From climate change to biodiversity: levers and lessons for investors

In February 2021, Preventable Surprises held a week-long online dialogue to set an investor agenda for biodiversity loss. In this Chatham House-rule, text-only online format, participants were invited to discuss and respond to a series of  “provocations” – short texts written by leading experts, designed to yield creative thinking, test the wisdom of the crowd and challenge the status quo. We are publishing these provocations on our blog this month in an effort to broaden this conversation.

By Corey Klemmer, Domini Impact Investments

The sophistication and scale of investor action on climate change has grown exponentially, yet the trendlines on GHG emissions remain remarkably unchanged. At the same time, the financial community is grappling with an exponentially greater and more complex risk: biodiversity loss.

The data challenge is frustrating but real. In the overwhelming majority of cases, the rich biodiversity data available is ‘site specific’ and cannot be easily linked to an investment, with notable exceptions like some project finance and sovereign debt. Sector level data can inform corporate engagement more than investment decisions. Without clear mapping of corporate value chains including financial flows, it is incredibly difficult to connect on-the-ground biodiversity data to publicly (and privately) traded securities and even harder still to aggregate it in a way that might provide portfolio level insights.

The traditional tools of financial analysis and accounting are insufficient to address tipping points or this level of complexity (for a point of reference, scientists estimate that we have yet to identify 80% of the species alive today, much less how they interact or the roles they play in their respective ecosystems). The theology of Milton Friedman economics roughly leads to the following:

1. Investment fiduciaries cannot accept a “below-market” rate of return.
2. Accordingly, investors will not ask companies in their portfolio to do less business, make less money, or put themselves out of business.
3. Modern portfolio theory is mostly concerned with measuring and addressing company level risks and performance; systemic risk is generally considered to be outside the scope of investor influence; thus, the universal owner theory often struggles in its application.

While the flaws in the logic, underlying assumptions and legal justification of this approach abound, it is a dominant cultural narrative with which we must contend, especially in the US. Again, investor action on climate is instructive here – we can see where the weaknesses of this approach are beginning to give way. Yet we need more than a critique of the status quo to address the challenges presented by biodiversity loss. We need a new way forward.

1. What do we (investors) want companies to do? How do we go beyond disclosure? What are nature-positive actions we can promote? We can ask for increased board competence, recognition in financial statements, disclose full traceability of supply chain, policy support for a strong CBD COP and make high level commitments. We can back that up with our proxy voting and shareholder proposals. But the question of how to drive specific and measurable action remains.
2. How can investors better use available data? Investors look for consistent, comparable data points across securities (companies), ideally quantifiable data that can be translated to financial risk or opportunity. Right now there are company ‘watch lists’ (e.g. the Forest500) and geographic data sets (e.g. ENCORE). Some data providers are starting to go further by aggregating or digging into supply chain information (e.g. Trase Finance and Forests and Finance).
3. How can we leverage Net Zero commitments to address nature loss? Companies, asset managers and asset owners are making commitments to reach ‘net zero’ by 2050. If the associated action plans don’t address nature loss, they are not fit for purpose (e.g. emissions will continue to climb if we reach tipping points in the Arctic or forests). How can we build in expectations about nature loss? Adjust carbon budgets to expect that we trigger at least one tipping point? Expand “Scope 3” emissions to account for land use change (perhaps ahead of updates to the protocol itself)?
4. Can we stay within our ecological boundaries without significantly constraining market growth? Many investors have expected rates of return that hover around 7%. Can we address over-consumption and still meet these expectations?
5. How do we leapfrog? What lessons can we take from TCFD, CA100+, and regulatory (in)action on climate change to drive a much more urgent response to nature loss?