Climate change and nature loss are fundamentally linked; one cannot be solved without solving the other. But navigating the climate transition is already challenging enough, let alone addressing the myriad impacts of investments on ecosystems and species. The dilemma for investors is how to take concrete actions on both fronts without being overwhelmed by complexity.
Climate change is one of the main drivers of biodiversity loss, and nature loss is one of the main causes of climate change. Rising temperatures are changing weather patterns which contributes to one in six species being at risk of extinction. On the other hand, land use change is a leading cause of climate change, contributing to an estimated 13–23 per cent of total CO2 emissions. Forest loss alone contributes to about 4.8 billion tonnes of CO2 emissions a year.
On the other hand, it also holds that solving one contributes to solving the other. Nature-based solutions are critical to achieving the goals of the Paris Agreement. Oceans, forests, and soils sequester carbon from the atmosphere and help avoid further global warming. This is estimated to be of the order of 14 billion tonnes of CO2 equivalent (GtCO2e) per year in 2050, which is roughly one-quarter of current annual emissions.
Because the two issues are interlinked, there is a clear case for tackling them in an integrated manner, both to avoid unintended consequences and to capture synergies. This is what scientists from the two relevant UN science panels – the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) and the Intergovernmental Panel on Climate Change (IPCC) – conclude. For example, the use of biomass as a renewable energy source may be a good solution for climate change, but it is detrimental for biodiversity if natural habitats are converted into monoculture plantations.
The COP27 climate summit in November 2022 included a full day on nature-based solutions and the interconnections between biodiversity and climate change. This served as a bridge to the COP15 biodiversity summit which took place one month later. This year’s climate summit in Dubai will also have a strong focus on nature. There is also a practical reason that business is advocating for an integrated approach, namely framework fatigue. In the medium term, we should be able to undertake an integrated approach to climate and nature in our investment portfolios. For now, however, we believe that insisting on an integrated approach could lead to analysis paralysis.
An integrated approach compounds the complexities of analysis of these two vast topics. This risks inaction or a dilution of focus, leading to investors not considering climate and nature risks and opportunities sufficiently enough to drive meaningful change. Climate change is just one of the five drivers of biodiversity loss — some others are land and sea use change, resource exploitation, invasive species, and pollution. Though complex, it can be funnelled down to a single metric which is globally transcendent: greenhouse gas emissions.
Biodiversity assessment is still very nascent and requires consideration of impacts and dependencies which occur locally. For example, water scarcity is specific to supply and demand in individual watersheds, and nitrogen discharge is highly problematic in a densely populated country like the Netherlands, but not necessarily in a country like France, for example. This makes it difficult to capture biodiversity in a single global dimension.
While more work needs to be done, climate change assessment is becoming mainstream in investment decision making. Assessing the drivers of biodiversity loss, however, requires more work to capture the nuances. For climate, we have integrated assessment models that relate global climate models to key macroeconomic variables. For nature, we don’t have such models. To develop these, we recommend developing them in a modular way, such that additional levels of complexity can be added over time.
So, what does this mean for investors? Both climate change and biodiversity are financially material risks that need to be taken into account, but that does not mean we need to wait until we have the tools for an integrated approach. The tools and data needed for biodiversity assessment are not as mature as those for climate. However, focusing on the key biodiversity impacts by sector, and identifying the key actions that companies in that sector can undertake to mitigate their contribution to biodiversity loss.
Investors may feel overwhelmed by too many sustainability considerations being added to their decision-making process. Lots of work remains to be done, in particular, for halting biodiversity loss, we need sector transition pathways like we already have for decarbonisation. These should serve as benchmarks to assess companies in a forward-looking way as to how they are aligning their businesses with the goals of the Kunming-Montreal agreement.
Methodologies and data for biodiversity assessment are being rapidly developed to support investment decision making. We have learned a lot from assessing climate-related risks and opportunities, which we can apply to take action to halt biodiversity loss. Perhaps because of these learnings, we may be able to move faster on addressing biodiversity loss than we have on climate change.
Emily Homer, climate specialist, and Rashila Kerai, biodiversity specialist, Robeco