Pictet Asset Management - Why COP-15 marks a turning point for environmental investing

The UN Biodiversity Summit marked a watershed moment for the preservation of the natural world, delivering an international agreement that could prove as transformative for environmental investing as the Paris climate accord of 2015.

Signed by almost 200 countries, the Global Biodiversity Framework (GBF) will boost investment in activities that protect the biosphere and will also require companies to routinely assess and disclose their nature-related risks.

The accord is underpinned by ambitious goals. It aims to halt biodiversity loss by 2030 and achieve recovery and restoration by 2050.

For these reasons it merits comparison with the Paris climate agreement. While implementing the 2015 accord in full continues to be an uphill struggle, the pact has succeeded in aligning financial flows and investment portfolios with climate objectives, unleashing hundreds of billions of dollars of new investment in the process. We see the GBF having much the same financial effect. 

Key features of the biodiversity pact include commitments to increase land and water preservation, reduce pollution and incorporate biodiversity considerations across a wide range of national policy areas. It also contains pledges to reduce harmful subsidies and mobilise funds toward national biodiversity plans by the end of this decade.

In other words, it alerts policymakers, businesses and investors to the fact that there is more to protecting the planet than net zero. Reducing greenhouse gas emissions and restoring the biosphere are problems that must be tackled together.

The GBF is not without flaws – it does not set country-specific targets, for example, nor is it legally binding. That said, we think the tone is sufficiently strong that companies and investors will no longer be able to ignore this key environmental dimension.

Target 15 of the accord is perhaps the most relevant to businesses and investors. It requires large companies and financial institutions to monitor and disclose their impact on biodiversity, as well as the risks they face from biodiversity loss. [1]

Importantly, this requirement will apply across the entirety of the business’s value chain. For financial institutions, the provisions will extend to portfolio investments.

Target 14 is also important. This calls for public and private financial flows to be aligned with the goals and targets of the GBF, which should help scale up action from the financial sector.

Such goals are a major step in the development of global environmental policy because they are measurable and subject to regular monitoring, reporting and review.

There is more to protecting the planet than net zero. Halting climate change and restoring the biosphere are problems that must be tackled together. 

Biodiversity disclosure: the new norm

Corporate disclosure of biodiversity risks could soon become the business norm.

Later this year, the Taskforce of Nature-related Financial Disclosures (TNFD) – a private-sector forum representing financial institutions and corporates with over USD20 trillion in assets – is set to release a new corporate disclosure framework covering a broad range of items from freshwater, marine and terrestrial ecosystem use to water pollution and biological disturbances.

At the same time, the International Sustainability Standards Board, a body setting a global standard for corporate sustainability disclosures, plans to add biodiversity to its climate risk reporting rules in early 2023. With better disclosure, investors will be better able to assess the nature-related risks companies face.

Those risks fall into three broad categories:

• Transition – costs arising from regulation, stranded assets and changing consumer preferences;
• Physical – financial impact on companies due to biodiversity loss and the loss of function of ecosystems they rely on;
• Liability – litigation and broader liability claims relating to biodiversity loss and legal breach.

Plugging the funding gap

The GBF should also lead to a reallocation of capital. As biodiversity protection grows in importance, it should give rise to new investment opportunities in ecosystem services and natural capital.

It is estimated that the world needs to spend nearly USD1 trillion a year to achieve positive biodiversity outcomes by investing, for example, in sustainable supply chains, green financial products, biodiversity offsets, carbon markets and natural climate solutions. Current spending stands at no more than USD143 billion. [2]

For its part, the GBF calls for both the public and private sectors to secure at least USD200 billion of capital per year for conservation initiatives – significantly higher than current levels of biodiversity financing but well short of filling the gap.

Recent years have seen a steady increase in biodiversity and natural capital investment, including bonds issued by companies that explicitly aim to minimise biodiversity loss and capitalise on the potential for long-term capital growth.

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, fishery, materials, real estate, consumer discretionary and staples, IT, utilities and pharmaceuticals.

The Food and Land Use Coalition estimates that efforts to transform current food and land use in favour of regenerative and circular practices have the potential to create a biodiversity market worth USD4.5 trillion by 2030. [3]

Contributing view from Prof. Garry Peterson, Stockholm Resilience Centre; Programme Director of Finance to revive Biodiversity (FinBio) programme

The Kunming-Montreal GBF began to address two key indirect drivers of biodiversity loss: the removal and reform of subsidies driving the destruction of nature, and the shifting of the incentives that structure global finance and business away from the destruction of nature and towards nature-positive actions that build inclusive wealth.

Halting biodiversity loss and restoring the web of life requires more than the GBF proposes.

Decades of scientific research, as summarised in the recent IPBES global assessment, demonstrate that policies need to also address the indirect social forces driving biodiversity loss, specifically the destruction of the living world due to material use and consumption, primarily by the rich world.

However, the GBF agreement does not contain targets to address the world’s hugely unequal destructive production and consumption. That is an essential but monumental challenge that will require overcoming resistance from variety of powerful actors who benefit from the status quo.

Overall, the agreement contains more than I and many others expected, but less than is needed. It provides a framework for action, and while action will be uneven it will accelerate.

[1] https://www.cbd.int/article/cop15-cbd-press-release-final-19dec2022
[2] https://www.nature.org/en-us/what-we-do/our-insights/perspectives/closing-nature-finance-gap-cbd/
[3] Food and Land Use Coalition, September 2019, https://www.foodandlandusecoalition.org/wp-content/uploads/2019/09/FOLU-GrowingBetter-GlobalReport.pdf

Important Information 

This article is used for informational purposes only and does not constitute,on Pictet Asset Management part, an offer to buy or sell solicitation or investment advice. It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. The effective evolution of the economic variables and values of the financial markets could be significantly different from the indications communicated in this document.