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November 2020

How Biodiversity’s Loss Can Cost Investors

Biodiversity has recently become the new buzzword in the world of sustainable finance. When most of us think of biodiversity, what comes to mind are usually pictures of threatened animals such as tigers, whales, or armadillos. However, few of us are able to truly grasp the meaning of biodiversity and its impacts on our lives. So, what is biodiversity and its loss really about? Why does it matter to the financial markets? And why is the topic becoming ever more current?
The Convention on Biological Diversity defines biodiversity as “the diversity of species, variation of genes and different ecosystems”. Biodiversity loss is not just about some threatened species, but rather its impact on nature at a systemic level. In very simplified terms, nature and its ecosystems consist of four pillars: water, air, land and biodiversity. The latter is the glue that holds everything together, allowing nature to work effectively and most importantly, absorbing shocks and preventing the entire system and sub-systems from collapsing. As in any other complex system, diversity is key for resilience.
Therefore, acting against biodiversity loss means preventing the collapse of nature’s sub-systems. This is crucial as we humans, society and the economy are highly dependent on nature’s ecosystem services. On a fundamental level, we literally live on ecosystem services.

Our reliance on ecosystem services

Ecosystem services are services that nature offers free 24/7 all over the world. Pollination, water purification and climate regulation are among the most cited examples. However, ecosystem services are comprised of much more, ranging from providing flood and storm protection, to disease control, erosion control, and the dilution of waste in air and water. Studies estimate that half of the world’s GDP is moderately or highly dependent on nature and ecosystem services. More importantly, life itself is reliant on them.
The problem is that we are losing biodiversity at an unprecedented rate. In our planet’s long history, we are now living in a new geological age, the Anthropocene. In this “age of humans”, we are, for the first time, the most relevant defining factor for our planet. Today, the planet is going through its sixth mass extinction. It is the first one caused by humans. About 75% of the land-based environment and about 66% of the marine environment have been significantly altered by human actions. Natural ecosystems have declined by 47%, while the global biomass of wild mammals has fallen by 82%. Astonishingly, global wildlife populations have declined by 60% over the last 40 years. Pollution, man-made climate change, the ever increasing use of land, and over-consumption, are some factors contributing to this dangerous loss of biodiversity, which in turn results in the loss of ecosystem services.
Biodiversity loss over the last few decades

Biodiversity loss is a financial risk for investors

As the loss in biodiversity leads to a reduction in ecosystem services, this will have far-reaching consequences for the economy and society, as well as presenting risks and opportunities for investors.
Borrowing the terminology from climate change, we can distinguish between two types of risks for investors: Physical risks and transition risks:
  • Physical risk is the risk resulting directly from reduced ecosystem services such as the lack of pollination for the agricultural industry or reduced flood control for the real estate market. Certain industries are more exposed to physical risk from biodiversity loss than others, for instance, tourism, agriculture, fishery or forestry.
  • Transitional risk on the other hand results from societal and political pressure. Within this, we can further distinguish more specific risks, like reputational, regulatory scrutiny and litigation risks. As societies will face an increasing loss in ecosystem services over the next few years, pressure on societies is expected to grow, and transitional risk will steadily increase. Industries that will be especially affected include agriculture, forestry, oil & gas, mining and construction.
However, with every cloud comes a silver lining. Although biodiversity loss poses great challenges to investors, we believe it also offers attractive investment opportunities. Companies that have biodiversity-friendly business practices, or provide solutions to problems of biodiversity and ecosystem service loss will have an advantage. Financial institutions and investors can and should play an important role in helping to reverse nature’s losses.

First Swiss institution joining Finance for Biodiversity Pledge

We believe that financial institutions have a key role to play in reversing nature’s losses. Bank J. Safra Sarasin is proud to announce that it has become the first Swiss institution to join the Finance for Biodiversity Pledge. The Finance for Biodiversity Pledge is a collective of 26 financial institutions around the world with EUR 3 trillion in assets, who have committed to making a positive contribution to biodiversity through investments and activities.
As a signatory, we recognise the need to protect biodiversity. Besides collaborating and sharing knowledge, we commit to engaging with companies by including biodiversity in our ESG policies. We also pledge to assess our own biodiversity impact and set science-based targets in order to increase our positive impact significantly, while minimising any negative effects.

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