Last December, the UN adopted the Kunming-Montreal Global Biodiversity Framework, in which more than 200 nations pledged to protect 30% of terrestrial, inland water and coastal and marine ecosystems from biodiversity loss by 2030. This almost doubled the previous commitment. “Biodiversity” refers to the variety of life on Earth and its ecosystems and habitats. It is a key element in providing critical health, economic and cultural benefits, and is essential to safeguarding food and medicine production, habitats and more.
At just $155 billion per year, however, current public and private investment in “nature-based solutions”—those that protect, conserve, restore, sustainably use and manage natural resources—is less than half of the $385 billion a year needed by 2025. And only one-third of the $485 billion a year needed by 2030 to help halt biodiversity loss and restore ecosystems.1 Examples of nature-based solutions include land conservation, dunes and stormwater parks, which tend to be funded with public funds.
Only 17% of current investments come from the private sector,2 presenting companies and investors with an opportunity to help close the funding gap—if not through nature-based solutions then through a different framework. Given the landmark UN agreement in December and the need for financing, Morgan Stanley Research analysts anticipate a surge in companies investing in strategies that prevent biodiversity loss. This, coupled with upcoming regulation in the EU on biodiversity-related disclosures, is also driving a surge in the the number of investors seeking to integrate biodiversity into their portfolios.
“Investing in biodiversity is essential to advancing a more sustainable global economy,” says Jessica Alsford, Chief Sustainability Officer at Morgan Stanley. “It not only ensures our planet’s natural resources are protected and resilient, but also helps unlock new opportunities for businesses to sustainably grow and innovate.”
What Can Investors Do?
The three key drivers of biodiversity loss—climate change, pollution and changes in land use (such as deforestation)—offer a framework for investors to understand where their investments can make a difference. Investors can build a biodiversity investing strategy in three key ways. The first two allow investors to assess the risk of biodiversity loss in their investments, while the third offers a framework for highlighting opportunities.
1. Screen for sectors and companies with the highest negative impact: This risk-management strategy posits two approaches. First, investors can screen out sectors or companies deemed to have the highest impact on biodiversity loss. The UN’s Principles for Responsible Investment flags forest products and fisheries, food, beverages and tobacco, mining, oil and gas and transportation in this category. Alternately, or additionally, investors can screen sectors or companies for which biodiversity loss poses a material financial risk. This category includes construction, food and agriculture, maritime, metals and mining, and water utilities, according to the International Capital Market Association’s Sustainability-Linked Bond Principles.
2. Trace controversial commodities: Another risk-management strategy involves tracing commodities associated with biodiversity loss. For example, illegal deforestation involved in the production of palm oil, cocoa, cattle or rubber is the single largest cause of biodiversity loss and responsible for about 15% of global carbon emissions.3 Various countries have passed or introduced legislation aimed at stopping the unregulated destruction of forests, and analysts believe that as these measures become more widespread, companies will be required to gather and report biodiversity-related information. Investors should become more attuned to the idea of including traceability of controversial commodities in their due diligence when considering an investment.
3. Target “solution stocks”: Morgan Stanley analysts see investment opportunities in more than 100 stocks linked to the three key drivers of biodiversity loss—land-use change, climate change and pollution. Land-use solution stocks include those in companies with exposure to sustainable practices, such as precision agriculture, vertical farming and digital farming. Within the climate change category are stocks with revenue and/or capital expenditure tied to factors such as renewable energy, energy storage, hydrogen, carbon capture utilization and storage, green mobility, energy efficiency, climate insurance and other emerging technologies. Finally, companies targeting pollution include recyclers of plastics and aluminum.