Tackling Climate Change by Investing in Biodiversity
May 24, 2023
By investing in biodiversity alongside other climate strategies, companies can find new opportunities and manage risk.
Key takeaways:
- Investors have developed strategies around climate-related risks, policies and disclosures, but haven’t put the same level of focus on biodiversity and nature-related risks.
- Investing in biodiversity can help companies better achieve climate-related goals.
- Prioritizing biodiversity in investments starts with assessing risks, understanding opportunities and having active ownership over these initiatives.
Overview
Addressing climate change often focuses on measuring and reducing carbon emissions. Regulation and the availability of data have also helped center discussions on this topic.
But there’s more to the picture.
“Carbon emissions are important,” says Jennifer O’Neill, associate partner on Aon’s responsible investment team. “But it’s missing a part of the equation: biodiversity. The natural environment all around us plays a huge role in absorbing carbon from the atmosphere.”
Biodiversity and climate change are inextricably linked — plants, oceans, animals, microorganisms and soil all play a role in absorbing greenhouse gasses. Depleting the natural environment also means sacrificing an effective method of carbon capture. Based on the world’s population and the current rate of consumption, however, humans have lived way beyond the planet’s means. As discussed in a recent Aon report, humans overused the planet’s resources 1.75 times faster than ecosystems can regenerate.
To tackle climate change more effectively, companies should prioritize replenishing biodiversity as well as reducing carbon emissions.
In Depth
Many companies have aligned their net-zero emissions goals with the Paris Agreement. From a global economic and environmental perspective, this alignment is a critical step in slowing the increase in global temperatures. From an investment perspective, an individual investor can employ tools or adjust portfolios to reduce emissions and attain a net-zero position on their investment assets. But in some cases, they may not be considering the impact in the wider world.
“You can think about things from a portfolio perspective,” says O’Neill, “but it’s also important to consider what that investment is doing in the real world. Is it incentivizing and accelerating the transition from a global economic perspective to net-zero? Or is it simply adjusting your portfolio’s position?”
To approach climate change efforts more holistically, companies will need to view abatement initiatives through emissions-based and biodiversity-based lenses. According to O’Neill, leaders are asking questions such as, “What should I be asking my asset managers about? How can I understand and begin to test their understanding of this area? What should I engage with them on? How can I ask them to be more active in their ownership of these underlying securities on my behalf?”
As leaders broaden their portfolios, four actions can help investors weave biodiversity into their climate efforts and prepare to make smarter, greener investments ahead of the curve.
Strategize with Best Practices
In 2015, the Financial Stability Board, an international entity that assesses and suggests adaptations to the global financial system, identified a need for climate-related information to better inform investing, lending and underwriting decisions, resulting in the creation of the global Task Force on Climate-Related Financial Disclosures (TCFD). Since then, TCFD has been used to categorize and quantify the possible materiality or significance of climate-related risks for organizations.
Soon, organizations will be able to look to the Taskforce on Nature-Related Financial Disclosures (TNFD) to understand nature-related risks. “TNFD is looking to develop a common framework that can be applied across organizations,” says O’Neill. “This will help companies articulate their exposure to nature-related risks in a similar way that TCFD is employed for organizations, corporates, pension funds, or other institutional investors.”
As companies update their climate-related goals, they can use both the TNFD and the TCFD frameworks to build a more well-rounded strategy — and recognize opportunities to make smarter investments.
Assess Current Position and Understand Risk
Companies can look at their current portfolio of assets and understand how to use emerging frameworks like the TNFD to assess their exposure to nature-related risks. Then, they can consider whether that position is as resilient or active as they want it to be.
Some nature-related risks to consider include water consumption and degradation of water supply and pollution exposure through the supply chain or through routine business. Both factors hinder marine life and the surrounding environment to adequately replenish itself.
“Regardless of what their current position is, there are actions that investors can take,” says O’Neill. “So, I would encourage all investors to consider critically how they’re currently exposed and whether that is a position that they’re comfortable with.”
Understand Different Types of Investment Opportunities
Some examples of climate-related investments include investing in assets that contribute to the development of renewable sources of energy, reducing pollution or removing carbon from the atmosphere. Renewable energy technologies and carbon capture technologies are options and are more mainstream.
From a biodiversity standpoint, there are also allocations that contribute toward the development of renewable agriculture, renewable land and responsible forestry. Responsible use of land helps permit better replenishment of soils and benefits agricultural production. This area of investment also opens the door to higher impact investing, which minimizes the disconnect between the actions a company takes within a portfolio and the impact it has on the real world.
Investments can also contribute to reduced pollution and a better environment for biodiversity to thrive. In the shipping world, for instance, reducing microplastics entering the marine environment through more efficient and effective shipping wastewater extraction technology allows the reduction of environmental impact in this critical supply chain link.
Engage Actively
Engagement, voting rights and the use of active ownership are crucial for companies to address biodiversity loss and climate-related issues. Having active ownership means contributing toward and influencing the strategic direction of a business, rather than just being passive recipients of an investment return. Much of this engagement starts with developing a strategy. Over the past few years, investors have developed a strategy around climate-related risks, policies and disclosures, but not all of them have given the same level of focus to biodiversity and nature-related risks.
“It’s important for investors to understand their level of competence and credibility on nature-related issues, because if we’re focusing exclusively on the emissions side of the equation, we risk missing out on one of the crucial components dealing with climate change,” says O’Neill.
O’Neill explains that certain jurisdictions’ regulatory efforts have encouraged organizations to take a more active role in their investments, for example, on the part of pension plan trustees. But it’s crucial for organizations that are investing money on an investor’s behalf to have a well-rounded strategy and prove that they are using tools like active ownership, engagement and voting rights to help further the organization’s agenda.
Embracing Ambiguity in Investing in Biodiversity
Historically, investors have gravitated toward focusing on carbon emissions because it offers measurable data points that help them understand their exposure to climate-related risks. Because there is a less data on biodiversity’s role in combating climate change than information about climate change, companies tend to shy away from exploring this investment consideration.
“In any area of investment, there is always a degree of uncertainty, and there are always some challenges in identifying what the perfect state of affairs is,” says O’Neill. “This is no different, but we can’t wait for perfect data to make decisions — it won’t happen, and it’ll be too late. Investors shouldn’t let the perfect be the enemy of the good. Take some action to understand where your position is today and then think about what tools can be used to improve that position and contribute to a better world for all.”
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to provide, and shall not be relied upon for, accounting, legal or tax advice or investment
recommendations.
Any accounting, legal, or taxation position described in this document is a general statement and
shall only be used as a guide. It does not constitute accounting, legal, and tax advice and is
based on Aon Investments’ understanding of current laws and interpretation. Aon Investments
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Aon Investments USA Inc. is a federally registered investment advisor with the U.S. Securities
and Exchange Commission. Aon Investments is also registered with the Commodity Futures
Trade Commission as a commodity pool operator and a commodity trading advisor and is a
member of the National Futures Association.
To find out more about Aon’s insights on climate change, click here.
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