PI Partnership – BNP Paribas Asset Management


SUSTAINABLE BY NATURE – THE IMPORTANCE OF BIODIVERSITY TO FINANCIAL INSTITUTIONS


“The story of the biodiversity crisis is a story of value destruction on an unprecedented scale. We understand that this is about more than just money – life is material to us too – but the financial estimates alone are stagger- ing, in terms of what we might lose and what we might gain if we change course now. We can, and we must, secure a better future for our clients and for society.”


Jane Ambachtsheer, global head of sustainability, BNP Paribas Asset Management


In recent years, there have been alarming declines in insect and bird populations. Larger animals have not fared much bet- ter: 70% of vertebrate species have disap- peared since 1970. When bees and other insect pollinators disappear, the birds that eat them and the plants they pollinate dis- appear. Thus begins a chain reaction, with severe implications for global food production and other ecosystem services. The loss of pollinators provides an exam- ple of how difficult it is to measure the economic impact of biodiversity loss. A recent study placed the economic value of insect pollination in the US at $34bn, based on 2012 data.¹ But the larger cost in terms of human sustenance and nutrition is substantially greater, potentially impacting sectors of the economy that depend upon a healthy, well-nourished workforce. One estimate places the cost of pollinator loss at over $500bn per year.² These costs are likely to be significant underestimates for at least three reasons: – The complexity involved in valuing the accelerating destruction of complex, inte-


grated systems that provide so many ser- vices essential for life and economic activity – Certain ecosystem services are irreplaceable – Only a portion of the costs can be trans- lated into financial terms. The intangi- bles, which include the knowledge lost when species disappear before they have even been discovered – are priceless. The estimates we have seen, however, are credible and large enough to threaten global financial stability and delivering sustainable returns to our clients. As fidu- ciaries, we have an obligation to act. Investors thrive on taking calculated risks – risk and reward are viewed as two sides of the same coin. Sophisticated investors are comfortable with risk. The biodiversity and climate crises, there- fore, demand new terminology. If a ‘risk’ is a negative event that may or may not occur, then the concept does not ade- quately capture what we are facing. Like climate change, biodiversity loss is an ongoing process, not a potential future event. There is a great deal of uncertainty regarding how this process may play out, and how negative and far-reaching the outcomes will be, but it is quite clear that continuing on a business-as-usual basis is driving us to disaster, and we must change course. The Convention on Biological Diversity’s goal to ‘live in harmony with nature’ pre- sents


opportunities for investors, as


society works to reorient consumption patterns and production methods. In par- allel with the shift to a low carbon econo- my, this transition is the most significant investment opportunity of our lifetimes. According to the World Economic Forum, these ‘positive pathways’ are estimated to


bring $10trn in business value and create 395 million jobs by 2030.³


Asset managers need new tools and approaches to risk management to address this threat. For example, tradi- tional risk modelling techniques tell us that the highest impact events are also the least likely to occur. These are often labelled ‘fat tail’ events. However, ecosys- tem collapse cannot be modelled using the same tools we use to predict random events. Ecosystem collapse is already hap- pening, initiated and driven by human activity. A reliance on our old models may mask the true nature of the threat. The most significant risk of biodiversity loss is not to companies when they lose access to certain ecosystem services or the the reputational risk of funding harm to nature. The paramount risk is the unrav- elling of nature itself, which is under way. This is an existential threat. Risk manage- ment focused solely on risks to individual issuers will not translate to a reduction of systemic risk. To manage systemic risk, investors need to use their influence on the problem, including more effective engagement and public policy advocacy. As investors, we must also take a ‘bottom-up’ approach and consider how nature loss translates into financial risk to companies.


1) https://www.sciencedaily.com/releases/2021/02/ 210203144555.htm (The economic value of insect pollinators was $34 billion in the U.S. in 2012, much higher than previ- ously thought, according to researchers at the University of Pittsburg and Penn State University. The team also found that areas that are economically most reliant on insect pollinators are the same areas where pollinator habitat and forage quality are poor.)


2) https://insights.osu.edu/sustainability/bee-population 3) Katri, A; Waughray, D., A blueprint for business to transi- tion to a nature-positive future (World Economic Forum, 15 Jul 2020), at: https://www.weforum.org/agenda/2020/07/ future-nature-business-action-agenda-blueprint-climate- changebiodiversity-loss/


BNP PARIBAS ASSET MANAGEMENT UK Limited, “the investment company”, is authorised and regulated by the Financial Conduct Authority. Registered in England No: 02474627, registered office: 5 Alder- manbury Square, London, England, EC2V 7BP, United Kingdom. This article has been prepared by the investment company. This article is produced for information purposes only and does not constitute: 1. an offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever or 2. investment advice. Opinions included in this material constitute the judgment of the investment company at the time specified and may be subject to change without notice. The investment company is not obliged to update or alter the information or opinions contained within this material. Investors should consult their own legal and tax advisors in respect of legal, accounting, domicile and tax advice prior to investing in the financial instrument(s) in order to make an independent determination of the suitability and consequences of an investment therein, if permitted. Please note that different types of investments, if contained within this material, involve va- rying degrees of risk and there can be no assurance that any specific investment may either be suitable, appropriate or profitable for an investor’s investment portfolio. Given the economic and market risks, there can be no assurance that the financial instrument(s) will achieve its/their investment objectives. Returns may be affected by, amongst other things, investment strategies or objectives of the financial instrument(s) and material market and economic conditions, including interest rates, market terms and general market conditions. The different strategies applied to the financial instruments may have a significant effect on the results portrayed in this material.This article is directed only at person(s) who have professional experience in matters relating to investments (“relevant persons”). Any investment or investment activity to which this document relates is available only to and will be engaged in only with Professional Clients as defined in the rules of the Financial Conduct Authority. Any per- son who is not a relevant person should not act or rely on this article or any of its contents. All information referred to in the article is available on www.bnpparibas-am.com. As at May 2021.


32 | portfolio institutional | June 2021 | issue 104


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