Investors today are acutely aware of the impacts of climate change and biodiversity loss on both the planet and their portfolios. SONYA LIKHTMAN, Associate Director – Federated Hermes explains why and what urgent action is needed to stop and reverse biodiversity loss.
The need to address biodiversity loss, alongside climate change, is especially clear in Australia, where economic dependence on nature and exposure to risks is especially high. Designated one of 17 mega-diverse countries, up to 10 per cent of all species on Earth are thought to be in Australia and 85 per cent of plant species are endemic, meaning they can only be found in Australia.
The Kunming-Montreal Global Biodiversity Framework (GBF) was agreed at COP15 in December 2022. As a party to the Convention on Biological Diversity, which convened COP15, Australia will need to implement the four goals and 23 action targets that are contained within the GBF at the national level.
The GBF includes a commitment to effectively conserve and manage at least 30 per cent of land and oceans and a pledge to restore at least 30 per cent of degraded ecosystems. There are also targets to halve global food waste, address the risk from pesticides and highly hazardous chemicals, and to implement nature-based solutions to align climate and biodiversity action.
Finance-related targets for 2030 include phasing out or reforming subsidies that are harmful to biodiversity by at least US$500 billion per annum and mobilising at least US$200 billion annually from public and private sources for biodiversity-related funding.
Importantly for investors, and in-line with the position Federated Hermes Limited actively advocated for through the Finance for Biodiversity Foundation, the GBF requires public and private financial flows to be aligned with biodiversity goals and targets. This means reducing financial flows that are harming biodiversity and increasing financial flows that support nature protection and restoration. The GBF’s Target 15 requires large companies and financial institutions to assess and disclose their risks, dependencies and impacts on biodiversity across operations, value chains and portfolios.
Australia has already taken some steps at the national level. In July 2022, Australia’s Federal Government committed to the ‘30×30’ target for land and ocean management and, in October 2022, the Government announced the Threatened Species Action Plan, which sets out Australia’s pathway for threatened species conservation and recovery over the next ten years. More recently, the Nature Repair Market Bill 2023 was introduced to Parliament.
Momentum on nature will continue to build as the Taskforce on Nature-Related Financial Disclosures (TNFD) delivers a framework that is expected to strengthen company disclosures on nature-related risks and opportunities in September 2023. As an early supporter of the TNFD, the Australian Government may also with time introduce nature-related disclosure requirements, as some European governments are actively considering.
Companies and investors should begin acting on biodiversity loss to get ahead of potential regulatory developments. Given how closely linked biodiversity and climate change are, addressing these issues together is likely to strengthen overall investor approaches to risk management and sustainability.
Investors can tackle biodiversity loss through engagement and stewardship, capital allocation and policy advocacy activities.
Engagement with companies will be especially important to halting and reversing biodiversity loss. EOS—Federated Hermes’ world-leading stewardship provider advising on more than $1.3tn in assets to deliver corporate engagement and proxy voting services—has written a white paper titled Our Commitment to Nature outlining how companies need to reduce their contribution to each of the five drivers of biodiversity loss – changes in land and sea use, direct exploitation of species, climate change, pollution and invasive alien species.
Investors should focus more on asking companies to assess and disclose their biodiversity impacts and dependencies throughout their operations and supply chains, in line with upcoming guidance from the TNFD. Companies must use their improved understanding to inform action, develop strategies and set timebound targets to address the most material risks and impacts.
To support engagement with companies, voting policies and approaches to shareholder resolutions can be geared towards accelerating company action on issues related to biodiversity loss, such as deforestation.
Preventing commodity-driven deforestation should be a priority in Australia, and internationally, given how important forests are for tackling climate change and biodiversity loss.
Change in Australia would have a material impact in reducing global deforestation. Multiple reports have placed Australia’s rate of deforestation among the world’s top ten nations, with much of its land clearing focused on expanding grazing areas. Encouragingly, moves to ban logging of native forests, many of which have been harvested for products easily replaced by plantation timber, have broadened, most recently with the Victorian Government’s decision to pull forward its ban to the end of this year.
According to recent data from the United Kingdom’s Utility Bidder, Australia’s annual rate of deforestation from 2015-2020 was 416,840 hectares, placing it fifth in the world deforestation rankings and the only developed nation in the top 20. This is a result consistent with previous reports from the WWF, which says that Australia will be among the “11 fronts” for deforestation between 2015-2030, ranking among sites such as the Amazon, Borneo, the Congo Basin and other tropical hotspots.
For context, the Amazon rainforest represents nearly a third of all the tropical rainforest remaining on Earth, but the risk of deforestation remains high. Over 70 per cent of deforestation is thought to be accounted for by cattle ranching, with land cleared for grazing, similar to the Australian experience. The production of soybeans, primarily for animal feed, is also a significant contributor to deforestation and associated biodiversity loss.
Clearing and burning rainforests destroys vital habitats and releases carbon dioxide back into the atmosphere, fuelling global heating. Studies have shown that large ecosystems, such as the Amazon rainforest, may collapse quickly once critical tipping points are reached.
Apart from threats to the environment and human well-being, deforestation poses risks to investors with exposure to companies with production and supply chains in the Amazon rainforest, eastern Australia and other important forest habitats. Key organisational risks span reputation, regulation, physical and broader systemic risks associated with biodiversity loss and climate change (see breakout box).
Companies found to be associated with biodiversity loss are likely to face reputation risks. For instance, supermarkets in the UK have come under pressure from consumers, NGOs and investors to address deforestation in animal feed supply chains. In some cases, they responded by ending relationships with suppliers that had links to deforestation in the Amazon rainforest.
A new EU law requires commodities placed in the EU market to be deforestation-free, produced in accordance with the laws in the country of origin, and covered by a due diligence statement. In the UK, under the Environment Act 2021, large companies that source commodities will be expected to conduct due diligence to ensure their products are free from illegal deforestation and conversion.
Deforestation exacerbates climate change and biodiversity loss, causing more frequent and severe physical climate change impacts and creating risks to the provision of ecosystem services such as water and climate regulation. In addition, many companies are dependent on products derived from rainforests, such as pharmaceuticals and cosmetics.
Transgressing any of the safe planetary boundaries, especially those for biodiversity loss and climate change, greatly increases the risk that the earth will shift irrevocably away from its current stable state.
Investors should expect companies with exposure to high-risk commodities such as soy, beef, leather, palm oil, timber, and cocoa to commit to deforestation-free and conversion-free production and sourcing by 2025, ensuring natural habitats are not converted or destroyed to grow agricultural commodities.
As our societies and economies are deeply embedded in nature, a failure to act could result in the collapse of food systems, further breaches to planetary boundaries, and significant financial repercussions across the global economy. Investors must address the risks to their portfolios and the planet by taking the urgent action required to halt and reverse biodiversity loss.
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