In Switzerland alone, after several years of double-digit growth, assets managed by sustainable funds now exceed those of traditional funds according to the most recent market report by Swiss Sustainable Finance. The report also emphasises that the climate remains a key theme in responsible investing.
There are good reasons for this. The climate emergency is a major challenge, and justifies channelling money towards companies seeking ways of dealing with it. In addition, there is broad consensus about the roadmap for stabilising temperatures: we need to reduce our carbon footprint and bring emissions as close to zero as possible. We know how to measure those emissions, so it is a simple task to distinguish the most virtuous companies in this respect. Encouragingly, every year we are seeing more and more companies setting measurable targets.
Sword of Damocles
However, efforts to combat global warming are only one aspect of the battle. The biodiversity crisis is another sword of Damocles hanging over the planet, and the finance industry is starting to realise the importance of factoring nature into investment decisions, as it did with the climate a few years ago. After adopting a net-zero target, the industry must now take a nature-positive approach.
This is especially vital since biodiversity and the climate are intimately linked. Regardless of how hard we try to reduce carbon emissions, we will not solve the problems arising from global warming without addressing those relating to biodiversity loss, and vice versa. Certain climate phenomena, such as heavy rainfall, lead to greater soil degradation, and poor soil is no longer able to absorb CO2. Restoring degraded soil therefore allows biodiversity to recover while also recreating carbon sinks.
Although biodiversity is a harder concept to grasp than the climate, it represents a huge challenge. According to the WWF, two thirds of the world’s wildlife has been lost since 1970 because of human activity, while the UN estimates that 40% of the world’s land is now degraded. Nature provides us with numerous vital and valuable services free of charge, including pollinating crops, storing carbon, and supplying us with drinking water, clean air, raw materials, and medicinal resources. According to the World Economic Forum, half of the world’s GDP is moderately or highly dependent on nature and its services.
“Ecosystem services”
Widespread biodiversity loss threatens nature’s ability to provide us with these “ecosystem services”. Even if it were possible to reproduce these services – and it will not be possible in many cases – it would be a very expensive exercise for our economies and companies. Biodiversity loss also comes with huge social costs in terms of nutrition and poverty. So we need to support companies that offer ways to protect and restore biodiversity, by investing in them.
The conflict in Ukraine has caused fertiliser and herbicide prices to surge, and so the need to improve the way we produce crops has become much more urgent. Solutions exist: some companies have developed processes that use agricultural inputs much more sparingly, and are therefore more economical and respectful of biodiversity. However, the current conflict could accelerate deforestation in tropical regions as palm oil threatens to replace sunflower oil, of which Ukraine and Russia used to be the main producers.
Politicians and regulators have clearly identified the challenges arising from biodiversity loss. Within the EU, for example, the green taxonomy is likely to help guide investments towards supporting biodiversity. It is now up to the finance industry to create investment products that are up to the task, and to develop suitable measurement tools. There is currently a lack of standardised, audited data, because there are no agreed methods for measuring biodiversity gains. The most effective way of changing this is to work together both within our industry and with partners in the conservation space.
The Swiss finance industry can play a key role in adopting a “nature-positive” approach to sustainable finance. It has a tradition of analysing corporate responsibility through theme-based approaches that are more sector-specific, accurate and in-depth than broad sustainability strategies. Although the latter have the advantage of attracting substantial amounts of money towards responsible investments, they only look at large-cap companies and ignore smaller ones, which nevertheless show promise because they offer targeted solutions to specific problems. In the long run, therefore, smaller companies have the most potential to generate investment returns.
So if the first leg of the race towards a more responsible finance industry was driven by the desire to combat global warming, the aim of protecting and restoring biodiversity has now picked up the baton. Supporting biodiversity requires a much more holistic view of the challenges ahead, along with solutions that the financial industry can help develop, while also offering a broad array of new investment opportunities.
Nicolas Faller