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businesses and biodiversity

October 2021
Marketing Material

Halting biodiversity loss: the new net zero

In an opinion piece published in Barron's China, Pictet Asset Management CEO Laurent Ramsey explains why protecting biodiversity should be a priority for both businesses and investors

Nature has always been critical to human health.

The people of ancient Mesopotamia used hundreds of plants, such as poppy and myrtle, to treat injuries and illnesses; many such nature-based treatments remain in use today. Indeed, by some estimates, more than one-third of modern drugs are derived from flora and fauna and the pharmaceutical industry uses as many as 70,000 different species of plants.

So when nature thrives, humans are healthier too. Unfortunately, the opposite is also true.

Thanks to biodiversity degradation caused by rapid economic development, the world is already losing one potentially critical drug every two years.1

For example, a species of Himalayan yew tree that is used to produce Taxol, a chemotherapy drug to treat cancer, is on the brink of extinction due to overharvesting and collection for fuel.2

But medical therapies represent only a fraction of what humans stand to lose from the depletion of the Earth’s biodiversity.

A healthy biosphere ensures the world is sufficiently supplied with food, clean air, water and fertile soil; it also creates the conditions under which crucial processes such as pollination, flood protection and carbon capture and storage take place.

All of this is threatened by biodiversity loss. Attempts have been made to quantify the risk.

One model, developed by the United Nations, treats the planet’s resources as “natural capital”, an asset much like any other that appears on a company’s balance sheet. Under this framework, the Earth’s supplies of clean water, fertile soil and minerals form the capital stock from which humans gain three essential “ecosystem services” – provisions, regulations and culture (see chart).3

The economic value of these services is estimated to be as much as USD140 trillion a year – or 60 per cent more than the global GDP.4

Ecosystem services: a subsidy for humanity
SRC-biodiversity_update_PAM
Source: UN Millennium Ecosystem Assessment, Pictet Asset Management

By rapidly drawing down on this natural capital while also failing to invest to preserve its value, humans have already severely degraded an estimated 60 per cent of the world’s ecosystem services.

Given the magnitude of the threat, you’d think reversing biodiversity loss would be a priority for both businesses and investors, particularly in the era of responsible capitalism.

But it isn’t.

Global warming and carbon emissions remain the top non-financial concerns. While an increasing number of companies are committing to net zero emission plans, few consider the loss of natural ecosystems a corporate responsibility.

To be fair, it is easy to see why.

Biodiversity is complicated. Unlike climate change, which has an extensive research infrastructure and well-defined physical targets, biodiversity is a messy and dynamic system that doesn’t lend itself easily to practical analysis. For example, more than 80 per cent of the world’s species – and therefore their habitats – remain undiscovered by science.5

However, given the intimate relationship between climate and the biosphere, the two crises can only really be tackled together.

Nothing makes that point more emphatically than a recent study showing that ocean and land ecosystems remove around half of anthropogenic CO2 emissions from the atmosphere every year.

Put it another way, half of our “climate debt” is removed, for free, by the biosphere every year – a vast subsidy to the world economy.6

The rise of green accounting

How might corporations respond to the problem of biodiversity loss?

To begin with, companies should acknowledge the threat that biodiversity loss presents to their bottom line.

These risks can manifest themselves in a number of ways.

Physical risks are the most obvious and immediate. For example, deforestation could trigger floods or reduce local rainfall, raising operational and insurance costs for various industries. Food producers may face a long-term decline in production and revenues as nutrient-rich soil disappears as a result of intensive farming.

Then there are liability risks. These include legal and reputational costs arising from lawsuits filed against companies allegedly causing ecological damage.

There are already a number of risk models businesses cans use. The UN, for instance, has developed a framework of internationally comparative statistics and accounts which allow investors to compare environmental accounting to make informed decisions – just as they compare economic accounts on gross product, trade or expenditure. The System of Environmental Economic Accounting (SEEA) is now used to calculate a progress towards Sustainable Development Goals.7

Then there are science-based models such as the Planetary Boundaries framework, which helps businesses quantify their contribution to species loss for every USD1 million of revenue they generate.8

Such models could form the basis for nature-related financial disclosure, such as the inclusion of biodiversity footprint data in quarterly reporting, as well as for business targets on issues like species protection or habitat restoration.

Some firms are moving faster than others. Luxury conglomerate Kering has developed Environmental Profit & Loss (EP&L) accounts to measure and quantify the impact of its activity on biodiversity and the environment. It is committed to reduce its EP&L footprint by 40 per cent across its supply chain by 2025.9

For other companies, biodiversity disclosure is legal obligation.

In France, new regulations introduced in 2019 require financial institutions – including banks, investors and insurers – to publish such information in their statements.

Benefits from investing in efforts to halt biodiversity loss could be considerable.

New net zero: biosphere and finance

Corporations’ role in halting biodiversity loss should not be limited to risk mitigation and transparent reporting. Businesses’ capital expenditure can also be re-directed to repair the damage caused to the ecosystem.

The benefits from such investment could be considerable.

This is where models such as the Species Threat Abatement and Recovery (STAR) metric can help. Developed by the International Union of Conservation of Nature, one of the most influential organisations on biodiversity, the STAR metric quantifies the impact a business’s investments can have in reducing species extinction risk. It can do so before investments are made (ex-ante) and can also measure the impact of conservation interventions on extinction risk over time (ex-post) for a particular manufacturing site, land management unit, region or country. Investment in natural capital will be crucial.

Currently, public and private investment to protect biodiversity amounts to estimated USD78-91 billion per year, about a tenth of what is deemed necessary10 and half of what the world spends in fossil fuel subsidies.11

But the mood is changing. Policymakers will discuss a set of ground-breaking biodiversity targets for 2030 at next year’s UN summit – the biggest in a decade – in Kunming, China.

Establishing a new net zero target on biodiversity loss that corporations should adhere to may be a Herculean task. But it is what we need to heal nature and achieve sustainable transformation of our economy.