Biodiversity: It’s only the beginning
On 4 April, I wrote a post on biodiversity and my lack of knowledge about any studies that show that increasing biodiversity is good for business or the share price of companies. I asked for your help, and I have to say a big, BIG thank you to all of you who responded. There were so many responses and tips that I cannot mention all of them here. But in this post, I will present my selection of some of the insights I have gained through your help.
Several fund managers wrote me to point me in the direction of individual companies in the food, beverage, and tobacco sector that are addressing these issues in their annual reports and their sustainability work. One fund manager pointed out Hotel Chocolat, which is a bit embarrassing because the company is a corporate brokerage client of my employer Liberum and I like their Sustainability work, so I should have remembered that they are actively working towards increasing biodiversity in the cocoa farms that provide their ingredients. Cocoa seemingly is a rather fickle plant and reducing the use of pesticides and other chemicals not only increases biodiversity but reduces the cost of producing cocoa and increases the long-term sustainability of cocoa plantations.
But if we go beyond individual companies, things are getting a bit patchy. Mike Tyrell from SRI-Connect, a website that connects ESG investors around the world and provides them with information about research and the latest developments in the space, pointed me in the direction of this informative survey of how businesses communicate on biodiversity and what investors are doing to engage with businesses on that issue.
The overall impression I get from these initiatives is that the business of biodiversity is still in its infancy and roughly at the same stage as the business of climate change was some 20 years ago:
There are currently very few businesses that report on biodiversity issues or have developed a strategy to preserve or improve biodiversity as part of their business activities.
None of the large asset managers currently focus on the issue of biodiversity in their sustainability work. However, there are a couple of initiatives, most notably a new joint venture by the largest French asset managers, to develop a tool to measure the investment impact of the destruction or preservation of biodiversity.
Some tools, like the one designed by ENCORE, are already available and try to measure the economic impact of the exploitation of natural resources. The problem with all of these tools is that they are logical but show no link between their results and the share price or the operating performance of businesses, the point I was looking for.
The problem is that while it is easy to show that the destruction of biodiversity and natural habitats causes economic costs, most importantly to the tourism and food industries, it is much harder to show that this is priced in financial markets. At the moment, biodiversity risks are externalities. For decades, the tobacco industry could reap outsized profits because the healthcare costs from smoking their products would be covered by health care insurance companies and national health care systems, not the tobacco businesses themselves. Eventually, that stopped and the tobacco business had to internalise some of these costs just like opiate producers had to internalise some of the costs they created for society.
Similarly, it is entirely possible that regulation will move in the direction of forcing businesses to internalise the cost they create on other industries from the destruction of natural habitats. Regulators have teamed up with industry experts and academics to form the Task Force on Nature-related Financial Disclosure (TNFD) which aims to broaden the established TCFD recommendations from climate-related risks to nature-related risks. The problem that I have with the TNFD is that it is moving at glacial speeds and will likely struggle to become relevant, particularly in light of the recently proposed IFRS Sustainable Disclosure Standards that broaden the TCFD approach not just to nature-related risks but to all sustainability efforts of businesses.
Finally, the most comprehensive resource on biodiversity and its economic and business impact that has been pointed out to me by several readers is the Dasgupta Review from February 2021 commissioned by the UK government. In it, one can find several approaches to how nature-related risks can be integrated into financial decision-making, but unfortunately, no empirical evidence that nature-related risks are currently priced in markets or that reducing a company’s impact on biodiversity loss is good for business.
Overall then, my assessment is one where I think there are lots of laudable efforts made by businesses, not-for-profits, and investors alike to assess the economic and financial impact of biodiversity loss. However, these efforts are very disjunct at the moment and there are neither a lot of commonalities between different efforts nor are there many numbers or other forms of hard data available at the moment. Most importantly, I still don’t know of any study that empirically shows the advantage of biodiversity protection for businesses or investors.
It really feels like we eventually will get there, and it seems likely that there is a ‘there’ there. Yet, we are currently at the beginning of the journey. It took about ten years for academics and practitioners to establish a clear link between climate-related risks and business profitability or its share price. I am hopeful that we progress faster with the business of biodiversity.