Why Investors should care about Biodiversity

At a glance:

• Biodiversity is integral to humanity’s ability to survive and thrive on our planet. Resource extraction and overuse of our ecosystems over the past 50 years has however threatened the stability of our economy and society. The World Economic Forum identified biodiversity loss third on the list of risks to the global economy over the next 10 years.

• In December 2022, global leaders came together in Montreal at COP15 to commit to halting biodiversity loss. We were on the ground at COP15, and in this paper discuss what did and didn’t make it into the resulting Kunming-Montreal Global Biodiversity Framework, reflecting on what this might mean for companies, their investors, and nature outcomes.

• Investors can exercise their influence in support of nature-positive outcomes by advocating for strong global standards and corporate policies on biodiversity. We discuss what BMO GAM is doing, the importance of linking climate and biodiversity, and why we believe that one emerging global sustainability reporting framework moving from “ESG” to “Sustainability” can make all the difference.

Biodiversity

A new geological epoch, known as the age of humans, is threatening the planet’s ecosystem. Biodiversity is a complex, interconnected system of land, ocean, flora, and fauna that provides stability to our climate and all living things. Over thousands of years, this stability is what has allowed us to grow crops, develop medicines, practice cultural events, build cities, and explore new parts of our world. Over the past 50 years however, our population has doubled, the global economy has grown four times the size, and global trade has grown ten times the size. All the while, humanity has unsustainably exploited resources to drive global growth at the expense of biodiversity.

Here are some staggering statistics:75% of land surface and 66% of oceans have been significantly altered by humans. 23% of lands have reduced productivity due to deforestation, pollution and rising temperatures 1 in 4 species on our planet is threatened 1 million species face extinction unless we curb the drivers of biodiversity loss.

More than half of global GDP can be linked to nature.

The 2023 World Economic Forum Global Risks Report placed biodiversity loss and ecosystem collapse third on the list of risks to the global economy over the next 10 years. According to the Organization for Economic Co-operation and Development (OECD), by 2011 the world was losing USD$4-20 trillion per year in ecosystem services due to land-cover change such as deforestation or desertification, and USD$6-11 trillion per year from land degradation, justifying the economic and business case for taking action. Biodiversity is also of growing concern to a younger generation of investors, with 50% of millennials citing it as a concern, compared to 28% of older investors.

If the world shifts away from nature-negative outcomes towards nature-positive outcomes now, we can halt and reverse biodiversity loss by the end of the decade.

COP15

International efforts to combat biodiversity loss have been ongoing for a long time, with the Convention on Biological Diversity (CBD) multilateral treaty coming into effect in 1992. After years of preparation and two weeks of intense negotiations, the 2022 United Nations Biodiversity Conference (COP15), chaired by China and held in Montreal, delivered a much-needed landmark biodiversity agreement. Members of BMO Global Asset Management (GAM)’s Responsible Investment team attended the conference in person and were front seat to a monumental agreement that will guide a future of action and commitment to biodiversity. What made it into the agreement: We were proud to see the Kunming-Montreal Global Biodiversity Framework (GBF) come together on the last day of negotiations, which featured 23 targets to achieve by 2030, such as:

• Target 2: Conservation and management of at least 30% of land, coastal areas, and oceans

• Target 15: Take policy measures to encourage companies (transnational and financial institutions) to monitor and disclose biodiversity-related risks and impacts in their operations, supply chains, and portfolios

• Target 16: Reducing global food waste by 50%

• Target 18: Phasing out or reforming subsidies that harm biodiversity by at least $500B per year, and scale up positive incentives for conservation and sustainability

• Target 19: Increasing biodiversity-related capital flows from public and private sectors to $200B per year, and directing $30B per year from developed to developing countries

• Target 22: Ensure equitable access and benefits from conversation and effective participation in decision-making on biodiversity by Indigenous peoples, local communities, women, girls, and human rights defenders.

By 2030: Conservation and management of at least 30% of land, coastal areas, and oceans

What did not make it into the agreement:

• Target 15: The original text required policy to mandate companies to monitor and disclose biodiversity risks and impacts. The eventual target was made less ambitious and instead encourages, rather than requires, companies to disclose this information.

• Despite food and agriculture being the biggest driver of biodiversity loss, these sectors did not receive target-specific attention.

• Certain developing countries’ concerns about the need for a separate global fund to help implement commitments were blocked by developed countries.

• Indigenous peoples flagged the need for stronger targets, access to finance for Indigenous communities, and clearer and more formalized recognition for the respect of land rights and stewardship of Indigenous peoples. Some critics of the biodiversity agreement also cautioned that the 30-by-30 target could be used to erode Indigenous rights under the guise of conservation.

The business and finance sector played a key role at the conference and will form a core function in achieving the framework’s new targets in the years to come, despite a less ambitious Target 15. We anticipate that the agreement will further accelerate the already growing ask from investors in companies to increase their biodiversity-related reporting. In addition to spurring new regulations, subsidies, and incentives, the 23 targets by 2030 will help rally and create more consistent framing around investor and business’ action on biodiversity. Other notable developments announced during COP15: ISSB expands its sustainability accounting standard-setting. One COP15 highlight was the International Financial Reporting Standards (IFRS)’ International Sustainability Standards Board (ISSB) announcement that it is moving towards a double materiality approach, meaning that its global corporate accounting standard-setting will consider both the impacts of social and environmental issues on a company’s bottom line, as well as a company’s impacts on people and planet. Read more about what a double materiality approach means here. In addition, the ISSB will enhance its Climate-related Disclosures Standard to include considerations of natural ecosystems and a just transition. It will look at the upcoming Taskforce for Nature-related Financial Disclosures (TNFD) to address the intersection of climate and biodiversity. We believe this is a crucial development that moves financial value creation beyond a risk-only based ESG lens towards a more holistic focus on sustainable outcomes. We previously advocated for this development in our submission to the ISSB in response to its initial consultation. Nature Action 100+ A long time in the making, the Nature Action 100+ collaborative investor engagement initiative had its soft launch at COP15. This initiative mirrors the framework of Climate Action 100+, the world’s largest investor collaboration on climate change, and focuses on tackling nature loss and biodiversity decline. BMO GAM has expressed interest in participating in the initiative once it formally launches. Now that the biodiversity framework and its 2030 targets have been agreed upon, it is up to governments to develop policies that will hold their countries accountable, force equitable changes to benefit biodiversity, and be transparent in their approach. It is also up to businesses to re-shape their environmental footprint using a nature-based approach, taking stock of the natural resources they use, and devising a plan to do so sustainably. Also, it is up to investors to advocate for responsible policy choices, engage with companies to encourage commitments and action on biodiversity, and to develop investment opportunities that drive capital towards biodiversity financing to close the global biodiversity financing gap.

It is up to businesses to re-shape their environmental footprint using a nature-based approach, taking stock of the natural resources they use, and devising a plan to do so sustainably.

The role of investors

One can tie almost every company back to one of the main drivers of biodiversity loss: logging, harvesting, fishing, pollution, and climate change. Investors have an opportunity to create change by encouraging investee businesses to:

1. Assess and understand their impact and reliance on natural resources

2. Integrate nature into their management and business decision-making

3. Align with the TNFD on how to report on governance, management, impacts and actions to mitigate biodiversity loss and drive nature-positive outcomes.

The TNFD mirrors the widely accepted Taskforce for Climate-related Financial Disclosures (TCFD), and, while it is still in beta-mode, is quickly becoming a best practice framework. One of the main five subthemes to BMO GAM’s Climate Action Approach is: “Protecting Our Natural Capital”. According to the World Economic Forum, over half of the world’s GDP is moderately or highly dependent on nature and its services. Furthermore, nature and the climate are inextricably linked: 15% of global carbon emissions result from deforestation and forest degradation. Without a well-functioning ecosystem, our planet is unable to absorb the impacts of a changing climate, posing risks to our economy and society. Conserving and restoring forests and ecosystems are some of the most cost-effective climate mitigation options according to the IPCC, and are necessary mitigate the impacts of climate change. In fact, restoring biodiversity is a direct solution to combatting climate change, as ecosystems, such as mangroves, kelp forests and rainforests, naturally absorb and utilize carbon from our atmosphere.The World Benchmarking Alliance (WBA) 2022 Nature Benchmark analyzed over 400 global corporate issuers and found that only 5% of companies assessed how their operations impact nature and biodiversity, and less than 1% understand how much their activities depend on nature and the ecosystem services it provides. This is where the new biodiversity framework and 2030 goals coming out of COP15 can contribute to building awareness.A lack of corporate disclosure requirements, assessment methodologies and corporate reporting standards have historically made it difficult for investors to understand their exposure to biodiversity risks across their portfolios. That is why our engagements with investee companies have so far centered around getting better data. As part of this, we encourage companies to participate in the Carbon Disclosure Project’s (CDP) data collection process. In November 2022, the CDP included data on biodiversity for the first time, targeting over 8,850 companies around the world. The CDP now collects climate, forest, and water-related data from companies and makes it comparable and accessible for investors.

BMO GAM’s approach

Apart from our engagements to encourage data reporting through the CDP, we are also active in the FAIRR initiative, an investor network focusing on ESG risks in the global food sector. Engagement topics include protein alternatives, sustainable agriculture, climate change and biodiversity. Looking ahead, we anticipate partaking in the upcoming Nature 100+ investor collaboration, as well as the UN PRI’s new nature-focused initiative. In 2022, in collaboration with our engagement and voting service provider reo®, we began a new proxy voting strategy to address global corporate laggards on deforestation. As such, in 2022 we withheld our support from 11 board directors at international companies with high exposure to biodiversity-related risks that did not have sufficient strategies for reducing contributions to nature loss.

We withheld our support from board directors at international companies with high exposure to biodiversity-related risks that did not have sufficient strategies for reducing contributions to nature loss

We have also been supporting policy developments that can help halt biodiversity loss. In 2022, we supported the U.S. Fostering Overseas Rule of Law and Environmentally Sound Trade (FOREST) Act, a bipartisan bill that seeks to prohibit commodities that originate from illegally deforested land from entering U.S. markets. We foresee biodiversity taking on more attention over the next several years as commitments turn to action and risks materialize for companies in operational, reputational, regulatory, and litigatory manners. We will continue focusing our ESG integration, company engagement and policy advocacy work on protecting our natural capital and increasing our own commitment to protecting biodiversity. A study of more than 1,500 public companies found that companies with more women on their board of directors were more likely to avoid harmful biodiversity disturbance https://www.triplepundit.com/story/2013/having-women-corporate-boards-increases-profits-and-sustainability/50046

Further reading and resources for investors:

• CDP Forests

• World Benchmarking Alliance: 2022 Nature Benchmark

• Inevitable Policy Response Forecast Policy Scenario + Nature: Preparing financial markets for climate- and nature-related policy and regulatory risks

• Taskforce for Nature-Related Financial Disclosures

• McKinsey: Nature in the balance: what companies can do to restore natural capital

• ISSB describes the concept of sustainability and its articulation with financial value creation