understanding of the risks biodiversity degradation presents to their bottom line and portfolios.
The threats aren’t just physical. They are regulatory, legal and reputational as well.
Yet the financial industry and the investment community can also make a bigger contribution to help restore what has been lost.
By developing a thriving natural capital market, investors can help shift capital flows away from businesses and projects that degrade the natural environment and towards regenerative initiatives.
Nature has always been the economy’s most important asset. It is time the finance industry recognised that.
Appendix: Mistra Finance to Revive Biodiversity (FinBio) research programme
By Gabriel Micheli, Senior Investment Manager at Thematic Equities and
Steve Freedman, Head of Sustainability Research at Thematic Equities
Pictet Asset Management is a founding member of a new four-year global research programme geared to helping the financial industry develop strategies to protect natural capital and halt biodiversity loss.
The biodiversity research programme, led by the Stockholm Resilience Centre at Stockholm University, will develop new methods and indicators to help the financial sector align its investments with biodiversity goals and contribute significantly to a nature-positive economy.
The four-year programme, funded by the Swedish Foundation for Strategic Environmental Research (Mistra), brings together a consortium of academic and private sector organisations, including the UN Principles for Responsible Investment and Stanford University. It will also consider ethical aspects and governance issues linked to the pricing of biodiversity.
Synthesising the lessons of previous and ongoing market initiatives and investigating future risks and opportunities will be part of its work too.
Specifically, in cooperation with our scientific and financial sector consortium members, we aim to focus on areas including:
- developing novel metrics and datasets to calculate biodiversity loss and measure its economic and financial impact
- measuring biodiversity-related risks at company and portfolio level
- developing sophisticated and measurable ways to incorporate biodiversity in strategic engagement with companies
- assessing prospects for biodiversity/ecosystem markets and other nature-positive investments
- identifying most promising technologies, financial mechanisms and economic tools to safeguard natural capital
More details can be found here.
