Articles

The emergence of nature and biodiversity

The case for tackling climate change has become increasingly clear to investors in recent years. Governments have stepped up efforts to mitigate and manage the devastating impacts of a warming world, with the Paris Agreement and, more recently, the Glasgow Climate Pact laying the groundwork for the action needed. 

The role of the financial industry in combatting climate change is also fast evolving. The raft of net-zero pledges made under the Glasgow Financial Alliance for Net Zero (GFANZ)1 demonstrates a real progression in how the financial industry is addressing this challenge. This is perhaps no surprise given the risks involved – as Christiana Figueres, former Executive Secretary of the UN Framework Convention on Climate Change once said, “Climate change increasingly poses one of the biggest long-term threats to investments”2.  

There is, however, another important topic emerging from the shadow of climate change and rapidly rising up the investor community’s agenda – that of nature and biodiversity. Climate change and biodiversity loss have typically been seen as separate issues, with the former dominating the discourse at both a governmental and private sector level. However, it’s becoming clearer that they may be twin crises on “two sides of the same coin”3.

Understanding the interplay between nature and climate change

One way to consider nature and biodiversity is through the benefits and value they provide to businesses and wider society, referred to as ‘ecosystem services’, or simply as ‘nature’s contributions to people’.

The Millennium Ecosystem Assessment classified ecosystem services into four major categories4: 

1. provisioning services, such as food and water; 
2. regulating services, such as flood and disease control; 
3. cultural services, such as recreational and cultural benefits; and 
4. supporting services, such as nutrient cycling, that maintain the conditions for life on Earth

These ecosystem services flow from the stock of natural capital, which is underpinned by biodiversity i.e. the diversity within and between species5.

These ecosystem services that are so critical to our way of life – from food security to green spaces that aid mental health – are not priced into our current economic measures6. One study estimates that more than half (55%) of the world’s total gross domestic product (GDP) – equivalent to an estimated $57.4 trillion – is moderately or highly dependent on nature and its services7, while the Dasgupta review outlines that our economies all depend on nature, either directly or indirectly8. However, nature has largely been considered a free and limitless externality.

With the world facing a crisis in biodiversity9, the statistics show just how damaging this belief is. According to a 2022 WWF Report, its Living Planet Index showed an average 69% decrease in monitored wildlife populations between 1970 and 201810. The world has also lost one-third of its forests to deforestation, half of which has occurred in the last century alone11. Between 1997 and 2011, it is estimated that declines in the world’s biodiversity resulted in losses of up to $20 trillion per year12.

The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) is a leading voice in advising policymakers on the state of nature and biodiversity globally. IPBES has identified and categorised five direct drivers of nature and biodiversity loss: 

1. land and sea use changes
2. direct exploitation of organisms (such as overfishing and deforestation)
3. climate change
4. pollution
5. invasive species13

Of these drivers, land and sea use changes, as well as exploitation, have the largest impact on nature and biodiversity loss currently. However, if we don’t limit the scale of warming, then climate change is likely to become the dominant cause of biodiversity loss and the degradation of ecosystem services in the coming decades14. Here lies the unique challenge between biodiversity loss and climate change – that they are highly interdependent of each other. The temperature rises and increased intensity of weather events associated with climate change are expected to lead to biodiversity loss by making habitats less hospitable. At the same time, this loss of biodiversity and nature means we lose some of our best defences against climate change15. 

To put that into context, the ocean absorbs around 25-30% of annual CO2 emissions16, while forests worldwide have absorbed about 18% of all human-caused carbon emissions17. As temperatures increase, however, the ability of the oceans to dissolve CO2 decreases18, while the rate of deforestation – currently equivalent to losing an area about the size of Portugal annually19 – means we are reducing the volume of CO2 absorbed each year. Nature also helps to reduce the impact of extreme events, such as flooding, by dissipating wave and tidal energy20. This interconnection between biodiversity loss and climate change means that it may not be possible to solve one without solving the other21.

How private finance can leverage climate action to halt biodiversity loss

In its 2022 report on the ‘State of Finance for Nature’, the UN identified a need to double investment by 2025 and eliminate nature-negative finance flows22. The financing gap is substantial and, as the chart below shows, a doubling of investment by 2025 is just the start. By 2050, $674 billion is required each year, four times current investment levels. According to the report, if this level of finance were to be achieved, we could halt biodiversity loss, significantly reduce emissions and restore close to one billion hectares of degraded land.