It’s been 54 years since the first Earth Day called for basic protections for the world’s waters, air and land. In the decades since, various environmental agreements have been reached and legislation signed into law, both in Canada and internationally. But much more needs to be done — especially to protect the biodiversity fundamental to our existence.
We’re pleased to share that with our new biodiversity screen, we’re now able to take meaningful action toward reducing biodiversity risk in our investors’ portfolios.
A natural evolution in sustainable investing
Genus has used ESG investing screens for years — removing fossil fuels, tobacco, alcohol, gambling (and other sectors with a negative impact on the environment and/or communities) from clients’ portfolios.
But last year, we started exploring ways in which we could layer on a biodiversity filter to address the loss of biodiversity and its economic implications. Our Sustainable Investment Analyst, James Dick, published a research paper that forms the foundation of Genus’ approach to biodiversity.
The screen uses data from ESG research firm MSCI to measure biodiversity risks and exclude sub-par performers. As Dick explains, the screen helps identify and exclude 40 of the lowest-performing companies in terms of biodiversity impact — everything that affects “a company’s capacity to conserve and enhance natural capital, encompassing finite resources related to ecosystem services, including clean air, water, fertile soil, productive oceans and forests, and all natural resources contributing to human well-being.”
The dual aim is to enhance portfolio performance and mitigate risks, which range from potential regulation to investor action to deteriorating business conditions caused by a loss in natural capital.
The screen is now being used across our Fossil-Fuel Free funds as well as our High Impact Equity FundTM — although Dick notes that we can apply the screen to any investor’s portfolio.
And while it’s too soon to say how this will translate into investor returns, Dick points to research from the World Economic Forum, which estimates that companies “focusing on nature-positive solutions for biodiversity protection could create $10 trillion in business opportunities and generate 395 million new jobs by 2030.”
How we screen out the “bad actors” on biodiversity
A screen is focused on excluding the “bad actors” on biodiversity from a fund or portfolio. Two examples Dick cites in his research are retailers Bath & Body Works and Ross Stores.
Bath & Body Works is screened out because it extensively uses palm oil and lacks “established best practices for procuring certified sustainable palm oil,” with large-scale production coming “at the expense of extensive deforestation in some of the world’s most biodiverse regions.”
In the second case, it’s Ross’s extensive use of cotton: “Ross Stores has not adopted sustainable sourcing policies or implemented measures for cotton traceability in its products, whether they are its own or licensed.”
Dick acknowledges that any screen has its limits. “With the divestment approach, you can’t sway these companies; you just exclude them from consideration,” he says. “But for us, it was a question of: How do we take out the worst actors doing significant harm, and then put that capital toward companies that are hitting the bar and showing progress.”
One of the beneficiaries of that redirected capital is Svenska Cellulosa Aktiebolaget, a Swedish pulp and paper company, which Dick says “mandates responsibly sourced wood materials and conducts landscape ecological planning on their forests to promote sustainability and biodiversity conservation.”
Signs of hope in the fight for biodiversity
Since that first Earth Day, global wildlife populations have declined by more than two-thirds, according to the World Wildlife Fund, as humans continue to clear the landscape for more farms, cities and roads. And that’s having a direct impact on climate change, notes Nobel Prize-winning economist Joseph Stiglitz: “Much of the loss of biodiversity is associated with deforestation and that, of course, has a very large impact on greenhouse gas emissions.”
According to the World Economic Forum, $44 trillion of economic value is now “moderately or highly dependent on nature and its related services.”
While it’s easy to despair, there is also reason for hope — especially for investors seeking to have a positive impact with their money. With sustainability reporting now extending beyond carbon emissions and into the protection of global species and habitats, there’s a growing recognition that biodiversity has become as critical as climate change.
Whether the argument is a moral one, an economic one or a legal one, there’s little doubt that biodiversity is key to reducing emissions, tackling climate change, and making better use of our finite natural resources.
As Gaylord Nelson, the U.S. senator who launched Earth Day in 1970, wrote on its 10th anniversary, “so long as the human species inhabits the Earth, proper management of its resources will be the most fundamental issue we face. Our very survival will depend upon whether or not we are able to preserve, protect and defend our environment.”
His statement is as true today as it was back then. And progress is, indeed, being made: at the 2022 UN biodiversity summit in Montreal, more than 188 governments committed to restoring and conserving 30 percent of ecosystems by 2030. Biodiversity-related financing will play an integral part in meeting that goal — and new tools, such as biodiversity screens, will make it easier to manage and measure the Earth’s most precious resources.
References:
Government of Canada, E. and C.C.C. (2017) Acts, Environment and Climate Change Canada – Acts & Regulations. Available at: https://ec.gc.ca/default.asp?lang=En&n=E826924C-1&wbdisable=false#:~:text=The%20Canadian%20Environmental%20Protection%20Act,the%20environment%20and%20human%20health. (Accessed: 02 April 2024).
Multilateral environmental agreements (MEAS) (no date) Environment. Available at: https://environment.ec.europa.eu/international-cooperation/multilateral-environmental-agreements-meas_en (Accessed: 02 April 2024).
Biodiversity: Its Impact on Portfolios & Returns. Available at: https://genuscap.com/wp-content/uploads/2020/05/GenusFossil_ImpactReport_Print-pdf-UPDATE-E.pdf (Accessed: 10 April 2024).
Nature and biodiversity: Identify and measure portfolio impacts and risks (no date) MSCI. Available at: https://www.msci.com/our-solutions/climate-investing/nature-and-biodiversity (Accessed: 02 April 2024).
Biodiversity: Its Impact on Portfolios & Returns.
Biodiversity: Its Impact on Portfolios & Returns.
Biodiversity: Its Impact on Portfolios & Returns.
Khalil, H. (2022) Global wildlife populations have declined by 69% since 1970, report finds, CNN. Available at: https://www.cnn.com/2022/10/13/world/wwf-living-planet-report-2022-climate-intl-scli-scn/index.html (Accessed: 02 April 2024).
Why the financial sector must invest in biodiversity (no date) World Economic Forum. Available at: https://www.weforum.org/agenda/2023/05/why-the-financial-sector-must-invest-in-boosting-the-earths-biodiversity/ (Accessed: 02 April 2024).
Nature risk rising: Why the crisis engulfing nature matters for business and the economy (no date) World Economic Forum. Available at: https://www.weforum.org/publications/nature-risk-rising-why-the-crisis-engulfing-nature-matters-for-business-and-the-economy/ (Accessed: 02 April 2024).
Paddison, L. (2023) Global loss of wildlife is ‘significantly more alarming’ than previously thought, according to a new study, CNN. Available at: https://www.cnn.com/2023/05/22/world/wildlife-crisis-biodiversity-scn-climate-intl/index.html (Accessed: 02 April 2024).
COP15: Nations adopt four goals, 23 targets for 2030 in landmark UN Biodiversity Agreement (no date) Convention on Biological Diversity. Available at: https://www.cbd.int/article/cop15-cbd-press-release-final-19dec2022 (Accessed: 08 April 2024).
