Defending nature – biodiversity funds promise end to the extinction crisis

Many scientists believe we are now in a sixth Mass Extinction, the only one to be caused not by natural phenomena, but by humans. One million species of plants and animals face extinction, many within decades, as their habitats are degraded or destroyed, and as man-made global warming makes their natural territories uninhabitable. We are losing species hundreds or even thousands of times faster than the natural rate of loss¹.

With over half of the world's GDP reliant on nature and its ecosystems services², this accelerating loss of biodiversity is an economic time-bomb. Now the investment community is taking note. Increasingly, nature is being seen as an asset class in itself, and new 'biodiversity funds' are emerging, offering investors the chance to realise returns while restoring nature and protecting our threatened biodiversity.

Nature and climate – twin crises

For more than two decades, since the Kyoto Protocol was adopted in 1997, the focus of international efforts to tackle the climate challenge has fallen on carbon – carbon emissions, carbon footprints, carbon credits. Recently, science has shown that this misses an important piece of the puzzle. Climate change and nature degradation cannot be treated separately – they are twin crises.

Read also : Investing in nature, our most precious asset - an interview with Marc Palahì, our Chief Nature Officer

When it comes to preserving nature, biodiversity is key. For instance, the world's forests absorb 1.5 times as much carbon each year as is emitted by the entire US economy – healthy forests are essential in mitigating climate change. Trees do not exist in isolation, however, and the near countless species of smaller plants and animals that inhabit forest environments are as important as the trees themselves. Above ground, insects, birds and mammals act as pollinators and spread seeds for new growth; below ground, a vast community of micro-organisms and fungi, many still unknown to science, play an essential role in storing water and maintaining forest health.

A similar story can be told in our marine environments (which absorb 25% per year of all man-made greenhouse gas emissions³) where healthy, biodiverse ecosystems are essential to preserving our oceans' ability to sequester carbon for the long-term.⁴

Biodiversity also plays a more direct role in much of the global economy. Our many pollinators, for instance, which include everything from insects to birds, bats, and even lemurs, are worth up to USD 577 billion to our global food systems⁵. Without them, crops would be threatened and food shortages could loom. Many of our medicines originate in the huge range of plants found in tropical forests. And mangroves, which are supported by a complex ecosystem of both marine and terrestrial biodiversity, are thought to prevent billions of dollars of property damage from flooding each year, while simultaneously operating as “fish factories" that support more than 4 million fishermen and women around the world⁶. According to the OECD, nature's ecosystems services are estimated to be worth as much as USD 140 trillion.⁷

Read also: Pollen counts: the forgotten pollinators powering nature

International momentum

World leaders are now showing greater recognition of nature's vital role both in our economy and in tackling the climate challenge. 2022's COP15 summit in Montreal marked a pivotal moment. Just as the Paris Agreement had set a measurable target for limiting climate change, the COP15 Global Biodiversity Framework (GBF) introduced clear objectives for conserving natural landscapes and biodiversity. Most notably, the GBF included a pledge by 196 nations to protect 30% of Earth's entire land and ocean area by 2030.

Crucially for investors, the GBF also calls for new legislation requiring businesses to disclose the risks they face from biodiversity loss, along with the impact that their business models have on the natural environment. Building on this, in September 2023, the Taskforce for Nature-related Financial Disclosures launched a landmark new set of guidelines outlining how firms should analyse and report on this risk.

Read also: Mobilising trillions to create a net-zero, nature-positive economy

The direction of travel is clear. Amongst policymakers, the nature crisis is now being taken as seriously as the climate crisis. Increasingly, firms will be required to adopt new business practices to mitigate their impact on biodiversity.

Biodiversity funds

Biodiversity funds seek to capitalise on this momentum by investing in firms that are providing solutions to the biodiversity crisis – such as providers of biological crop protection to replace the pesticides that are causing pollinator numbers to plummet⁸; or manufacturers of precision farming technology that can boost crop yields while minimising farming inputs, thus reducing the degradation of soils. Some funds also invest in so-called 'best-in-class' firms – those companies with the smallest 'biodiversity footprint' in their sector.

This focus on nature-positive business practices will be catalysed by public finance. According to the OECD, around the world USD 500 billion goes on support measures (such as agricultural subsidies) that are potentially harmful to biodiversity⁹. As these damaging subsidies are redeployed – in the EU, for instance, the Green Deal and a reformed Common Agricultural Policy will redirect agricultural subsidies towards farmers who replace monocultures with crop diversity¹⁰ – new finance will be unleashed.

For investors, this is creating a new opportunity to invest in nature itself. Though still in their infancy – biodiversity funds hold assets worth USD 1.6 billion as compared with USD 350 billion of assets held in more established 'climate funds'. However, as they enter the investment mainstream, their on-the-ground impact will come under increasing scrutiny.

Measuring impact

Measuring the amounts of carbon emitted by fossil fuels is conceptually simple. Measuring biodiversity and the overall health of natural environments is more complex. Yet biodiversity investments will stand or fall on their measurability.

Read also: How can a company reduce its carbon footprint ?

When it comes to species diversity, some investment funds use a test known as 'Mean Species Abundance', which compares species' populations in disturbed and undisturbed ecosystems. By itself, this measure is unlikely to be sufficient, as it prioritises investments in those sectors which intrinsically have a lower impact on the natural environment, such as digital technology. At Lombard Odier, we believe that change will not be catalysed by shunning the hard-to-abate sectors or fossil-heavy companies. Instead, investors should look for both returns and impact by investing in those firms leading their field in creating more sustainable ways of working, such as food producers committed to regenerative farming.

Soil health is closely linked to biodiversity. Governments and industry are now beginning to recognise 'Soil Organic Carbon' (levels of naturally-absorbed carbon in soils) as a way to measure the recovery of soils in degraded landscapes. holistiQ – the sustainable investment platform launched by Lombard Odier Investment Managers in partnership with systems change experts Systemiq – is already putting this theory into practice by collecting datapoints on soil organic carbon for a number of large food and agriculture companies. At Lombard Odier, we believe that this will become an increasingly important metric across multiple industries as biodiversity funds move towards maturity.

Realising a nature-positive world

According to research by the World Bank, biodiversity and habitat loss could cost the global economy USD 2.7 trillion annually by 2030.¹¹ This economic loss is compounded by the immediate and direct threat to human health. As landscapes degrade we are likely to see a growing threat of food and water shortages – it is also thought that biodiversity loss makes pandemic diseases more likely.¹²

Against this backdrop, investors can play an important role in encouraging a shift to nature-positive business models. In agriculture, this will include a shift from industrial monocultures to regenerative farming, restoring habitats for birds and insects, and renourishing soils. A circular bio-economy will offer innovations in regenerative, bio-materials to replace the non-biodegradable, resource-intensive materials we use for much of modern life. And our energy systems will continue their rapid shift away from fossil fuels and towards renewably-produced electricity.

Read also: Swiss farming – a pioneer in sustainable agriculture

At Lombard Odier, we believe that nature is the world's most underpriced asset class. As nature- and biodiversity-based investments reach maturity, we will see the biggest revaluation of the next century. For investors this will create the opportunity to achieve long-term returns while ending human-induced species extinction and realising the Global Biodiversity Framework's “shared vision of living in harmony with nature."

¹ https://www.unep.org/unep-and-biodiversity
² https://www.edie.net/pwc-55-of-global-gdp-at-risk-from-nature-loss/
³ https://pubmed.ncbi.nlm.nih.gov/32887875/
⁴ https://www.frontiersin.org/articles/10.3389/fmars.2022.880424/full#B29
⁵ https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8396518/#B25-insects-12-00688
⁶ https://www.sciencedirect.com/science/article/abs/pii/S027277142030706X
⁷ https://www.oecd.org/environment/resources/biodiversity/Executive-Summary-and-Synthesis-Biodiversity-Finance-and-the-Economic-and-Business-Case-for-Action.pdf
⁸ https://www.nature.com/articles/s41598-021-03366-w
⁹ https://www.oecd.org/environment/resources/biodiversity/report-a-comprehensive-overview-of-global-biodiversity-finance.pdf
¹⁰ https://agriculture.ec.europa.eu/common-agricultural-policy/income-support/greening_en
¹¹ https://www.worldbank.org/en/news/press-release/2021/07/01/protecting-nature-could-avert-global-economic-losses-of-usd2-7-trillion-per-year
¹² https://www.unesco.org/en/articles/pandemics-increase-frequency-and-severity-unless-biodiversity-loss-addressed

This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.

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