Why is biodiversity a relevant issue for investors?

Marjolein Meulensteen: ‘Around 70 per cent of our economy is heavily dependent on ecosystem services, so biodiversity loss, just like climate change, is a systemic risk. It actually goes without saying that biodiversity is important.’

Karel Nierop: ‘As governments, businesses and investors increasingly internalise these systemic risks, there is a growing realisation that biodiversity loss has a significant impact on business operations, projects and the portfolio. This also creates opportunities to invest in adapted and new value chains.’

Robert Klijn: ‘The N:P ratio – the ratio of nitrogen to phosphate in coastal waters – is currently 375:1, whilst the biologically optimal value is 16:1. This makes the system structurally vulnerable. Some of that nitrogen comes from abroad via the Rhine, but the Netherlands also makes a significant contribution of its own. We are now trying to resolve an issue that went wrong decades ago. The question is how the financial community can help with this.’

Maria Velkova: ‘I am here to highlight the perspective of the so-called blue economy. More than two-thirds of the Earth’s surface is covered by water, and we obtain more than 50 per cent of our oxygen from the oceans. Something we also rarely stop to consider is that three billion people rely on fish and seafood as their primary source of protein. To put that into perspective, that is more than pork and beef combined. At the same time, investment in the oceans and SDG 14 is the most underfunded. That presents an opportunity for investors.’

Nicholas Moss: ‘Biodiversity and ecosystem services form the basis of our economy. This applies in particular to natural resources such as agricultural land, forest land and other forms of natural capital, whose long-term productivity depends on healthy ecosystems. At the same time, global demand for food, fibre and timber continues to grow. We believe that investors should focus on those sectors where they can invest directly in biodiversity and ecosystem services whilst also benefiting from strong structural demand drivers. By investing in the sustainability, resilience and productivity of these assets, investors can create significant value for both nature and their portfolios. In our view, this is one of the few sectors in which investors can combine attractive long-term returns with the conservation and enhancement of the natural systems that underpin economic activity.’

Tim Balemans: ‘Our clients – large Dutch pension funds – attach great importance to the conservation of biodiversity. Precisely because pension funds have obligations spanning decades, it is important to look beyond the issues of the day and focus on developments that may have material long-term consequences for the economy, businesses and investment portfolios.

Biodiversity is one such issue. At the same time, we are seeing the consequences of biodiversity loss and climate change not only in the future, but already all around us today. This summer’s heatwaves and periods of drought demonstrate that the economy and society depend on healthy ecosystems.

What does biodiversity mean to you?

David Hawkins: ‘For us, it’s primarily about the integrity of the ecosystem in the places where we invest. That means that, during the due diligence phase, you already investigate what the project in question will mean for land use, water, the living environment and local communities. Do we feel comfortable committing to that?’

Nierop: ‘Many people view nature and biodiversity as mere scenery. But nothing could be further from the truth: we humans are part of that nature and, together with countless other species, form one vast ecosystem. The fact that many people lack this awareness is perhaps the deeper cause of the biodiversity crisis the world is facing.’
 

Around 70 per cent of our economy is heavily dependent on ecosystem services, so biodiversity loss, just like climate change, is a systemic risk.

 
Meulensteen: ‘In an ecosystem, everything is interconnected. If you remove one component, the whole thing can fall apart. We try, particularly as investors, to measure biodiversity using a single metric, and that never gives a complete picture. Nevertheless, it is important to gain as clear an understanding as possible of the impact and interdependencies that our investments have on biodiversity. Fortunately, investors are also becoming increasingly aware of this.’

Moss: ‘By investing in agricultural land and woodland, we are investing in natural resources: water, soil, air, trees and crops. These resources are entirely dependent on biodiversity and the surrounding ecosystems, and in one way or another influence the performance of the assets. Biodiversity therefore has real social and economic consequences.’

To what extent do you view biodiversity primarily as a financial risk that needs to be mitigated, or rather as an issue where investors should actively seek to create a positive impact?

Balemans: ‘We assess both the impact of companies on natural capital and their dependence on ecosystem services. This enables us to move from a conceptual and general analysis to a portfolio-level analysis, so that we can identify and analyse these systemic risks. In addition, we can use this, for example, to ask companies to map out both their land-use footprint and their dependence on ecosystem services, so that we can engage with these companies and try to mitigate these risks within our portfolios. As for the opportunities: last year we introduced biodiversity as an impact theme for two pension funds, and this is the first step towards identifying the potential that lies within the biodiversity theme.’
 

We are now trying to resolve something that went wrong decades ago. The question is how the financial community can help with this.

 
Adrien Cambonie: ‘Risk mitigation is the urgent and obvious starting point for investors, because physical risks such as water scarcity and reputational risks are of vital importance today. In the mitigation hierarchy, however, nature-positive finance is defined as a combination of both risk mitigation and positive impact. Halting and reversing biodiversity loss are complementary, and both the risks and the positive effects are needed to resolve the nature crisis we are facing. For us, addressing biodiversity risk is primarily an operational matter (raw materials, water consumption, waste generation, supply chain), whilst the positive impact stems mainly from the products and services we sell.’

Can you give examples of companies that are very effective at addressing biodiversity risks, or that offer solutions to biodiversity loss?

Klijn: ‘In Ghana, there is a company founded by a Dutchman that uses around 11,000 tonnes of human faeces and organic market and household waste to produce 864,000 kilograms of organic fertiliser and 685 megawatts of electricity. Nothing leaves that site. It’s just as the Chinese have been doing for four thousand years. People had their own plot of land and used everything. So no external fertiliser is needed; everything is simply regenerative.’

Nierop: ‘We have many examples of private investment, but within our listed investment universe there is a Japanese company with a positive biodiversity footprint that has already built more than 70,000 sustainable, energy-neutral homes. Native tree species are planted around the housing estates or individual houses, thereby supporting local ecosystems. In this way, the company’s activities genuinely preserve and enhance biodiversity.

Cambonie: ‘I’d like to talk about a Portuguese producer of cork oaks. The great thing about cork oaks is that you don’t have to fell the tree to harvest the bark. The forests of cork oaks are called Montados and are classified as biodiversity hotspots. The company, which has owned this land for generations, therefore manages an asset that is a biodiversity hotspot. What’s more, they can harvest this material, which is not only lightweight and sustainable but also forms a natural barrier against fire and can be used for insulation. The material is also used to make trainers, furniture such as chairs and stools, and similar items. Furthermore, the company provides leading-edge information in its sustainability report. They have even quantified the value of the ecosystem services they support by managing these forests.’

Moss: ‘In the United States, we are investing in the mitigation banking market, which is essentially an active market for biodiversity. According to some estimates, this is worth more than ten billion dollars a year. Projects in this sector involve the restoration of habitats, streams and wetlands. It is a regulated compliance market that is not very well known, but has existed since the 1980s. Over the past twenty to thirty years, a third-party market has emerged, meaning that if you are active in a particular area restoring an ecosystem, you can sell offset certificates to companies that need to offset their emissions. From a business and financial perspective, with the right projects, it can also be very attractive.’

Velkova: ‘There is a company that operates the first large-scale production plant in China to serve the Asian market – the largest market for fish products. They produce alternative protein that has been tested. We know that it is not only a substitute for fishmeal but also offers other functional benefits. So the technology is there. In Norway, there is a listed company working on cancer treatment that utilises fish by-products and is affiliated with a larger fish production site. We also have a number of aquaculture companies, such as mussel farms in Portugal, which we know can have a positive impact on the environment.

What are the key data sources in the field of biodiversity, and what are their most significant limitations for investors?

Nierop: ‘A practical way to measure improvements in biodiversity – which simultaneously mitigates risks and offers a solution for both forestry and agriculture – is soil health. This is one of the core objectives of our investment strategy in these sectors. Soil health can be measured, amongst other things, by analysing the organic matter in the soil, taking soil samples and monitoring over time how the density and content of organic matter increase. By reducing or eliminating the use of chemical inputs and using biological alternatives instead, you can improve soil health, thereby providing better protection against flooding and even fires.’

Moss: ‘We make use of numerous datasets and methods, but one of the most interesting ones we have been working on is natural capital accounts. With these accounts, we aim to map out all the ecosystem services on which a farm, forest or other land-based asset depends. We then apply economic analyses to assign a financial value to these, so that we can assess the services they provide, much like a financial balance sheet. The significance of this is that it offers investors a way to conceptualise ecosystem services that are difficult to understand. Soil health, for example, equates to dollars, just like ecosystem health and production. If you can present all of this in a way that investors can understand, whilst also demonstrating where degradation leads to losses, it becomes an effective tool for management as well. The methodologies are still under development, though. It is difficult to arrive at some of these insights, but I think that, at present, it is one of the best ways to conceptually establish a holistic model of ecosystems, biodiversity and their economic value.’
 

For us, it is primarily about the integrity of the ecosystem in the places where we invest.

 
Meulensteen: ‘We can measure a great deal at project level and use that information to create proxies, but for larger portfolios. Even though this data isn’t always based on actual on-site measurements of biodiversity, it does provide a good initial picture. Scientific insights are also developing at breakneck speed. Although the information isn’t always perfect, there’s enough to guide our decisions.’

Cambonie: ‘We’re seeing more and more data providers using satellite imagery via spatial analysis. That doesn’t solve all your problems, but if, for example, you want to get an idea of the risk a company faces in the supply chain, you can compare different assets against various environmental layers – such as water stress or deforestation – and from there gain an understanding of the environmental risk.’

Hawkins: ‘Many companies offset their CO₂ emissions and also try to measure nature-based solutions. How can you measure what you’re doing? For example, you might plant a thousand trees, but the success rate might only be 40 per cent. How do you maintain that? How do you monitor it? I recently came across a company that not only uses remote sensing but also deploys people on the ground. They look at the investment’s life cycle: in this case, the trees over time. The available datasets combine various elements, such as chlorophyll indices, which effectively amounts to constructing a kind of measuring instrument to verify your investment. This has been highly relevant for quite some time, both for offsetting and for actual reforestation projects.’

Nierop: ‘In addition to data at the level of individual assets or investments, at some point you also want to have portfolio-level data, using proxies, so that you can compare them. This provides a more standardised framework for determining the biodiversity footprint of an individual investment, or even a portfolio.’

Balemans: ‘Data in the field of biodiversity is rapidly evolving. An increasing number of data sources are becoming available, ranging from corporate reports to scientific data on ecosystems, land use, deforestation and water use. At the same time, it remains a challenge to link these different data sources and translate them into consistent indicators for investors. For example, information on the state of nature is often more readily available than data on the impact and dependencies of individual companies. Through the Partnership for Biodiversity Accounting Financials (PBAF), we are contributing to the development of standards and methodologies that help financial institutions incorporate biodiversity data consistently into their analyses and reporting.’

Velkova: ‘What I’ve heard is that we do know what has a negative impact on biodiversity, but we don’t really measure what has a positive impact.’

Nierop: ‘In fact, a great deal of attention is being paid to how to measure positive impact. If you look at the key drivers of Important Bird and Biodiversity Areas – or IBAs – for biodiversity legislation, which is fairly well documented, it’s quite clear which factors you need to be wary of, or where, when making investments, you need to check what policies a company has, for example, regarding deforestation or renewable energy.’
 

Precisely because pension funds have commitments spanning decades, it is important to look beyond the issues of the day.

 
Velkova: ‘I think we’re only just scratching the surface of what’s happening within the system. We’re not really measuring the impact that, for example, fishing has on the climate and the ocean. As soon as you catch small fish, you lose the large and even larger fish, for instance. Any schoolchild would understand this connection, and yet we don’t factor it into our thinking.

Nierop: ‘When you talk about investing in biodiversity and nature, the discussion mainly revolves around the question of what you can demonstrate to show a positive impact. I think that’s the wrong discussion to be having. We actually already know how things can be improved. It’s also about what we’re doing right now – not just from a moral standpoint, but also from a financial one, in terms of both the risks of inaction and the opportunities that exist.

Could you make allocation decisions based on limited figures?

Hawkins: ‘We’ve seen cases of power stations trying to switch to a biomass-based setup as a transitional measure, whilst continuing to use fossil fuels in the meantime. In the United States, there’s a process of authorised afforestation around those plants. The surrounding forest is felled – obviously for timber products – and whatever is left on the ground is burnt on site. The idea was that the biomass power station would use the residues – which would simply be burnt anyway – as fuel for its own electricity generation. They themselves consider it a very green approach, but we do not really regard it as ‘renewable’. It is a transitional measure, provided certain conditions relating to the residual materials are met. We did, however, carry out environmental due diligence. In this specific case, the greatest risk for us was that they had no anti-deforestation policy, no procurement policy, and limited due diligence in the area of procurement, even though their parent company would commit to this and collect all this residual wood and supply it to them. We then said: ‘There is a risk that you will ultimately be supplied, in part, with timber from highly valuable forests in the area – primeval forests with high biodiversity. Good governance is needed there.’ It took them some time to process this, but they did take it to heart. This is an example of how biodiversity loss can be kept to a minimum. As part of the agreement, we also agreed to revisit this in six months’ time, as we regard this as a relatively significant risk.’

Balemans: ‘The data may not yet be perfect, but there are certainly opportunities to make use of it. For us, it might be more effective to focus more on the underlying causes of biodiversity loss rather than relying solely on aggregated footprint figures. The causes include factors such as changes in land use, water consumption and pollution, and the exploitation of resources. In our view, the relevance of these causes also varies from sector to sector. Aggregated data can be useful tools for determining what is important within each sector.’

Meulensteen: ‘For us, it is important that companies with significant market influence that are at high risk, or exposed to risks, have plans in place to mitigate those risks and carry out the assessments themselves. What is their impact? And if they can determine this at a local level, so much the better.’

What minimum requirements must be met before an investment is made?

Hawkins: ‘In the screening process, there is definitely a minimum threshold or a red flag. There are a few truly fundamental best-practice elements. The best practices are, in fact, the basic principles. The spectrum can be broad: you have companies in the portfolio with very high standards, but also companies with low – or rather, immature – standards. At the basic screening stage, it essentially comes down to the question: how do you deal with protected areas, or areas of high landscape or net value? We will also provide recommendations and advice to improve the situation. For example, we have made suggestions regarding good practices, what responsible management entails, and what a deforestation policy should look like.’

Velkova: ‘Any form of extraction activity that depletes the ocean is a no-go for us. That is something we cannot see how it could ever be properly mitigated.’

Nierop: ‘We have comprehensive minimum standards covering various topics. As a matter of principle, we do not invest in fossil fuels, mining, large-scale industrial agriculture, and so on. We have a universe of companies that do meet our minimum standards. We carried out a portfolio scan on this basis and subsequently conducted an assessment, particularly in the area of biodiversity. We want to engage in a very targeted dialogue with companies. So: what are the high-priority issues and sectors we need to focus on for our biodiversity programme? The issues we have identified are deforestation and water pollution.’
 

At the asset level, there is a real opportunity to combine food security, CO₂ storage and biodiversity.

 
Meulensteen: ‘As far as deforestation is concerned, we do not invest in palm oil producers that produce non-certified palm oil. The same applies to paper companies that do not adhere to the Forest Stewardship Council’s (FSC) strictest standards. The possibility of engaging in dialogue with companies is perhaps an even more important factor for a listed investment portfolio.

Is there a place for investing in biodiversity on the public equity markets? And if so, how should this be positioned within an equity portfolio?

Cambonie: ‘It is not only possible to invest in biodiversity via listed markets; it is also essential. Given the scale of the problem, we must make every effort possible. Ten years ago, the United Nations stated that five to seven trillion dollars would be needed annually to achieve the SDGs. That is roughly the size of the private market. I am convinced that we absolutely need public capital, as well as private companies. Large listed companies have the balance sheet strength required to actually invest in the transition.’

Meulensteen: ‘I believe that impact can also be achieved on the stock market by investing in solutions that reduce the negative impact on biodiversity.’

Nierop: ‘So-called green bonds, the supply of which is increasing, offer a way to reverse some of the loss of biodiversity by attracting funds from the private markets.’
 

Many people view nature and biodiversity as mere scenery. But nothing could be further from the truth: we humans are part of that nature

 
Moss: ‘Although this is not part of our portfolios, as a company we are involved with impact bonds and have invested in bonds for reforestation and the protection of rhinos. These initiatives are supported by various stakeholders, including the World Bank.’

Velkova: ‘We keep an eye on green bonds, but we don’t see them very often. I think this is due to the lack of a single metric for measuring the effectiveness of green bonds. Perhaps we should take the same approach to biodiversity as we do to the energy sector – namely, not to stop just because there are still many imperfections.’

There is an interconnection between CO₂ emissions, biodiversity and food security. How might we combine these three issues?

Velkova: ‘For us, protein production is the link between these issues, because we see it as the determining factor in what our CO₂ emissions will look like over the next twenty-five years, how biodiversity will be affected by this, and how the growing population will be fed. Our investment thesis is that sustainably farmed fish, shellfish and crustaceans can provide a solution. Not the only one, of course, but a major part of the solution. We’re seeing a lot of activity in this area: the sector is no longer a niche market. I’m optimistic and believe we’re once again at a significant turning point, drawing a parallel between the so-called blue economy and renewable energy. From an investor’s perspective, there is a huge opportunity to invest in this sector, as, according to the World Bank, 1.5 trillion dollars will be needed over the next twenty-five years to invest in aquaculture. We have learnt many lessons from agriculture that we can apply to aquaculture. Now is the opportunity to apply those lessons and ensure that it yields better returns for investors.’

Moss: ‘At the asset level, there is a real opportunity to combine food security, CO₂ sequestration and biodiversity. Furthermore, at portfolio level, by combining different strategies, you can also offer a combination of food and timber security, whereby you regard ecosystem restoration as a complementary asset within a portfolio, alongside productive assets such as timber and agricultural land. We believe this offers some of the best opportunities to invest directly in all three of the aforementioned areas.’

Nierop: ‘In many respects, the major food companies are the oligarchs of our consumption. By influencing them via the stock market – for example, through engagement or shareholder activism – you can steer their policy. And that policy affects everything: from the sourcing of raw materials and their production methods to every other link in the value chain. In this way, you create a leverage effect that can transform the entire sector.’
 

Short-term thinking has no place here, but unfortunately our financial system is heavily based on short-term metrics.

 
Balemans: ‘In our engagement programme with twenty companies from the food and retail sectors, we emphasise the close interconnection between climate, biodiversity and food security. This interconnection is reflected, amongst other things, in themes such as the protein transition and the transition to more sustainable and regenerative agricultural systems. We also focus on the resilience of supply chains: how do climate change and biodiversity loss affect the availability of raw materials and products, and to what extent will current production regions still be suitable for their production in ten or twenty years’ time? We engage in dialogue with businesses about the specific challenges they face and the role that every link in the chain can play in bringing about these transitions. In addition, we are exploring how we can contribute, through targeted impact investments, to the development of sustainable agricultural and food systems and, thereby, to a more resilient economy.’

Klijn: ‘The government doesn’t really distinguish between regenerative agriculture and current agricultural practices. If you look at the natural compensation areas, what is Staatsbosbeheer actually doing? They’re sending those large cows – the Scottish Highland cattle – there, simply to do the same thing that regenerative livestock would normally do. Farmers are now being driven out of the natural compensation areas, whilst at the same time cows are being brought in to regenerate them. So the government is doing two contradictory things. This is clearly a case of misallocation of capital. Somehow, the government fails to recognise that what these regenerative farmers are doing has a positive impact on nature.

What are realistic yet ambitious biodiversity targets, and how can these be used to steer investment portfolios in the right direction?

Klijn: ‘I see three forces that are already setting the system in motion. Firstly, consumers want genuine products again: organic, fermented, unprocessed. Secondly, legislation is tightening: there are legal cases against food companies concerning the impact of their products on health and nature. The third factor is that science is shaping policy. In the United States, the population’s gut health has become a federal priority, including a focus on fermented foods. These three forces reinforce one another’.

Meulensteen: ‘It is important to be ambitious. Tackling biodiversity loss is a long-term endeavour.’

Velkova: ‘As soon as you start investing in something related to biodiversity and expect it to perform in a completely predictable manner on a quarterly basis, you’re cutting corners. Short-term thinking doesn’t apply here, but unfortunately our financial system is heavily based on short-term metrics. That’s why we’re also a fund with an open-ended term. We believe that a structure with a five-year term isn’t really suitable. You won’t then be able to demonstrate the financial return an investor would expect, and so you’re not really serving the purpose.’
 

Halting and reversing the loss of biodiversity are complementary.

 
Balemans: ‘For a pension fund, a good biodiversity target should be financially relevant, influenceable and measurable. We see in the market that many pension funds are still struggling to formulate a quantitative biodiversity target, as the measurement methods are still very much under development. That is why we currently consider a combination of risk, engagement and impact targets to be more effective than a hard biodiversity KPI. For our clients, we aim to reduce the negative impact of our portfolio on biodiversity and, where possible, contribute to nature restoration. We can do this by integrating nature-related risks and dependencies into investment decisions, encouraging companies to reduce their impact on biodiversity, and investing in solutions that contribute to resilient ecosystems and food systems.