Biodiversity and our approach to it

We have been managers of dedicated sustainable investment funds for almost 20 years.  Key to our approach is that economies should develop along a path enabling the world’s population to live longer, better and healthier lives without undermining the planet’s ability to provide the resources that humans and other species rely upon.  Biodiversity is one component necessary for that path, along with climate stability, air and water quality, human rights and others.  That’s why we have been researching and engaging companies on a wide range of topics related to biodiversity for nearly two decades.

What is biodiversity?

Biodiversity is the term commonly used to refer to the variety of living species on Earth, including plants, animals, bacteria and fungi. It is not a marketable good or product, nor a service; it is the living web that connects the tangible and intangible elements of healthy ecosystems.

The many contributors to biodiversity loss include changes in land and sea use, direct exploitation of organisms, climate change, pollution and invasive species. And there are different regulatory regimes governing different contributors for example forest management, water, waste etc.  There are many challenges to assessing the biodiversity risks and impacts of companies as they are location specific, dependent on how each company interacts with nature across its value chain, and they are often cumulative.  Add in a huge amount of intermediation through supply chains which in turn makes it very difficult to source useful data and it’s clear that addressing biodiversity loss in investment is not straightforward.

Given the growing realisation of the importance of biodiversity to economic activity, an increasing number of financial industry initiatives, targets and commitments have been created.  There are many large scale issues that need to be tackled by multiple actors including companies, financial institutions, governments and non-governmental organisations (NGOs).  With that in mind, we support the efforts of the finance industry to improve company disclosures on nature-related dependencies, impacts, risks and opportunities

However as bottom-up long-term investors, what makes us different is our focus on targeted, company relevant topics and real world change. This allows us to address practical issues which often impact on multiple areas of concern.  Our investment approach is committed to identifying high quality companies that contribute to, and benefit from, sustainable development. Rather than considering “biodiversity” as a stand-alone theme we focus on specific, tangible factors such as pollution, supply chains and plastic packaging. These issues feed into biodiversity outcomes and are more in control of company management than broad measures of natural capital or biodiversity loss.

We don’t have strategy or portfolio level targets for stemming biodiversity loss. Solving the problems leading to biodiversity loss requires deep collaboration among many stakeholders and so it’s hard to see how individual investor targets make sense.  Targets can also lead to unintended consequences, for example when investors divest to meet targets rather than holding a company and engaging for change.  Not to mention that tracking progress towards targets requires data and metrics which are not yet widely available for biodiversity.  Action today is more important than targets set for the future and so we focus on what every company we invest in can do in the here and now as well as their direction of travel.

Biodiversity and our investment process

The importance of ethical stewardship in addressing the interconnected problems of biodiversity loss, climate change and human development is a common thread that runs through all our investment decisions.  For example, we wrote about the challenges of sustainable food production in this article from 2020, including how it gave rise to a number of excellent investment opportunities.  We have been considering the impacts of human activity on biodiversity loss for many years; how we incorporate that in our investment process can be summarised as follows:

• Avoiding companies that we believe have a significant negative impact on the environment,
• Investing in companies that we believe are working to reduce their environmental footprint and so reduce pressure on biodiversity,
• Investing in companies that we believe are actively providing solutions to some of the interrelated challenges listed above,
• Engaging with companies to encourage them to improve their operations and disclose more information

Given all the challenges of analysing biodiversity impacts and the need for location and company specific information, we consider that a bottom-up detailed analysis is what really makes the difference in assessing company efforts in reducing impacts and driving solutions.  As an example of how the very small can contribute positively to biodiversity, consider the wonderful world of microbes as used by company Novonesis

Novonesis

Novonesis is a global bioscience company based in Denmark. It uses its understanding of microbiology, fermentation and enzymes to create products for food and agricultural companies.  Microbes include bacteria and fungi, so tiny that they can’t be seen without a microscope, but exist in all ecological niches on the planet. They are also the oldest forms of life on the planet having existed for 3.5 billion years.

Novonesis take advantage of the fact that all plants and animals evolved in a world of microbes to create solutions to current challenges including:

• Food preservation: Approximately 30% of food that is produced is wasted at some point along the supply chain, with a resulting waste of the energy, water and raw materials, not to mention the land that was used to produce it.2
• Plant health: Although plants evolved to interact with microbes for better health and growth, the agricultural boom of the last 50 years has seen us favour using chemical fertilizers and pesticides instead.3
• Animal health: The wide spread use of antibiotics and the resulting contribution to anti-microbial resistance.

The Chief Financial Officer (CFO) of an agricultural machinery company remarked that the world needs to produce as much food in the next 50 years as it has in the last 10,000 years.  Considering the impact of agriculture on soil health, water use and biodiversity, solving these challenges can be a huge positive for the natural world.