Article

The future environment matters to investors

The rising importance of environmental, social and governance investing (ESG) means investors cannot ignore the environmental footprint of their investments.

| 5 min read

As Britain’s water companies have recently discovered, polluting waterways with raw sewage doesn’t make you popular with the public at large. But being environmentally careless is not just a public relations issue. Over the long term, such a reputation is likely to impact a listed company’s valuation too. Environmentally conscious investors are likely to steer clear.

This means businesses and investors are increasingly looking to understand the way their actions and supply chains impact biodiversity loss and how to minimise any negative effect. There are growing calls on businesses to disclose their risks to biodiversity and environmental damage in addition to more intensive, legally required climate reporting so that we can better understand the impact they are having on the environment.

The Taskforce on Nature-related Financial Disclosures (TNFD) is currently creating a framework for companies to report and act on any nature-related risks. Its aim is to help facilitate and support a change in the direction of global financial flows – away from nature-negative outcomes toward something more nature positive. TNFD follows in the steps of the now widely adopted TCFD (Taskforce for Climate-Related Financial Disclosures). The framework is expected to be released in September for adoption by the market.

Nature Action 100 is another initiative. A cousin of the Climate Action 100+ platform, it is a global investor engagement initiative aimed at driving increased corporate ambition and action to reverse nature and biodiversity loss. It engages with companies in key sectors that are deemed to be important in reversing nature and biodiversity loss by 2030.

Biodiversity to the fore

It has now been six months since the United Nations (UN) global summit on biodiversity: COP15 in Montreal. Governments from around the world met in Canada to decide on a new set of targets to guide global action on biodiversity loss through to 2030.

The biodiversity COPs are held every two years and differ from the climate COPs (eg COP26 held in Glasgow) as they focus purely on strategies to halt biodiversity loss. Due to Covid-related delays, part one of COP15 was held virtually in Kunming in October 2021 with the second part taking place in December 2022 in Montreal.

COP15 was a landmark moment for biodiversity awareness, highlighting an area that had been forgotten by many amongst the fervent interest in climate change and the race to net zero. Biodiversity loss gets eight times less coverage than climate change, yet global biodiversity has declined almost 70% since 1970.

Whilst species becoming extinct is a normal and expected part of the evolutionary process, the widespread loss of animal species is occurring at a rate of 100-10,000 times higher than background-expected extinction rates. This has led many researchers to believe that we are entering a mass extinction event. There have been five previous mass extinction events, but this is the first such event that can be attributed to the behaviour of a single species – humans.

Since COP15 some significant environmental agreements have been made which will be vital to the success of GBF.

Since COP15 some significant environmental agreements have been made which will be vital to the success of GBF.

The landmark agreement signed at COP15 was the Global Biodiversity Framework (GBF). It was signed by over 180 nations committing them to addressing the ongoing loss of biodiversity, restore ecosystems and protect indigenous rights. The GBF is based on four overarching goals which set out a vision for biodiversity by 2050 and 23 actionable targets for 2030, which include putting under protection 30% of the planet and 30% of degraded ecosystems by 2030 (known as 30 for 30).

The goals also mention the need to unlock or, indeed, close the biodiversity finance gap of $700bn a year, alongside the equitable transfer of knowledge and information particularly for developing nations – largely echoing the views from COP26 and 27 which seek to ensure financial help is available for the nations mostly likely impacted by climate change. Although the GBF is not legally binding, countries are required to monitor and report on their progress against the goals and targets every five years or earlier.

Since COP15 some significant environmental agreements have been made which will be vital to the success of GBF. Most notably was the treaty to protect the high seas made in March this year. This provides a legal framework for establishing marine protected areas (MPAs) in the high seas - a vast area of ocean that lies outside national boundaries. MPAs will protect against the loss of wildlife and allow the genetic resources of the areas to be shared.

Better stewardship of the planet is clearly in the interest of humanity. But it’s also in the interest of investors that the companies they partially own treat the environment well too

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

The future environment matters to investors

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