Why investing in biodiversity is more crucial than ever

Covid-19 and the collapse of economies and businesses around the world have helped brand 2020 as a year many of us would like to forget. But if anything, it has highlighted the resilience of strong investors and companies.

Despite the difficulties and unexpected nature of the pandemic, as humans we have adapted. It now feels unnatural to leave the house without a facemask and the words ‘social distancing’ are engraved in our minds.

We are now more aware than ever of the importance of our surroundings, which we have learned not to take for granted as many of us did pre-Covid-19.

Despite the unfortunate side effects of the pandemic, it’s also brought the importance of environmental, social and governance (ESG) factors to the fore, and within that falls biodiversity – the variety of living organisms on earth.

This often overlooked area contributes to our wellbeing and inherently affects the economy.

Our world at risk

There’s an array of good and bad ESG practices any company – small or large – can incorporate. Good practices are praised by many consumers and investors. For example, if a company managed to not let any of their workforce go during the early days of the pandemic, their reputation – falling under the social aspect of ESG – probably remained strong or improved.

If a CEO took a pay cut or forfeited his or her bonus to benefit employees, this would be classified as a strong governance factor. Conversely, overworking staff on lower pay, cutting benefits or using practices that damage the environment fall under poor ESG practices.

Until recently, many global investors deemed ESG factors as ‘nice to have’ in portfolios but not necessary to generate profit or win over clients. That opinion changed starkly as investors and consumers all over the world shifted their focus to how companies dealt with the early days of the pandemic.

Regionally, Europe continues to be at the forefront of strong ESG integration within funds but, according to Morningstar, in the first half of 2020, net inflows into ESG funds in the US reached $21bn (£15.2bn), nearly equalling the entire total for the previous calendar year.

Throughout the past couple of decades, we’ve heard about the damaging effects our actions have had and will continue to have on the environment if changes aren’t made. These issues have been growing for decades. This is where it is key that investors not only see biodiversity as an investment opportunity for the present but also a chance to play their part in preserving the world and its natural resources.

Biodiversity within ESG

Although assets under management in funds that abide by ESG principles have surpassed $1trn globally for the first time on record, ESG information today is often married with Covid-19- related discussions.

Many investors are not aware that biodiversity delivers valuable services such as pollination, water purification, flood protection and carbon sequestration – with an estimated value of between $125trn and $140trn per year, which is more than 150% of the global GDP.

As our world continues to change for the worse, it’s vital for investors to seek change and protect the biodiversity and ecosystems we have in place before it’s too late.

With at least 40% of the world’s economy derived from biological resources, not taking strong measures now will lead to greater harm in the future.

It’s up to companies to place more protection on the biodiversity we rely on and for investors to look out for the companies doing this when deciding where to place their capital. Companies that demonstrate responsible ways of dealing with environmental issues will benefit by gaining the goodwill of investors.

According to German financial indices company Solactive: “It is expected that in the future, governments and institutions enforce stricter regulations concerning species and bio- diversity conservation, making it very costly for companies to react to the requirements instead of proactively planning and acting in advance.

“Early adopters of this trend are likely to face higher costs in the short run but will certainly benefit in the long term.” This further explains the positive long-term investment approach biodiversity can fulfil. So although there are many ESG funds gaining prominence, as an investor it’s vital to see which funds specifically cater towards biodiversity rather than assuming they all do.

Choosing companies that are enforcing sustainability and trying to combat climate change among other environment issues means working with individuals that care about the world we live in. From an investor’s perspective, this can also potentially provide strong returns and new investment opportunities along the way. It’s a win-win.