The world is in the midst of a nature crisis that cannot be ignored. GAM Investments’ Stephanie Maier considers the intrinsic link between nature loss and climate change and explores what financial decision makers across the world can do to tackle the systemic challenge of nature loss and degradation.
05 May 2023
Wildlife populations have declined 69% since 1970 and one million species currently face extinction. Financial markets are waking up to the reality that economic systems are reliant on nature and the fertile soil, fresh air and clean water it provides.
Given a business-as-usual approach leaves half the world’s GDP, or USD 44 trillion, at risk, we are skating on very thin ice. Forward thinking financial decision makers across the world are emerging to tackle the systemic challenge of nature loss and degradation. This is reflected in private sector pressure contributing to the landmark Global Biodiversity Framework (GBF) signed in Montreal last year. This framework gives clear direction to regulators as the Paris Agreement did in 2015, and commits nations to protect 30% of the Earth by 2030, along with 22 other targets.
We must tackle nature and climate together
As highlighted at COP26 and COP27, nature loss and climate change are intrinsically interlinked – a failure in one sphere will cascade into the other and attaining net zero will require addressing both. We know that thriving ecosystems help slow global warming as oceans and land act as major carbon sinks. Similarly, a warming world exacerbates biodiversity loss, driving animals from their habitats and destroying healthy ecosystems.
In a market that sees the value of nature conservation, many sectors will have to change. The food sector, for example, is perhaps the largest global driver of nature loss currently, while also being responsible for one-third of global emissions. The financial sector can play a role in driving meaningful change in how food is produced and sold throughout the supply chain, encouraging traceability and other climate smart initiatives.
At GAM, we signed up to an investor letter supporting three pieces of legislation in the US, reducing deforestation in supply chains, as well as joining 35 financial institutions with more than USD 8.9 trillion in assets under management in committing to the Deforestation Pledge.
Lessons from climate can accelerate nature action
We can expect similar reporting and disclosure tools and methods drawn up for the climate to help tackle nature loss, although nature metrics are inherently more complex. We are already witnessing this with the new the Task Force on Nature-Related Financial Disclosures (TNFD) framework to help companies and financiers assess and act on their impact on the natural world as they have with the Task Force on Climate-related Financial Disclosures (TCFD), planned to be released this September. The International Sustainability Standards Board (ISSB) reporting standards have also indicated they will reflect the ‘fundamental’ value of nature. Engagement will undoubtedly play a key role in driving change, with a Nature Action 100 investor initiative, modelled on Climate Action 100+, due to be launched in June.
From a financing perspective, we should also look to the potential for green and sustainability bonds to allocate capital, as well as the opportunities for innovation from alternative ways of growing food to using remote sensing and AI to support restoration and conservation. Moreover, we see a growing biodiversity market emulating the current carbon credits markets. Australia has already taken the leap and hosts a system where biodiversity certificates can be traded in a similar way to carbon credits, with recent PwC research estimating that it could be worth USD 137 billion by 2050.
Nature is the bigger picture
What is clear is that the economy must change - from the food we eat to the way we travel. We cannot overstate the reliance our food systems, buildings and infrastructure, medicines and many of our crucial services have on nature. If we do not prioritise the natural world and the species that live in it, we face a system-wide collapse. Protecting nature is a foundational part of creating a more sustainable future – held on equal terms and inextricably interlinked with achieving a just transition to net zero. Only then can we create an economy truly built to last.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers.