One of the more prominent emerging trends in ESG investing is to focus on biodiversity. Companies are increasingly asked by investors how they ensure that their operations help increase biodiversity – or at least don’t damage existing wildlife. The miserable failure that was COP26 had a dedicated session on biodiversity and how it can help mitigate climate change. But has anyone asked if biodiversity is not just “good business” but good business?
I fully support efforts to preserve and increase biodiversity around the globe. From an environmental perspective increasing biodiversity helps create carbon sinks that reduce the concentration of CO2 and other greenhouse gases in the atmosphere and thus mitigate climate change. That is important and should be promoted wherever we can.
But when I put on my investor hat, I sincerely wonder, what this business of biodiversity is all about? Businesses will only change their operations if they have an incentive to do so. That incentive can come in the form of reduced operational or financial risks. For example, we know that having a more diverse board of directors reduces operational risks, which is why it is a good idea to have more women and people from diverse backgrounds on the board. Similarly, reducing greenhouse gas emissions reduces borrowing costs and thus is a financially sensible thing to do.
But what are the incentives for businesses to preserve biodiversity? I am not aware of any study that shows that a company’s share price is changing in reaction to biodiversity conservation, nor am I aware of any study that shows that increasing biodiversity has operational or financial benefits for businesses.
There is one recent study that looked at the fiscal multipliers of government spending on initiatives to increase biodiversity. This study showed that there is a large fiscal multiplier associated with increasing biodiversity – much larger than the fiscal multiplier associated with government spending on non-eco-friendly agriculture.
Fiscal multipliers for green land use vs. conventional agriculture use
Source: Batini et al. (2021)
The problem with this study is clearly outlined by the authors in the paper, so no blame on them. They clearly state that the data on green land use comes from developing countries and their efforts to not only regenerate the environment but also train locals in nature preservation and revenues from increased tourism and eco-tourism. Meanwhile, the fiscal multipliers from non-eco-friendly agriculture are derived from the impact of government subsidies on farming in developed countries. So, it really is an apple to oranges comparison, but unfortunately, that seems to be as good as it gets.
But the problem with this kind of apple to oranges comparison is that we know that education has one of the highest fiscal multipliers anywhere. Educating your people is the cheapest and fastest way for a developing country to end poverty. Meanwhile, we know that tax rebates and subsidies have one of the lowest fiscal multipliers and are generally a waste of money (with the one exception being subsidies to help a new technology like renewable energy scale up).
So, the differences in fiscal multipliers in the chart above are in my view simply a reflection of a different kind of government spending, not of eco-friendly vs. non-eco-friendly land use.
This brings me to a request for my readers. I have been trying to find decent studies about the economic impact of biodiversity preservation and the impact on businesses. So far, I could not find anything. But I am truly curious and would love to learn more about that topic. If you know of any such studies, please send me an email. I would greatly appreciate it.
I would venture to guess that you can only improve biodiversity by creating well-functioning and healthy ecosystems, so I view improving biodiversity as a general term for improving the environment that supports us. Have you heard of the work being done by the Intrinsic Exchange Group? They're trying to put a price on ecosystem services and create a new asset class for Natural Asset Companies. Have a look if you're interested.
Could something like the rhino bonds be used to link the biodiversity goal to financial incentives?