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LGIM – Biodiversity: an intergovernmental COP out?

With governments struggling to gain traction on nature loss, corporates and financial institutions shoulder ever-greater responsibility to drive positive change.

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With governments struggling to gain traction on nature loss, corporates and financial institutions shoulder ever-greater responsibility to drive positive change.

Natural capital – the environmental wealth provided by nature – is indispensable to our economies. In some cases, this is obvious: food, water, building materials or medicines. But other linkages are less obvious, such as the intricate ecosystems responsible for nutrient cycles in fertile soils or the pollination of crops by insects. Biodiversity – the variability among living organisms and the very fabric of natural capital – keeps our ecosystems functional and makes our economies productive.

It is therefore no surprise that the loss of biodiversity presents a global systemic risk. The World Economic Forum estimates that more than 50% of the world’s gross domestic product (GDP) – around $44 trillion – is either moderately or highly dependent on nature.[1] The World Bank estimates that a partial ecosystem collapse could cost 2.3% of global GDP (or $2.7 trillion) per year.[2]

These are big numbers, but they fail to convey the immediacy of our potential vulnerability and the importance of biodiversity beyond our direct dependencies.

Climate change and nature loss are mutually reinforcing: a changing climate threatens natural ecosystems, and nature loss amplifies climate change by reducing the ability of ecosystems to store carbon. Passing critical thresholds will spark runaway change from one equilibrium to another.[3] The risks are larger and more imminent than we are currently prepared for; we need to address nature’s degradation without further delay.

So, what are we doing about it?

At a global level, public awareness is undoubtedly growing through initiatives such as the UN Biodiversity Day, scheduled for 22 May. However, progress is slow, following a decade of disappointment and lack of action. None of the Aichi targets set in 2010 by the UN Convention on Biological Diversity (CBD) were met by their 2020 target date.

COP15 to the rescue?

Well, not exactly. Despite its huge importance in establishing a global agreement on post-2020 targets, the conclusion of the UN Biodiversity Conference, COP15 (the nature equivalent of last year’s COP26), due to take place this month, has now been postponed for a fourth time. Newly proposed dates for October 2022 will defer the conference by more than two years after it was first scheduled, and there’s still uncertainty around this date.

It would, however, be unfair not to acknowledge that there has been some progress despite the significant global challenges of recent years.

In October 2021, at ‘part one’ (of two COP15 parts), there were encouraging national commitments to develop, adopt and implement a post-2020 global framework that would put biodiversity on a path to recovery by 2030. We have also seen a more conscious push in some markets to address biodiversity loss through policymaking (e.g. the EU’s SFDR, the UK’s Environment Bill, France’s Article 29) and corporate reporting frameworks (e.g. the IFRS ISSB and the Task Force for Nature-related Financial Disclosures or TNFD, which looks to support a shift in global financial flows from nature-negative towards nature-positive outcomes).

The second part of COP15, however, is where the real action lies. It is where governments will need to finalise these targets and formally adopt the post-2020 framework. It is where we will either get a deal and a clear direction forward or risk a complete collapse in momentum akin to the 2009 Copenhagen climate talks.

What can investors do?

Collectively, we need to be more active in protecting nature. Investors have a critical role to play in driving this forward.  

That is why – irrespective of intergovernmental progress – we have been engaging policymakers on the issue. This includes pushing for reform of the EU Common Agricultural Policy that is essential for not only climate mitigation and negative emissions but to support long-term environmental resilience in terms of climate adaptation, biodiversity improvements and food security.  

We are committed to working collaboratively across the finance sector, which is why in 2021 LGIM signed the Finance for Biodiversity Pledge, committing us to collaborate and share knowledge, engage with companies, assess impacts, set targets and report publicly.

We know there are significant challenges in how we tackle this complex issue effectively, which include insufficient reporting, data availability and a lack of internationally agreed metrics. Since publishing our Biodiversity Policy in November 2021, we have been engaging with the TNFD and are actively contributing to its beta-reporting framework consultation. As part of our deforestation commitment, we have taken further steps to assess our exposure to commodity-driven deforestation risk. This an important part of making progress towards climate and biodiversity goals, and we will be further accelerating our engagement on deforestation over the coming months. We are integrating biodiversity metrics into LGIM’s ESG tools, including the forthcoming update of the ESG Score and the ongoing evolution of the ESG View. We will be continuing to collaborate and share knowledge to further develop our expectations of companies’ approach to managing nature and biodiversity risks, impacts and opportunities.

A lot needs to be accomplished this year if we are to successfully address the nature crisis. Corporates and financial institutions must take the reins in the absence of intergovernmental urgency.  

Sources

[1] https://www.weforum.org/press/2020/01/half-of-world-s-gdp-moderately-or-highly-dependent-on-nature-says-new-report/

[2] https://www.worldbank.org/en/news/press-release/2021/07/01/protecting-nature-could-avert-global-economic-losses-of-usd2-7-trillion-per-year

[3] Nature is Next – Integrating nature-related risks into the Dutch Financial Sector (wwf.nl)

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