Evidence of link between biodiversity loss and performance of investments

Loss of biodiversity and degradation of natural ecosystems around the world is one of the greatest sustainability challenges we face today.

David Craig is CEO of Refinitiv and Group Leader of Data & Analytics Division at London Stock Exchange Group (LSEG)

But the link between this and the future performance of your investments or pensions remains little understood and difficult to quantify.

However, compelling evidence of this link is emerging, and the picture is stark. More than half of the world’s economic output – US$44tn of economic value generation – is moderately or highly dependent on nature. Economies and corporates rely on healthy ecosystems, which provides critical services that support the world’s social and economic systems, such as crop, livestock and fish production, pollination and coastal protection.

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The recorded extinction of 83 per cent of wild mammals and 50 per cent of plants therefore represents significant risk to corporate and financial stability.

With this in mind, finance ministers from the G7 have endorsed the launch of the new Taskforce on Nature-related Financial Disclosures (TNFD), a new global market-led initiative which aims to provide financial institutions and corporates with a simple framework to address the complex issue of understanding and measuring nature related risks, and enabling activity and finance to be re-directed to nature positive activities.

The launch of TNFD is so important because biodiversity has often been relegated to a niche status in the world of sustainable investment priorities. The opportunity cost of inaction is also becoming hard to ignore. Action for nature-positive transitions could generate up to US$10.1 tn in annual business value and create 395 million jobs by 2030.

I am honoured to have been appointed co-chair of the new taskforce alongside Elizabeth Maruma Mrema, executive secretary of the UN Convention on Biological Diversity (CBD). In its first year, the TNFD aims to build upon the success of the Task Force on Climate-related Financial Disclosures (TCFD), which has become instrumental in mainstreaming the issue of climate-related financial risks.

The taskforce has also committed to delivering a global framework by 2023 for companies to report and act on evolving nature-related risks.

Historically, inconsistent reporting from companies using a hodgepodge of industry standards and widespread data quality issues has proven to be a major barrier. It has prevented investors from comparing sustainability performance on an “apples to apples” basis on issues such as water security, land use, bio-diversity and greenhouse gas emissions.

To really start impacting capital flows and driving corporate behaviours, we need ubiquitous adoption of globally consistent reporting standards in the same way financial metrics such as EBITDA or price to earnings ratios are ingrained into financial markets.

Such information will become vital to understanding the risks associated with certain investment decisions, especially in countries such as Australia, India and Mexico – where biodiversity risks are projected to be most acute.

The horrendous wildfires that plagued Australia in January 2020 and the resultant loss of an estimated four billion animals serve as a poignant reminder of climate and nature-related risks that can destroy delicately balanced ecosystems and significantly disrupt economies and livelihoods.

LSEG, which recently became the first stock exchange to join the United Nations Climate Change ‘Race to Zero’, is well positioned at the heart of global financial markets to act as a facilitator in driving change.

In addition to engaging proactively with industry standard setters and regulators, LSEG offers markets in which to raise green finance and data on capital raising trends. The opportunity is well recognised. Refinitiv Workspace data shows that over 4,700 green bonds have been issued in the last seven years, raising a combined $1.35tn.

Moreover, LSEG also offers innovative indices in green financing, ESG data and analytical tools that investors can use to align portfolios of stocks and bonds and re-direct financial investments towards achieving the goals of the Paris Agreement.

While still a complex tapestry of definitions, standards and investment approaches, it is truly phenomenal how quickly the financial services sector is embracing a range of important sustainability issues.

It is exciting to think that we are at the dawn of the biggest structural reallocation of capital to ever take place. I remain optimistic about the future.