Biodiversity: implications from an investment perspective
Leading companies are committing to the 'Action Agenda for Nature and People' as governments advance negotiations on the ambitious global biodiversity framework, scheduled for final agreement at the UN Biodiversity Conference in Kunming, China this year. From an investment perspective, the economy is critically dependent on the Earth's Natural Capital with biodiversity intertwined with systemic risks and returns.
At Lombard Odier, our focus on nature is embedded in our investment philosophy and partnerships as we look at investment solutions that harness the capabilities and growth prospects from the circular bio-economy. Dr. Christopher Kaminker, Head of Sustainable Investment Research, Strategy and Stewardship at Lombard Odier sheds some light on the significance and implications of biodiversity from an investment perspective at a EuroCham webinar on “At the Biodiversity Frontline – Corporate Action" in the key takeaways below:
Our economic model has run WILD
Dr. Christopher Kaminker began by sharing a birds-eye view of our economy that reveals the most glaring concerns of our linear 'take-make-waste' model that has unsustainable impact on our planet. With half of the world's total GDP moderately or highly dependent on our Natural Capital, the current Wasteful, Idle, Lopsided and Dirty (WILD) economy that we are in has drastic implications especially from an investment perspective, where biodiversity underlie most sectors we invest in.
Although change is in motion given the transition to a more circular economy which we term as CLICTM (Circular, Lean, Inclusive, Clean), the challenge remains vast to fully safeguard environmental challenges and to keep global warming below 1.5°C.
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Biodiversity pushed beyond manageable limits
In particular, nature and biodiversity have been pushed beyond manageable limits in nine planetary boundaries within which humanity can operate sustainably, with massive intrinsic costs to the economy. For example, the IPCC estimates a USD 69 trillion damage from 2°C global warming1, while 70% of our USD 2.5 trillion ocean economy depends on healthy oceans that is facing acidification2. In the US, cleaning up hazardous waste is expected to take 50 years and cost USD 500 billion3, whilst the OECD estimates health and productivity costs of air pollution at USD 2.6 trillion per year4.
These environmental limits are of vital significance to investors as transitions in our environment and economic model will create existential risks and opportunities. Dr. Christopher Kaminker shared in a vivid illustration of how “bees don't send invoices" for their valuable pollination efforts – explaining how 90 out of 100 crops we eat globally rely on pollination by insects and animals, totaling up to some USD 600 billion per year in value to the food industry.
“Biodiversity has infinite value to our economy and society, but not necessarily on the market price associated with it. These pollinators provide such ecosystem services for free that is, in fact, very valuable, and we have since lost 70% of the pollinators since the late 1970s. This is the severity of the situation, whereby the free market is not going to take care of the Natural Capital balance sheet," he added.
Four powerful forces at work – transitioning to a circular economy
The good news is that policy makers can change the situation, such as putting a price on negative externalities, increasing prices on carbon, and banning combustion engines. The transition from WILD to CLICTM has already begun and is gaining speed, with four powerful forces at work creating momentum.
In response to a concluding question on any important recent change companies need to pay attention to in terms of sustainable investing, Dr. Christopher Kaminker noted that these four forces work together as a powerful feedback loop that is propelling the shift from the outdated take-make-waste linear economy towards the new sustainable circular model.
We are seeing increasing pressure from governments with new and stronger targets in policy and regulation, such as making CO2 emissions more costly. In terms of market forces, companies are figuring out how to use bio-economy to generate new algorithms of growth, such as using technology to harness nature. Economies of scale are driving down the costs of CLICTM solutions thereby increasing adoption, as it becomes cheaper for consumers.
Investors are students of this whole transformation, whereby we are seeing a redeployment of capital in line with the transition. At Lombard Odier, we recognise that it is our fiduciary duty as stewards of capital, to help our clients align their portfolios to mitigate the risks and tap into the opportunities of the circular economy.
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1 Intergovernmental Panel on Climate Change Global Warming of 1.5C report (2019)
2 Reviving the Ocean Economy: The case for action, World Wildlife Fund and Boston Consulting Group (2015)
3 Natural Capital At Risk: The Top 100 Externalities of Business, Trucost (2013)
4 Air pollution to cause 6-9 million premature deaths and cost 1% GDP by 2060, Organisation for Economic Co-operation and Development (2016)
