Biodiversity: Sustainable investing’s new frontier?

Abbie Llewellyn-Waters, Head of Sustainable Investing, explains why Biodiversity is the next big theme for sustainable investing.
Abbie Llewellyn-Waters

Head of Sustainable Investing

Jupiter AM

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While the eyes of the world have been on the upcoming COP 26 in Glasgow – labelled as humanity’s last chance to save the planet, there has been a much less-publicised, but just as important, event occurring in Kunming, China.

The birds and the bees

COP 15 is a two-part UN biodiversity summit which aims to protect the diversity of plant and animal species, and ensure natural resources are used sustainably. This will be crucial to setting out a new framework for a co-ordinated response to protecting biodiversity and reversing its loss that is going to need to be much stronger than previous efforts whose targets have broadly failed to have been achieved.

Put simply, biodiversity refers to the variability among living organisms from all sources, encompassing terrestrial, marine, and other aquatic ecosystems, from plants and trees to simple organisms and animals. Why will biodiversity be the next frontier for sustainable investors? We know that 50% of global GDP depends on biodiversity yet we continue to use nature’s resources much more quickly than they can be replenished. For example, 75% of crops that produce human food rely on animal pollination, yet there is evidence that agricultural practices, climate change and pesticide use is driving declines in pollinator populations. And that impact will be felt across the whole natural ecosystem, with much broader implications for our economy and standards of living.

Providing an incentive to reduce carbon emissions by putting a price on carbon will be one of the major topics of COP 26. Similarly, I expect that companies’ impacts on nature will increasingly be understood as a cost they need to bear to incentivise changes to the way they operate and the impacts of their products. My hope is that many of the learnings from climate change negotiations will be able to be directly applied to natural capital, meaning that the policy landscape will shift much more quickly. We are already starting to see this with the rapid development of the TNFD (Taskforce for Nature-Related Financial Disclosures).

Shifting supply chains

Every sector and industry has a role to play in addressing the key issues facing the world we live in. By looking to identify companies that are actively seeking to reduce to zero the negative impact they are having on the natural world, we are able to find opportunities across a broad range of sectors. When it comes to biodiversity, we believe that the companies best placed to succeed in the future are the ones that are already changing their business practices to be more sustainable. This could range from a clothing manufacturer that actively seeks to close the loop on fabrics to mitigate the risks of input material production disruption or a food producer using nature-positive farming practices and reducing soil and water pollution.

One example of a company which we see as leader in its approach to biodiversity in its supply chains is Unilever. It has ambitious targets in place to have deforestation-free supply chains by 2023, implement water stewardship processes in some of the world’s most water stressed areas and have 100% of its ingredients being biodegradable by 2030. It has also compiled guidance to suppliers on best practices with respect to sustainability and land health with an additional focus on smallholder farmers, among many other ways in which it actively seeks to work with its supply chain to become more sustainable. Due to the size and influence of Unilever, it can make a massive difference across multiple supply chains with the changes it makes; we believe that Unilever is a great example of a company which is at the forefront of protecting biodiversity and restoring nature. By ensuring that its supply chains are sustainable it is also helping to safeguard its future returns for investors by building in resilience and actively seeking to reformulate its products to address emerging consumer requirements.

The implications for investors

So – what are the implications for investors? This will, just as with carbon, present significant risks to some businesses but also some excellent investment opportunities in those companies that are seeking to lead the transition to a more sustainable world.

The World Economic Forum predicts that between 2011 and 2050, biodiversity loss may cost the world economy up to $10 trillion. The Jupiter Global Sustainable Equities strategy looks to invest in exceptionally robust companies with durable franchises; looking ahead, companies’ earnings are going to be increasingly interlinked with their exposure to the physical impacts of biodiversity on their operations and supply chains as well as regulations to curtail their negative impacts on nature. Reputational and brand damage will also become increasingly prevalent.

I also believe that the investment opportunity to help protect and restore nature is excellent. To begin, companies that are actively seeking to reduce their impact and by inference future costs are likely to find themselves with a major cost advantage. And as more and more companies see the need to address both their impacts and dependencies on biodiversity, those that are able to help them do so across a wide range of sectors will likely see some highly meaningful addressable markets opening up in line with the long-term structural trend of sustainable production and consumption.

As the regulatory backdrop and consumer preferences and awareness continue to develop, and corporate disclosures improve, biodiversity impacts and dependencies will continue to be a key topic for the Jupiter Global Sustainable Equities strategy as we look to invest in those companies that are leading the transition to a more sustainable world.

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Biodiversity: Sustainable investing’s new frontier?