Key Points
- As investors, we believe there are several key aspects of biodiversity that warrant more focused attention, inform our understanding and help shape our investment decisions.
- Companies have historically concentrated on their own impacts on biodiversity; however, we know that they also depend on natural ecosystems and services to operate, much as they do on a stable climate.
- It can be difficult to understand how investors can capitalize on opportunities and direct capital towards companies in listed markets providing biodiversity solutions, and while this area continues to develop, we believe it requires careful consideration with an appreciation of the nuances.
Biodiversity describes a complex and dynamic system – one which remains inadequately understood, but is clearly integral to a healthy, global ecosystem. The science around the topic continues to advance and, as a result, our investment approach should respond and evolve. There are various ways to consider the importance of biodiversity. As investors, we believe there are several key aspects that warrant more focused attention, inform our understanding and help shape our investment decisions.
Developing Our Understanding of Biodiversity
As a starting point, the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) outlines the direct drivers of biodiversity: land and sea use and change, natural resource use and exploitation, pollution, invasive species, and climate change.1 However, the way in which companies affect each of these drivers is not entirely clear. Guidance to measure, monitor and assess corporate impacts varies by subtopic. The impact companies have on climate change, as well as the effect climate change has on companies, tends to be well understood and structured. Disclosures on this topic are becoming more useful to investors, and the Task Force on Climate-related Financial Disclosures (TCFD) reporting is becoming mandatory in more regions. By comparison, disclosures on invasive species are not as complete. We do not yet have the means to systematically understand how companies affect, or are affecting, invasive species.
We also need to improve our understanding of the ways in which companies depend on, and benefit from, biodiversity. Companies have historically concentrated on their own impacts on biodiversity. However, we know that companies also depend on natural ecosystems and services to operate, much as they do on a stable climate. This is a key concept in considering the financial implications of environmental, social and governance (ESG) issues – companies can have an impact on the natural environment and human capital, as well as depend on them. Long-term sustainable businesses need to operate within planetary boundaries (as highlighted by Doughnut Economics).2 Some tools and research exist to highlight sectors and industries with a material reliance on biodiversity, but these tend to concentrate on a small handful of sectors, and do not always connect these dependencies to the mechanisms by which they can affect companies.
Within the realm of financial materiality, there is limited consensus around the methodology by which one can evaluate companies’ dependence and/or impact on biodiversity. Breaking this down into tangible components through the IPBES drivers makes this more actionable, and in our view more credible. For example, understanding land use and deforestation risk requires different subject-matter expertise, risk-management systems and measurements compared to understanding pollution or water consumption. However, it also makes it harder to look at industries and regions consistently, and to report aggregated data. As with all issues, a simple and consistent approach to analyzing and comparing performance is preferable, but may in fact mask underlying risks and impacts. This is particularly true for those factors not well captured by numeric or binary indicators. Moreover, this lens does not apply well to all issues. For example, the financial sector has a significant but indirect impact on and exposure to biodiversity through its lending practices, and the pharmaceutical industry remains concerned that biodiversity loss could affect future drug development, given that compounds identified in nature can seed this process.
This leads us to another area for development – the use of data. Geospatial data has enabled a much greater understanding of and focus on biodiversity. However, in order for investors and companies to fully understand their impact and reliance on biodiversity, this needs to be connected to company operations and supply-chain data. We do not believe using generalized information is always meaningful, given that natural resources and ecosystems vary based on specific locations. In our view, the key to understanding biodiversity risks and opportunities is in studying granular issues and locations. In doing so, this should drive improvements in corporate and investor biodiversity impact reporting, aiding better measurement of initiative success, and supporting portfolio biodiversity footprinting.
How Can We Invest with Biodiversity in Mind?
It can be difficult to understand how investors can capitalize on opportunities and direct capital towards companies in listed markets providing biodiversity solutions. While this area continues to develop, we believe it requires careful consideration with an appreciation of the nuances.
It is possible to invest in companies doing less harm, like improving emissions efficiency. Precision agriculture is a great example: these technologies enable us to produce food and maintain yields, while reducing the fertilizers and pesticides required. While this can help to reduce a negative impact, precision agriculture companies are still a key part of a system that has an overall significant negative effect on biodiversity. If we again make the climate comparison, there is not the same transition pathway that exists to understand how companies can move to address these externalities.
There are also solutions that can enable the protection of biodiversity. For example, satellite imagery and blockchain can empower more precise traceability and monitoring. These tools can facilitate enforcement of ocean no-go zones and track or monitor land utilization to support more sustainable sourcing. The technologies clearly have applications beyond biodiversity preservation but can be a useful tool for this as well. Companies offering such solutions are therefore unlikely to have pure exposure or alignment to biodiversity but could offer important contributions to its management.
There are also continuing efforts to preserve genetic diversity through investments in seed and gene banks. Advancements in life science tools (i.e. faster sequencing speeds, falling costs per genome, etc.) are also augmenting the ability to capture and catalogue information. The resulting ‘plant libraries’ tend to be managed by non-profit organizations, but the information can be used by public companies to drive research. Developments in crop protection and seed innovation are also supporting biodiversity efforts. The development of crop-protection products that are less persistent in the environment, tools that enable the more precise administration of crop chemicals, and technology that could potentially radically reduce the need for these products (e.g. laser weed eradication tools) could all support biodiversity-preservation goals. Seed and plant research is also uncovering genetic targets that could allow plants to be more resilient, potentially reducing the need for crop-protection products as well.
Finally, companies offering solutions to biodiversity issues do exist, but they are often not listed-market investments. An example of this is Beewise, a technology company that uses artificial intelligence and real-time data analysis to construct beehives, replicate bee behavior and prevent colony collapse. The premise is that farmers currently benefit from pollination as a free natural service, but as biodiversity loss accrues, farmers may have to pay for it. In addition, companies can affect biodiversity through their operational practices, such as by turning to or sourcing from farms employing regenerative agricultural practices. Again, this is not a direct solution that investors can direct capital towards, but it is used by large-cap companies with food or commodity exposure.
Conclusion
As we have discussed throughout our biodiversity blog series, our understanding of the topic continues to evolve, and therefore our approach will too. We have constructed a method of breaking down and understanding biodiversity-related risks and opportunities, which we believe enables us to analyze these in a meaningful way. Seeing how they may interact, both with each other and with other ESG issues (e.g. climate), is important to the process. As risks and opportunities emerge, we will continue to explore research, data and expectations of companies and investors. Similarly, our understanding of this issue, and the effect it has on companies, informs our understanding of where opportunities to invest in solutions may exist. Through our multidimensional research platform, we are able to bring together different research inputs (covering, for example, sustainability and private markets), as well as our engagement with companies, to make better-informed decisions and develop a more comprehensive understanding of the topic.
Sources:
- https://www.newtonim.com/us-institutional/insights/blog/why-biodiversity-matters-to-investors-2/
- https://doughnuteconomics.org/about-doughnut-economics
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice. Newton manages a variety of investment strategies. How ESG considerations are assessed or integrated into Newton’s strategies depends on the asset classes and/or the particular strategy involved. ESG may not be considered for each individual investment and, where ESG is considered, other attributes of an investment may outweigh ESG considerations when making investment decisions. ESG considerations do not form part of the research process for Newton's small cap and multi-asset solutions strategies. For additional Important Information, click on the link below.
Important information
For Institutional Clients Only. Issued by Newton Investment Management North America LLC ("NIMNA" or the "Firm"). NIMNA is a registered investment adviser with the US Securities and Exchange Commission ("SEC") and subsidiary of The Bank of New York Mellon Corporation ("BNY Mellon"). The Firm was established in 2021, comprised of equity and multi-asset teams from an affiliate, Mellon Investments Corporation. The Firm is part of the group of affiliated companies that individually or collectively provide investment advisory services under the brand "Newton" or "Newton Investment Management". Newton currently includes NIMNA and Newton Investment Management Ltd ("NIM") and Newton Investment Management Japan Limited ("NIMJ").
Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed.
Statements are current as of the date of the material only. Any forward-looking statements speak only as of the date they are made, and are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results could differ materially from those anticipated in forward-looking statements. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment and past performance is no indication of future performance.
Information about the indices shown here is provided to allow for comparison of the performance of the strategy to that of certain well-known and widely recognized indices. There is no representation that such index is an appropriate benchmark for such comparison.
This material (or any portion thereof) may not be copied or distributed without Newton’s prior written approval.
In Canada, NIMNA is availing itself of the International Adviser Exemption (IAE) in the following Provinces: Alberta, British Columbia, Manitoba and Ontario and the foreign commodity trading advisor exemption in Ontario. The IAE is in compliance with National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations.
