Congratulations to Thematics AM!We are honored to announce that our affiliate expert Thematics Asset Management has won Water Sector Equity – Best-in-Class Award at BENCHMARK Fund of the Year Awards 2022. This award shows recognition to our expertise and innovative thematic strategies built for the future.
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And if this isn’t stark enough, the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) has stated that “nature is declining globally at rates unprecedented in human history, and the rate of species extinctions is accelerating, with grave impacts on people around the world now likely”.
The IPBES also identifies five direct human-driven causes of biodiversity loss, ranked by impact:
- Changes in land and sea use, driven primarily by agriculture, forestry, urbanization, and coastal development.
- Direct exploitation of organisms, in particular overexploitation of animals, plants, and other organisms, mainly via harvesting, logging, hunting, and fishing.
- Climate change, which causes increase in average temperatures and an intensification of extreme weather events.
- Pollution (air, water, and soil). Marine plastic pollution has increased tenfold since 1980.
- Invasive alien species. The globalisation of trade and increased tourism have accelerated the introduction of invasive species into ecosystems (via ballast water in the shipping industry, for example).
It falls within the scope of UN Sustainable Development Goal (SDG) 15, the aim of which is to: “Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss”.
For example, nature plays an important role in carbon storage: half of anthropogenic CO2 emissions are absorbed by natural sinks such as oceans, vegetation, and soils. Yet ecosystem degradation through land-use changes is a major contributor to cumulative CO2 emissions, and therefore is an additional driver of climate change.
The Taskforce on Nature-related Financial Disclosures (TNFD) – an equivalent of the TCFD for biodiversity – was established to develop and deliver a risk management and disclosure framework to report and act on nature-related risks.
The TNFD derives nature-related risks from the physical (eg natural disasters, loss of crop yield), transition (ie from a misalignment between an organisation's or an investor’s strategy and management and the changing landscape in which it operates) and systemic (ie the breakdown of the entire system).
It defines nature-related opportunities as “activities that create positive outcomes for corporates and/or financial institutions and nature by avoiding or reducing impact on nature or contributing to its restoration”. However, there is a complex interplay of nature-related dependencies and impacts on company and investor performance.
As such, the TNFD has developed a qualitative assessment framework to assist corporates and investors on nature-related risks and opportunities.
Yet unlike a carbon footprint, measuring the biodiversity footprint of a company or a portfolio is a more challenging task. There is no unique foot printing metric such as the tonnes of CO2 equivalent, and data is more localised.
Still, several methods have been recently developed by different data providers like Iceberg Datalab (Corporate Biodiversity Footprint) or Carbon4 Finance and CDC Biodiversité (Biodiversity Impact Analytics powered by GBS).
They use indicators describing species richness and relative abundance as a proxy for overall biodiversity. These models do not directly count the relative abundance of a species in a location but measure it indirectly through a pressure-impact model.
These ‘natural capital assets’ can be divided into four main groups: land, ocean, freshwater and atmosphere.
Each provides services, known as ecosystem services, which benefit industry and are essential to our wellbeing. Globally, these services were worth an estimated $125-140 trillion in 2011 – more than one and a half times global GDP in the same year2.
However, the deterioration of biodiversity affects the stock of natural capital and the associated ecosystem services, which has severe consequences on business and society: a cost estimated at $4-20 trillion per year owing to land-use change alone2.
All economic activities depend upon and impact ecosystem services in multiple ways, either directly through operations or indirectly through supply chains. Therefore, as a key building block in sustaining biodiversity, the positive impact that well-sourced ideas can have in the water investment ecosystem shouldn’t be underestimated.
Within an investable universe that includes pollution, invasive species and change in land/sea use, water funds can play a role as a critical plank in the broader mandate of biodiversity investments. And certain stocks within this investable universe fit within IPBES’ five key drivers of biodiversity loss (see illustration) to frame the diverse opportunity set that can be accessed through a biodiversity lens.
With a range of government and non-government entities already sounding the alarm on the need for a greater focus on biodiversity, it is clear that considered investments in the water value chain can provide a solution to one of the greatest challenges faced by the human race.
Or, put another way: water’s intrinsic importance in creating a sustainable, biodiverse world is as critical to global health as drinking the resource itself.
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2 Source: Costanza et al, Changes in the global value of ecosystem services, 2014, https://www.sciencedirect.com/science/article/abs/pii/S0959378014000685
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