Nature and biodiversity loss: how is it relevant to portfolios?
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Nature and biodiversity loss: how is it relevant to portfolios?

Nature, and the resources and services it provides, underpins the economy and sustains life on earth. Yet indicators on the health of ecosystems are heading in the wrong direction, according to the Intergovernmental Panel on Biodiversity and Ecosystem Services.

As awareness of the repercussions of these trends grows, stakeholders are coalescing around a global goal to halt and reverse nature loss by 2030, and to regenerate it in the longer term. This is shaping the direction of regulation.
As this theme evolves we see four mechanisms by which it can translate to risks and opportunities for investors:
  1. Companies causing negative impacts on nature will face increased risks and costs
  2. Companies’ operations and supply chains are at increasing risk of disruption
  3. Increased systemic and sovereign risks
  4. Shifting financial flows and new investment opportunities

We will assess each of these to identify impacts for companies and portfolios.

1. Companies causing negative impacts on nature

Pressure is increasing to reduce and reverse damage to nature through tighter regulations of harmful practices, increased oversight of supply chains, taxes on polluting activities, and increased litigation. Examples of this can be seen in the EU Farm to Fork strategy1. cutting use of harmful pesticides and fertilizers by 2030; negotiations on a global treaty on plastic pollution; and expanded due diligence requirements for products linked to deforestation.
Failure to manage these risks could result in increased operating costs, lower revenues, loss of access to markets, and increased costs of capital. Companies that have traceable supply chains, use resources more efficiently, and innovate to provide lower-impact products, however, could see greater opportunities.
Using the five drivers of nature loss identified by Intergovernmental Platform on Biodiversity and Ecosystem Services (IPBES), which can each be linked to a range of company activities and impacts, provides a framework to identify material risks among businesses and in portfolios (Figure 1).

Figure 1: Company contributions to nature loss

Company contributions to nature loss chart
Source: Columbia Threadneedle Investments 2022
Company disclosures across many of these issues are mixed, but external initiatives provide valuable inputs – for instance, deforestation data from Forests 500 and CDP Forests; plastics data from the Ellen MacArthur Foundation; chemicals data from ChemSec; wastewater quality data from regulatory agencies and CDP Water; and a range of data from the World Benchmarking Alliance.

2. Disruption to companies’ operations and supply chains

Risks will arise not only where companies impact nature, but also where they depend upon it. The resources and services that nature provides, such as water availability, healthy soils or pollination, will become increasingly disrupted If current trends continue. This could result in price volatility, operational and supply disruption, and stranded assets. However, companies that are evaluating risks in their supply chain and seeking to improve resilience of the resources on which they depend may be less vulnerable.
The ENCORE tool (Exploring Natural Capital Opportunities, Risks and Exposure) developed by the United Nations Environment Programme World Conservation Monitoring Centre (UNEP- WCMC) provides an evidence-based assessment of the vulnerability of economic activities to disruption (Figure 2).
Figure 2: The disruption of products and services
The disruption of products and services
Source: ENCORE/UNEP FI/UNEP WCMC/Global Canopy
In addition, the use of mapping data on the degradation of ecosystem services can further highlight possible hotspots of higher risk related to these activities.

3. Increased systemic and sovereign risk

Nature-related risks will also flow through the wider economy via impacts on inflation, GDP, disruption to trade and social unrest. The World Economic Forum estimates that 55% of global GDP is dependent on high-functioning biodiversity and ecosystem services2, highlighting the scale of the issue, while the UK Treasury’s Dasgupta Review in 2021 argued that the entire economy is “embedded within” nature.3
Financial institutions will face risks. Studies from the Dutch and French central banks estimate that between 36% and 42% of their financial institutions’ portfolios are comprised of assets that are highly dependent on nature.4 Similarly, a World Bank study of Brazilian banks found that 20% of credit portfolios were highly dependent on nature.5
The potential for negative feedback loops between nature and climate change is another concern. Forests, soil and the ocean all store carbon, but climate change may reduce their ability to do so, increasing net emissions and limiting the potential of nature-based solutions. Climate change can also reduce the resilience of ecosystems, for example by changing the suitability of habitat, reducing water availability or changing weather patterns. Severe tail-risk events such as reduced rainfall in the Amazon, which would have major consequences for regional economies and food systems, might also become more likely.
Economies which appear to be at potentially higher risk due to the nature- dependence of their GDP and negative indicators of ecosystem health include South Africa, India, Turkey, Mexico, Brazil and Argentina.6

4. Financial flows and investment opportunities

As all of these factors evolve we expect to see lower willingness to invest in companies linked to harmful activities; increased investment in real assets and new types of assets such as forestry, sustainable agriculture, nature-based solutions and blue bonds; and new investment opportunities in technologies that can help reduce impacts on nature.

Avoiding harm and finding new opportunities

Europe’s 2021 Sustainable Finance Disclosure Regulations (SFDR) are already leading to greater scrutiny of companies’ track records and involvement in nature-related impacts and controversies. Increasing numbers of investors are also adopting exclusions related to nature – for instance at COP26 global investors pledged to eliminate deforestation from portfolios by 2030. This trend is likely to continue.

The next phase of the EU Taxonomy may steer investment towards companies that positively impact biodiversity. However, we think the draft criteria are narrowly defined, potentially leading to only a sliver of companies being able to evidence eligibility. More positively, we believe the development of this theme will support long-term investment opportunities
in technologies that can increase productivity in the use of resources (Figure 1).

Conclusion

Nature and biodiversity loss is a complex and fast-evolving theme. Economic conditions in 2022 may prove a hiccup in efforts to reduce nature loss, but over time the scale of the risks will increase pressure to reduce impacts and to remedy damage. Milestones such as the UN’s COP15 negotiations on a global biodiversity agreement, related regulatory proposals and initiatives such as the Taskforce for Nature-related Financial Disclosures will give an indication of the pace of evolution, and will remain a focus in our research and engagement.

Food & Materials transition engagement: Biodiversity and deforestation

Company: The Home Dept

Sector and country: Retail, USA

Why we engaged

We wanted to better understand Home Depot’s sourcing commitments and
encourage their further development.

 

How we engaged

Video call with VP of Sustainability and several portfolio managers.

 

What we learnt

The company’s disclosure is lacking in detail, but it does have granular
information on the origin and certification status of its wood products, which it will disclose. The company has also committed to respond to the CDP Forests questionnaire. Home Depot’s wood sourcing policy will be expanded to a wider range of at-risk forest regions – including those where it does not source – to avoid ambiguity. Sourcing of slower growing timber used in building materials, such as spruce and hard pine, poses a barrier to Home Depot adopting more comprehensive commitments on deforestation and forest degradation.

 

Outcome

Management heard our views on the need for continuous improvement
in policies and disclosure on wood sourcing. We will review its progress
and updated disclosures next year. Its policies on deforestation will rightfully remain a focus, given growing biodiversity and climate risks. The discussion highlighted the need to balance progress on company commitments with ensuring they are meaningful, achievable and avoid unintended consequences.

Nature and biodiversity loss: how is it relevant to portfolios?

4 October 2022
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Nature and biodiversity loss: how is it relevant to portfolios?

Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is an advertising document. This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services.
Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. Risks are enhanced for emerging market issuers.
The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be appropriate for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either.
Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This is an advertising document. This document and its contents have not been reviewed by any regulatory authority.
In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.
In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.
In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.
In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association.
In the USA: Investment products offered through Columbia Management Investment Distributors, Inc., member FINRA. Advisory services provided by Columbia Management Investment Advisers, LLC. Collectively, these entities are known as Columbia Management.
In the UK: Issued by Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority.
In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Societes (Luxembourg), Registered No. B 110242, 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.
In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.
In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors’ with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.
Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is an advertising document. This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services.
Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. Risks are enhanced for emerging market issuers.
The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be appropriate for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either.
Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This is an advertising document. This document and its contents have not been reviewed by any regulatory authority.
In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.
In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.
In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.
In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association.
In the USA: Investment products offered through Columbia Management Investment Distributors, Inc., member FINRA. Advisory services provided by Columbia Management Investment Advisers, LLC. Collectively, these entities are known as Columbia Management.
In the UK: Issued by Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority.
In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Societes (Luxembourg), Registered No. B 110242, 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.
In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.
In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors’ with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.
Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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