One World

Biodiversity (biological-diversity) refers to all the variation of life that can be found on Earth (plants, animals, fungi and micro-organisms). It is also the groups that they form and the habitations in which they live. Nature in all its forms, including species and entire ecosystems such as coral reefs and rainforests. It is imperative to human life. The air that we breathe, the water that we drink, and the food that we eat is all reliant on biodiversity. Furthermore biodiversity is fundamental to our global economy.

According to the report ‘Nature Risk Rising: Why the Crisis Engulfing Nature Matters for Business and the Economy’ by the World Economic Forum; ‘although the world’s 7.6 billion people represent only 0.01% of all living things by weight, humanity has already caused the loss of 83% of all wild mammals and half of all plants’.

Human civilisations and economic activities crucially rely on biodiversity. The World Economic Forum’s research showed that $44 trillion of economic value generation (more than half of the world’s total GDP) is moderately or highly dependent on nature and its services, and is therefore exposed to nature loss risk. Despite this, efforts to alleviate the risks of climate change are significantly more established than that of nature related risks. The Task Force on Climate-related Financial Disclosures (TCFD) recommendations are a key device for enhancing corporate and investor climate action. Like climate change, biodiversity loss must urgently rise up investment agendas. But the science behind biodiversity is not readily understood. How business operations and investment decisions affect or depend on nature, and the accompanying risks are not widely known or appreciated.

The ongoing COVID-19 pandemic is a catastrophic and colossal example of a nature-related risk. The destruction of natural habitats increases the likelihood of a new virus jumping from animals to humans. Wild animals who are carriers of viruses that humans have not been previously exposed to, are being forced to live in closer proximity to humans as their habitats are destroyed. The global pandemic caused by COVID-19 has brought fears of wildlife health and its interface with human health to the forefront of public attention worldwide. COVID-19 has resulted in unspeakable human suffering, economic devastation, and social consequences. Anxieties about zoonotic cross-over are not new, but the COVID-19 pandemic has raised awareness among the public and decision-makers of the significant risk of novel disease transmission from wildlife. The public can now see the correlation between wildlife abuse, trade, and zoonotic disease transfer, particularly in ‘wet markets’. This has given rise to calls for absolute bans on wildlife trade, especially where these exist to source human consumption.

‘With the Task Force on Climate-related Financial Disclosures, TCFD, we managed to shift private finance and we need to do the same with TNFD’ - President Macron.

The finance sector is coming together to respond to the nature crisis with the initiative to implement a Task Force on Nature-related Financial Disclosures (TNFD). Thirty four financial institutions from across five continents have joined together with the governments of UK, France, Peru and Switzerland and the financial regulators from Argentina and Mexico to form an Informal Working Group. The group, which has 62 members in total, including the World Bank, the OECD and a number of multinational companies, will bring together the TNFD. In the second half of 2021 the Taskforce will be fully established and then in Q3/Q4 2023 a global dissemination of the finalised TNFD Framework will occur.

Our global food system is the main driver of biodiversity loss, and therefore needs to be urgently addressed. In our SRI and Sustainable models we hold BMO responsible funds. In 2020, BMO engaged 52 companies to drive more sustainable practices in food production and they are also a member of the FAIRR Initiative. This is a collaborative investor network raising awareness of the ESG risks and opportunities arising from intensive livestock production, which targets food retailers and producers.

Alongside our global food system, another main cause of biodiversity loss is the overexploitation of natural resources. Natural resources are those that the planet provides without the necessity of human intervention. Despite being vital to our survival, humans are draining the planet's natural resources at a quicker amount than their natural regeneration. There are two types of natural resources, renewable and non-renewable. Renewables are unbounded, like solar radiation, or biomass which has rapid renewal. Non-renewable resources are those that exist in nature in a restricted way because regeneration involves many years, these resources include minerals, fossil fuels, oil, natural gas, and coal.

Humans are exhausting the planet's natural resources and as a consequence standards of living will begin to decline by 2030 unless immediate action is undertaken. The WWF warns that at the current rate of overexploitation of natural resources an enormous deficit is being created. Humans are consuming 20% more than can be regenerated each year and this percentage is growing progressively. The uncontrolled consumption of natural resources has a terrible effect on the loss of habitats vital for flora and fauna and as result expedites the extinction of species. There are some 30 million different animal and plant species in the world, and of these, the International Union for Conservation of Nature (IUCN) states that presently more than 31,000 species are threatened with extinction. The WWF reported that the world's population of fish, birds, mammals, amphibians, and reptiles declined by 58% between 1970 and 2012 due to human’s exhausting natural resources. The Living Planet Index (which tracks more than 4,000 species of vertebrates) stated that increasing deforestation and agricultural expansion were the key drivers behind this decline. Human activity has severely degraded three-quarters of all land and 40% of oceans.

This loss affects the economy, according to a United Nations Food and Agriculture Organization (FAO) 33% of the world’s soil is now moderately to highly degraded. If the loss of fertile soil continues at the same rate, agricultural commodity prices will unavoidably soar. Furthermore, our health will suffer if we do not take care of the forests as there will be fewer CO2 sinks (natural deposits, like oceans, forests, and soils that absorb the CO2 in the atmosphere, reducing its presence in the air) and therefore more air pollution. According to the World Health Organization (WHO), nine out of ten people worldwide breathe air with high levels of pollutants and seven million people die each year from air pollution.

As sustainable investors, we look at the solutions to the overexploitation of natural resources. The future, as stated in the United Nations Agenda 2030 for Sustainable Development, poses a dual challenge to humans. The need to conserve the many forms and functions of nature whilst creating an equitable home for people on a finite planet. To reverse the damage done, we need to conserve natural capital by restoring degraded ecosystems and considerably increase the global network of protected areas. There is also a significant need to advance and improve production systems by greatly reducing the objects, materials, resources, and volume of waste in production processes. This needs to include managing resources in a sustainable manner and promoting the production of renewable energy.

In our sustainable models, we hold a number of funds whose ethos is to conserve natural capital, promote and facilitate renewable energy and enable a more sustainable planet. One example is the FP Foresight Global Real Infrastructure fund which invests in companies that own or operate real infrastructure or renewable energy assets anywhere in the world. They have been investing in renewable energy infrastructure since 2008 and their renewable energy infrastructure assets produce 2.7GW of clean energy generating capacity.

Likewise in the sustainable range is the Impax Asian Environmental Markets fund, whose strategy is to allocate capital towards companies helping to transition the global economy to a more sustainable model. This includes companies whose activities result in carbon emissions being avoided, the generation of renewable energy, water treated, saved or provided, materials recovered and waste treated and the displacement of coal use in Asian cities. One such company has treated, saved, or provided 3.3 million megalitres of water. Without its operations city dwellers might have only limited access to water and waste would go untreated.

A further example from the sustainable range is the Pictet Nutrition fund. Their nutrition strategy invests in companies that are developing solutions to help secure the world’s future food supply. One of their themes is farming and continued improvements in agricultural practices, such as using land more efficiently. Soil is an essential resource for 95% of the food that is produced. But today, as 33% of soil has been degraded this is not easily reversible, as it can take up to 1,000 years to produce just 2 to 3cm of fertile topsoil. Therefore addressing this is a major challenge, but also represents an opportunity for companies that have the ability to provide solutions. The Pictet Nutrition fund invests in such companies, such as a business which produces precision monitoring tools which enable the accurate application of fertilisers to correct soil imbalances.

The sustainable investor already has nature risk mitigation and environmental solutions themed into their portfolios. Not only protecting them from financial forfeiture due to the impact of nature loss on the economy but also sitting them well for the implementation of the TNFD and the growth opportunities built into investments that fight back against biodiversity loss and world degradation.

This communication is from Alpha Beta Partners a trading name of AB Investment Solutions Limited. Alpha Beta Partners Limited is registered in England no. 10963905. AB Investment Solutions Limited is registered in England no. 09138865. AB Investment Solutions is authorised and regulated by the Financial Conduct Authority. This material is directed only at persons in the UK and is not an offer or invitation to buy or sell securities. Opinions expressed, whether in general, on the performance of individual securities or in a wider context, represent the views of Alpha Beta Partners at the time of preparation. They are subject to change and should not be interpreted as investment advice. You should remember that the value of investments and the income derived therefrom may fall as well as rise and you may not get back your original investment. Past performance is not a guide to future returns. Further information is available on request, or on our website