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BNP Paribas Asset Management: Sustainable by nature – The importance of biodiversity to financial institutions

“The story of the biodiversity crisis is a story of value destruction on an unprecedented scale. We understand that this is about more than just money – life is material to us too – but the financial estimates alone are staggering, in terms of what we might lose and what we might gain if we change course now. We can, and we must, secure a better future for our clients and for society.” – Jane Ambachtsheer, global head of sustainability, BNP Paribas Asset Management

In recent years, there have been alarming declines in insect and bird populations. Larger animals have not fared much better: 70% of vertebrate species have disappeared since 1970. When bees and other insect pollinators disappear, the birds that eat them and the plants they pollinate dis- appear. Thus begins a chain reaction, with severe implications for global food production and other ecosystem services. The loss of pollinators provides an example of how difficult it is to measure the economic impact of biodiversity loss. A recent study placed the economic value of insect pollination in the US at $34bn, based on 2012 data.1 But the larger cost in terms of human sustenance and nutrition is substantially greater, potentially impacting sectors of the economy that depend upon a healthy, well-nourished workforce. One estimate places the cost of pollinator loss at over $500bn per year.2 These costs are likely to be significant underestimates for at least three reasons:

  • The complexity involved in valuing the accelerating destruction of complex, integrated systems that provide so many services essential for life and economic activity
  • Certain ecosystem services are irreplaceable
  • Only a portion of the costs can be translated into financial terms. The intangibles, which include the knowledge lost when species disappear before they have even been discovered are priceless. The estimates we have seen, however, are credible and large enough to threaten global financial stability and delivering sustainable returns to our clients. As fiduciaries, we have an obligation to act. Investors thrive on taking calculated risks
  • Risk and reward are viewed as two sides of the same coin. Sophisticated investors are comfortable with risk.

The biodiversity and climate crises, therefore, demand new terminology. If a ‘risk’ is a negative event that may or may not occur, then the concept does not adequately capture what we are facing. Like climate change, biodiversity loss is an ongoing process, not a potential future event. There is a great deal of uncertainty regarding how this process may play out, and how negative and far-reaching the outcomes will be, but it is quite clear that continuing on a business-as-usual basis is driving us to disaster, and we must change course.

The Convention on Biological Diversity’s goal to ‘live in harmony with nature’ pre- sents opportunities for investors, as society works to reorient consumption patterns and production methods. In parallel with the shift to a low carbon economy, this transition is the most significant investment opportunity of our lifetimes. According to the World Economic Forum, these ‘positive pathways’ are estimated to bring $10trn in business value and create 395 million jobs by 2030.3

Asset managers need new tools and approaches to risk management to address this threat. For example, traditional risk modeling techniques tell us that the highest impact events are also the least likely to occur. These are often labelled ‘fat tail’ events. However, ecosystem collapse cannot be modelled using the same tools we use to predict random events. Ecosystem collapse is already happening, initiated and driven by human activity. A reliance on our old models may mask the true nature of the threat.

The most significant risk of biodiversity loss is not to companies when they lose access to certain ecosystem services or the the reputational risk of funding harm to nature. The paramount risk is the unraveling of nature itself, which is underway. This is an existential threat. Risk management focused solely on risks to individual issuers will not translate to a reduction of systemic risk.

To manage systemic risk, investors need to use their influence on the problem, including more effective engagement and public policy advocacy. As investors, we must also take a ‘bottom-up’ approach and consider how nature loss translates into financial risk to companies.

1) https://www.sciencedaily.com/releases/2021/02/ 210203144555.htm (The economic value of insect pollinators was $34 billion in the U.S. in 2012, much higher than previously thought, according to researchers at the University of Pittsburg and Penn State University. The team also found that areas that are economically most reliant on insect pollinators are the same areas where pollinator habitat and forage quality are poor.)
2) https://insights.osu.edu/sustainability/bee-population
3) Katri, A; Waughray, D., A blueprint for business to transition to a nature-positive future (World Economic Forum, 15
Jul 2020), at: https://www.weforum.org/agenda/2020/07/ future-nature-business-action-agenda-blueprint-climate- changebiodiversity-loss/

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