Future of Water: The Climate-Biodiversity Connection

Biodiversity is defined by the United Nations as “the variability among living organisms from all sources including…terrestrial, marine, and other aquatic ecosystems [and] includes diversity within species, between species and of ecosystems”.

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”.

While the crisis of climate change has been well documented, the loss of biodiversity is closely interconnected. Indeed, they must be addressed in tandem, with climate change a direct threat to biodiversity, and vice versa.

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.

Through their investments, business impacts and dependencies on biodiversity translate into risks to financial institutions.

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.

Water is a major component of ‘natural capital assets’. For reference, ‘natural capital’ is the stock of both renewable and non-renewable resources (eg plants, animals, air, water, land, minerals) that combine to yield a flow of benefits to people.

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.