Could the collapse of biodiversity be the next big wave to hit the global economy? There are some mind boggling numbers, which suggest we should be really concerned.
In a 2019 UN report, scientists warned 1 million species - out of an estimated total of 8 million - are threatened with extinction, many within decades. Changes in land use, climate change, pollution and hunting all play a key role in this event.
While awareness is growing around biodiversity, it is fair to say it has not had the same championing that an issue like climate change has had. For example, comments from a UN Secretary General, calling a recent report on climate change ‘a code red for humanity’ made headlines across the globe.
Simply put, biodiversity means the variety of life on Earth. It includes variation at three levels: genetic, species and ecosystem. It captures the diversity of plants, animals, insects and other organisms in land, ocean and freshwater ecosystems. Biodiversity enables adaptation to the changes in external conditions that a species may experience, ensuring the resilience of individual species and whole ecosystems. This capacity – both within species and within ecosystems – will become increasingly more important as climate change alters temperatures, precipitation patterns and the frequency of extreme weather events.
The problem is it is also under major threat - not only are 1 million species facing the threat of extinction, but figures from the Living Planet Index shows an average 68% decrease in mammal, bird, amphibian, reptile and fish population sizes between 1970 and 2016.
The threat in clear sight
I want to give you three examples of this threat. The first is tied to resource efficiency – a major element of the biodiversity theme. In this case water - it is amazing to think that it was only a couple of years’ back that Cape Town, a major global city, was running out of water, with residents potentially having to queue for daily rations.
The second is that some of the damage done to our most biodiverse regions – think of known forests like the Amazon, the Congo and the Taiga – can now be viewed from space. The third also shows the magnitude of the damage we are doing. I read recently that in Iran, cheap fuel has been used to power pumps to extract vast amounts of groundwater to meet the challenges of its rapidly growing agriculture. The falling levels of groundwater can also be detected from space; with Nasa saying the loss in weight has actually affected the regions’ gravitational field – that’s just amazing to comprehend.
At present, we would require 1.6 Earths to maintain the world’s current living standard – a shocking statistic. Climate change is just one of the drivers of biodiversity loss, with changes in land and sea use; invasive alien species; direct exploitation of organisms and pollution also playing their part.
We do not have the 10-year timeframe we had for climate change to meet biodiversity challenges
Federated Hermes engagement and stewardship assistant manager Sonya Likhtman warns that biodiversity has unfortunately sat in the “slightly too difficult to handle bucket” adding that although people always knew there was a crisis, they had not made the link between investors and their responsibilities. She adds that although companies are paying closer attention in specific areas – such as plastic in the ocean or deforestation – the challenge is that we do not have the 10-year timeframe to build awareness of biodiversity, as was the case with climate change.
Likhtman says there are efforts in place to build a post-2020 global biodiversity framework. This is in the shape of the COP15: UN biodiversity summit, which has already been cancelled twice due to Covid and is now set to take place in China this October. She says people are hopeful around the ambitious framework and that it can be an equivalent to the Paris Agreement on climate change.
Covid has, inadvertently, also done some good by highlighing how the loss of biodiversity can impact human health. Likhtman points to the impact of zoonotic diseases (an infectious disease that has jumped from a non-human animal to humans).
She says scientists have been perennially warning us about how the destructions of animal habitats brings them – and the diseases they can also transfer – into closer contact with humans. You can’t get a more relevant example than a pandemic which brought the world to a standstill.
Healthy ecosystems can also provide an essential source of many drugs used in modern medicine. A 2016 study found, ‘there are over 1,300 medicinal plants used in Europe, of which 90% are harvested from wild resources; in the United States about 118 of the top 150 prescription drugs are based on natural sources. Furthermore, up to 80% of people in developing countries are totally dependent on herbal drugs for their primary healthcare, and over 25% of prescribed medicines in developed countries are derived from wild plant species.’
The economic threat is also phenomenal. There are estimates that the value of ecosystem services and natural capital stands between $125-145trn per annum – research suggests half of global growth is highly or moderately dependent on nature.
The fund managers rising to the challenge
BMO Responsible Global Equity co-manager Nick Henderson says resource efficiency is closely tied to the biodiversity theme, adding that he expects many more challenges in the coming years.
Henderson says water is only one area where they look to meet the challenges of waste. Xylem, a US-based water infrastructure business, is the type of company the fund targets to meet those challenges. Henderson says its Flygt brand provides de-watering products and services (pumps and other devices) to address droughts and flooding related challenges.
The Pictet Global Environmental Opportunities fund uses the Planetary Boundaries framework (a concept introduced in 2009 and aimed to define the environmental limits within which humanity can safely operate) to screen out parts of the economy or industries which are causing the large drivers of biodiversity loss, such as economic activities that have an overly negative impact on land use, climate change and pollution. The framework helps cover the different main drivers of biodiversity loss, instead of focusing on one dimension and forgetting about another, which would ultimately be counterproductive.
Examples of holdings in the Pictet fund include Smurfit Kappa, a sustainable packaging and recycling solutions business to replace plastic packaging and minimize waste, and Christian Hansen, a global bioscience company based in Denmark, which develops bacteria for crops that can substitute fertilizers which tackles the challenge of excessive fertilization, resulting in nitrogen and phosphorus runoff into water systems.
Investors may also want to consider the Federated Hermes Global Emerging Markets SMID Equity fund or the Rathbone Ethical Bond fund.
I’d argue investor awareness on biodiversity is a journey which has only just begun. There remain big challenges but also big opportunities for investors wanting to help tackle this growing threat.
Darius McDermott is managing director of Chelsea Financial Services. The views expressed above are his own and should not be taken as investment advice.