Biodiversity crisis: The role of investors in resolving species extinction - Part 2
- The decline of ecosystems is at an unprecedented level and is largely the result of human industrial activity. The world is losing biodiversity – and drivers of this loss are multiple and interconnected in complex ways;
- There is increasing public scrutiny and debate on mitigating biodiversity loss. The severity of the issue has been highlighted by a United Nations report which examined the growing expectations on financial institutions to help tackle the crisis and better contribute towards achieving Sustainable Development Goals (SDG) – in particular SDG 14, Life Below Water, and SDG 15, Life on Land;
- But it is not too late to act. Investors can play an important role in resolving biodiversity loss by better understanding the issue and how it impacts companies in different sectors. Investors need to incorporate a robust assessment of risks and opportunities into their investment analysis and direct capital to firms helping to resolve biodiversity loss. Engaging companies on their practices is vital;
- We assess how investors are impacted by the practices of investee companies – in terms of those which cause biodiversity loss and others which are harmed by it.
Biological diversity is the infrastructure which supports all life on Earth. It underpins the stock of natural capital and allows ecosystems to thrive. It is the sum of all living species, encompassing fauna, flora and the environments they inhabit. It is also in crisis. Biodiversity loss is an environmental catastrophe developing at a faster pace than climate change - and according to the United Nations (UN), no less than one million plant and animal species are in danger of extinction because of human actions1. Loss of biodiversity is not only a tragedy of nature but also a major problem for humanity. The knock-on effects will harm people around the world who depend on biodiversity for their survival. It threatens food security, livelihoods and the economy. On a planet totally deprived of biodiversity, there is no life.
1 United Nations Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services, 2019
AXA IM is set to start a biodiversity engagement programme with investee companies across several sectors, to better understand how such firms take this issue into account. This will include assessing how corporations measure and manage both their impact and dependencies on biodiversity. We will seek to gain a deep insight into how groups in key industries and markets are managing their biodiversity related externalities, exposures and risks. Our plan is to identify relevant good practice across key industries and use this as the basis for engagement with a wider group of companies.
We have developed the following biodiversity assessment framework:
Biodiversity management and oversight
- Board and senior management expertise and oversight
- Company-wide assessment of biodiversity impact and dependencies
Biodiversity operational impact management
- Policy specifically covering biodiversity issues
- Direct operations biodiversity impact management programmes
- Supply chain biodiversity impact management programmes
- External audit and certification (e.g. ISO 14001, ISO 37101)
- Reporting on backward-looking key performance indicators
- Establishing forward-looking, ambitious targets
Company’s response to engagement dialogue
- Willingness of companies to discuss biodiversity
- Response to and progress of engagement over time
- Company participation in external stakeholder initiatives
In the following section, we look at how specific industries are harming and are at risk of being harmed by biodiversity loss. We also detail our engagement approach in these contexts.
- Food production as an industry is a key contributor to the loss of biodiversity – namely, through the exploitation of natural resources within its agricultural supply chain. The impacts are both on land and in water
- Overfishing has resulted in a large negative impact on marine ecosystems. Agricultural expansion, where it has come at the expense of virgin forests, represents the main threat for land and freshwater ecosystems
- Pollution from damaging agricultural practices and waste – for example which has led to marine plastic pollution– also represents significant threats to biodiversity
Food production drives biodiversity loss
Our food production systems are key drivers of both terrestrial and marine biodiversity loss. The biggest drivers of biodiversity decline are overexploitation of natural resources, in particular by industrial-scale agriculture. The Food and Agriculture Organization of the United Nations (UN FAO) estimated that industrialised farming practices cost the environment some US$3trn per year. The problem has been that plants and animal species in the wild are being lost at rates quicker than their natural recovery rate. We have seen the same trends in the sea.
Expansion of the beef, soy bean, palm oil, and timber industries have had particularly rapid impact on tropical rainforest losses. As well as the biodiversity loss in these habitats, another environmental factor is the reduction of carbon sinks which mitigate climate change. Also, as extensive use of groundwater is becoming increasingly scrutinised, it has become apparent that man-made desertification is another driver of wildlife loss. Pollution and waste resulting from food production has increased significantly. Marine plastic pollution has increased tenfold since 1980. Agricultural effluents – such as manure, pesticides, weedkillers and fertilisers - into waterways have caused widespread harm to the life in rivers and oceans.
However, protecting and restoring natural habitats, as well as widespread adoption of sustainable farming practices, is possible. Food companies are in a unique position to influence the required transitions in production.
Biodiversity conservation strategies are emerging
Ecological conservation has been a policy area of governments for a number of decades. The UN Convention on Biological Diversity (CBD) was adopted at the Rio de Janeiro Earth Summit in 1992. The European Union (EU)’s Natura 2000, through the Birds Directive and the Habitats Directive, established a region-wide network of protected areas including birds, animals and plants which are considered rare, threatened or endemic.
In recent years, the issue has shifted away from being largely one of consideration for multi-national policymakers and not-for-profit organisations to companies. This has been particularly the case for the food production industry where there are clear business benefits in ensuring good practices around biodiversity conservation. This includes security of supply, improved efficiency in operational practices and company image or reputation. Products which are grown within sustainable cultivation practices such as organically-labelled goods have also been of benefit to companies. There are other issues to consider such as reducing the risk of incurring regulatory and legal penalties as well as the introduction of taxes and charges levied for poor and destructive practices. Food companies have hence started developing biodiversity protection-dedicated strategies.
However, given the complexity of agricultural supply chains, it has been difficult for food companies to ensure the quality sourcing of every ingredient. Thus far, we have seen product-oriented initiatives and related certification schemes developed, rather than fully-integrated biodiversity protection guidance within the supply chain. For example:
- The Roundtable for Sustainable Palm Oil (RSPO) which certifies no loss of virgin forest, and no clearance of areas of high conservation value
- The Roundtable for Responsible Soy (RTRS) – a similar initiative to RSPO
- The Standard for Sustainable Cattle Production Systems, which promotes sustainable farming and sustainable land grabbing for farming purposes
- The Forest Stewardship Council (FSC), that promotes the responsible management of the world’s forests, for example for packaging raw material
- The Marine Stewardship Council (MSC) and the Aquaculture Stewardship Council (ASC).
- National and EU organic product labels indicate that the product has been grown within sustainable cultivation systems
Several major food companies have restricted the use of certain insecticides within their supply chains. Pollinator policies have been implemented to encourage suppliers to phase out the use of neonicotinoids and chlorpyrifos, which have been linked to declining bee populations. Some are publicly disclosing performance metrics and targets on pesticide use.
- While the food sector is harming biodiversity as described above, the loss of biodiversity is also harming the food sector. Biodiversity is critical for safe-guarding long-term global food security
- The industry is reliant on and supported by the interaction of a wide range of living organisms such as crops, pollinators, aquatic life, farm animals and micro-organisms
- Stable biodiversity allows companies to better manage the stability, efficiency, quantity and quality of food production
Need for the birds and the bees
Agricultural intensification has led to greater yield that has supported growing world populations, but there is growing recognition that this must be done by without undermining the capacities of land and seas to meet the needs of future generations. Food companies are heavily reliant on biodiversity - this does not only include the wide variety of different foods consumed by humans. In addition, the production of food relies on a range of nature-dependent processes which includes crops, pollinators, aquatic life, farm animals and micro-organisms. Water cycles and soil formation are critical to the health and stability of natural capital on which food companies depend directly or indirectly for raw materials, energy, land or water. As an illustration, potentially half a trillion dollars in annual global crop output is at risk as a result of pollinator loss. The global overexploitation of fishing resources leads to a US$50bn shortfall each year. Biodiversity loss risks higher resource costs and lower variety of ingredients. There is also concern that the lack of biodiversity exposes food production to be more vulnerable to diseases and pests.
Sustainable food production practices are increasingly being established both by governments and by food producers. These include efforts to assess and measure the true value of natural resources to business longevity and resilience, understanding vulnerabilities within supply chains and preparing for alternative ingredients and sourcing. These are being strengthened by improved measuring, monitoring and reporting of specific key performance indicators (KPIs) – some of these with the dual aim of increasing efficiency and operational performance.
Such assessments of natural capital risks and opportunities in the overall value chain are the first steps we see in the industry to start understanding dependencies. Beyond that, assessing the value created by ecosystem services represent leading practices. For example, a study of coffee bean cultivation practices by Ricketts found that yields were 20% higher in plantations in close proximity to forests where access to insect pollinators is higher. Assessing natural services in such ways could represent valuable decision-making information to choose solutions which result in better outcomes for biodiversity and natural capital.
Despite increasing steps taken by governments to establish regulation and by individual companies to implement leading practices, there remains much more to be done in the global food industry.
Companies should seek to assess, measure and report on how biodiversity loss impacts their long-term stability and resilience.
Our main engagement recommendations with the food production sector include:
- Establishment of a dedicated policy to ensure responsible agricultural practices, protect vulnerable ecological habitats and species, and target zero clearing of virgin forest through the supply chain
- Implementing relevant monitoring, disclosure and forward-looking ambitious targets of key performance indicators. For example, this could include measurements on particularly harmful pesticides use in the supply chain
- Putting in place a dedicated approach on the sourcing of commodities. This includes developing dedicated supply chain mapping tools to provide traceability, measure volumes and track how commodities move through the supply chain
- Establishing transparency and targets on supply chain certification. Disclosing the share of each commodity - wood, soy, palm oil, fish, etc. - which is certified against existing certification schemes, such as RSPO, RTRS, FSC, MSC, ASC, organic labels, and so on
- Participating in industry initiatives in collaboration with a wide group of stakeholders
- Identifying business dependencies on biodiversity and related ecosystem services, including both direct and indirect throughout the supply chain
- Assessing dependencies’ associated business risks. This should ideally be in tandem with economic valuation of biodiversity dependencies to help clarifying risks
- Developing biodiversity information systems, setting targets, measuring and valuing performance, and reporting on results. Biodiversity strategies for business are likely to include improved corporate information system, development of biodiversity KPIs and related quantitative targets, as well as their integration into wider business risk management processes
- Taking action to minimise harm to business from biodiversity loss. This includes understanding vulnerabilities within supply chains alongside preparing for alternative ingredients and sourcing, and integrating biodiversity factors into business strategy and decision-making
- Encouraging participation in multi-stakeholder biodiversity impact and dependencies measurement initiatives. Sharing best practices and working towards common practices and tools. Firms need to actively work on biodiversity information systems and footprint measurement beside academic, government-related, non-governmental organisations and peers to feed research and develop available solutions. It will help companies, civil society and investors better understand and assess firms’ impact and dependencies on biodiversity
“It is not too late to make a difference, if we start now at every level from local to global. Through ‘transformative change’, nature can still be conserved, restored and used sustainably.”
That is the message of the IPBES report. We also share this view and it is our ambition to contribute to transformative change. As investors this means researching biodiversity to better understand how it impacts companies in different sectors, as well as integrating biodiversity considerations into our investment analysis and portfolio construction. It also means monitoring and engaging investee companies on their performance and allocating capital to investment opportunities that create solutions to biodiversity loss challenges.
 Natural Capital Impacts in Agriculture: Supporting better business decision-making, Food and Agriculture Organization of the United Nations, 2015
 UN Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), 2019
 Potts et al. (2016), with figure (inflated to 2015 USD value) based on the work of Lautenback et al. (2012), who used production and price figures for 2009.
 A 2008 UN report, produced jointly by the World Bank and the UN Food and Agriculture Organization, says that the world's fishing fleets are losing USD$50bn each year through depleted stocks and poor fisheries management. It asserts that half of the world's fishing fleet could be scrapped with no change in catch. Businesses related to fishing are already experiencing direct impacts through a decreased supply of fish for food or feed.
 Economic value of forest to coffee production, Proceedings of the National Academy of Sciences, Ricketts 2004
Not for Retail distribution: This document is intended exclusively for Professional, Institutional, Qualified or Wholesale Clients / Investors only, as defined by applicable local laws and regulation. Circulation must be restricted accordingly.
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities. Past performance is not a guide to current or future performance, and any performance or return data displayed does not take into account commissions and costs incurred when issuing or redeeming units. References to league tables and awards are not an indicator of future performance or places in league tables or awards and should not be construed as an endorsement of any AXA IM company or their products or services. Please refer to the websites of the sponsors/ issuers for information regarding the criteria on which the awards/ratings are based. The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested. Exchange-rate fluctuations may also affect the value of their investment. Due to this and the initial charge that is usually made, an investment is not usually suitable as a short term holding. Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision. Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 7 Newgate Street, London EC1A 7NX. In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries. Design & Production : Internal Design Agency (IDA) | 00000 08/2019| 27-10428 - Photos: gettyimages