Biodiversity and climate change: A joint challenge
Joe Pigott, Climate Change Specialist within our Responsible Investing team
Please note: This article is designed to be thought leadership content to offer big picture views and analysis of interesting issues and trends that matter to our clients and the world in which we live. It is not designed to be taken as expert advice, investment advice or a recommendation and any reference to specific companies is therefore not an opinion as to their present or future value or broader ESG credentials. Reliance upon any of the information in this article is at the sole discretion of the reader. Some of the views and issues discussed in this article may derive from third-party research or data which is relied upon by Barclays Private Bank and may not have been validated. Such research and data are made available as additional information for the reader where appropriate.
The emergence of nature and biodiversity
The case for tackling climate change has become increasingly clear to investors in recent years. Governments have stepped up efforts to mitigate and manage the devastating impacts of a warming world, with the Paris Agreement and, more recently, the Glasgow Climate Pact laying the groundwork for the action needed.
The role of the financial industry in combatting climate change is also fast evolving. The raft of net-zero pledges made under the Glasgow Financial Alliance for Net Zero (GFANZ)1 demonstrates a real progression in how the financial industry is addressing this challenge. This is perhaps no surprise given the risks involved – as Christiana Figueres, former Executive Secretary of the UN Framework Convention on Climate Change once said, “Climate change increasingly poses one of the biggest long-term threats to investments”2.
There is, however, another important topic emerging from the shadow of climate change and rapidly rising up the investor community’s agenda – that of nature and biodiversity. Climate change and biodiversity loss have typically been seen as separate issues, with the former dominating the discourse at both a governmental and private sector level. However, it’s becoming clearer that they may be twin crises on “two sides of the same coin”3.
Understanding the interplay between nature and climate change
One way to consider nature and biodiversity is through the benefits and value they provide to businesses and wider society, referred to as ‘ecosystem services’, or simply as ‘nature’s contributions to people’.
The Millennium Ecosystem Assessment classified ecosystem services into four major categories4:
- provisioning services, such as food and water;
- regulating services, such as flood and disease control;
- cultural services, such as recreational and cultural benefits; and
- supporting services, such as nutrient cycling, that maintain the conditions for life on Earth
These ecosystem services flow from the stock of natural capital, which is underpinned by biodiversity i.e. the diversity within and between species5.
These ecosystem services that are so critical to our way of life – from food security to green spaces that aid mental health – are not priced into our current economic measures6. One study estimates that more than half (55%) of the world’s total gross domestic product (GDP) – equivalent to an estimated $57.4 trillion – is moderately or highly dependent on nature and its services7, while the Dasgupta review outlines that our economies all depend on nature, either directly or indirectly8. However, nature has largely been considered a free and limitless externality.
With the world facing a crisis in biodiversity9, the statistics show just how damaging this belief is. According to a 2022 WWF Report, its Living Planet Index showed an average 69% decrease in monitored wildlife populations between 1970 and 201810. The world has also lost one-third of its forests to deforestation, half of which has occurred in the last century alone11. Between 1997 and 2011, it is estimated that declines in the world’s biodiversity resulted in losses of up to $20 trillion per year12.
The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) is a leading voice in advising policymakers on the state of nature and biodiversity globally. IPBES has identified and categorised five direct drivers of nature and biodiversity loss:
- land and sea use changes
- direct exploitation of organisms (such as overfishing and deforestation)
- climate change
- invasive species13
Of these drivers, land and sea use changes, as well as exploitation, have the largest impact on nature and biodiversity loss currently. However, if we don’t limit the scale of warming, then climate change is likely to become the dominant cause of biodiversity loss and the degradation of ecosystem services in the coming decades14. Here lies the unique challenge between biodiversity loss and climate change – that they are highly interdependent of each other. The temperature rises and increased intensity of weather events associated with climate change are expected to lead to biodiversity loss by making habitats less hospitable. At the same time, this loss of biodiversity and nature means we lose some of our best defences against climate change15.
To put that into context, the ocean absorbs around 25-30% of annual CO2 emissions16, while forests worldwide have absorbed about 18% of all human-caused carbon emissions17. As temperatures increase, however, the ability of the oceans to dissolve CO2 decreases18, while the rate of deforestation – currently equivalent to losing an area about the size of Portugal annually19 – means we are reducing the volume of CO2 absorbed each year. Nature also helps to reduce the impact of extreme events, such as flooding, by dissipating wave and tidal energy20. This interconnection between biodiversity loss and climate change means that it may not be possible to solve one without solving the other21.
How private finance can leverage climate action to halt biodiversity loss
In its 2022 report on the ‘State of Finance for Nature’, the UN identified a need to double investment by 2025 and eliminate nature-negative finance flows22. The financing gap is substantial and, as the chart below shows, a doubling of investment by 2025 is just the start. By 2050, $674 billion is required each year, four times current investment levels. According to the report, if this level of finance were to be achieved, we could halt biodiversity loss, significantly reduce emissions and restore close to one billion hectares of degraded land.
There are several challenges with mobilising this level of finance for nature and biodiversity, particularly as to reach this level of scale, private finance is going to be critical alongside that of public finance. Investors will need strong policy signals, robust data, and investable projects. Investment in nature and biodiversity is currently in its infancy, often taking place via smaller, localised initiatives that would need to be significantly upscaled.
At a national level, the UN Biodiversity Conference (COP15) held in Montreal in December 2022 resulted in a positive signal that governments are committed to halting and reversing biodiversity loss. Most notable was the agreement of the Kunming-Montreal Global Biodiversity Framework (GBF) which had, amongst other things, a target to conserve and manage 30% of land and the oceans by 2030, as well as to increase financing to at least $700 billion per year over the same time frame23.
Strong policy signals are a key element for mobilising private capital. While the COP15 GBF is not legally binding like the Agreement made for climate at COP21, some have referred to it as biodiversity’s ‘Paris’ moment. Time will tell if it will drive significant action from companies as further commitments will likely be required, but it can be viewed as a positive step from the global community.
Intention alone isn’t enough
Investors need more than intent, however; they also need decision-useful information from companies to guide their capital allocation decisions. The Task Force on Nature-related Financial Disclosures (TNFD) aims to deliver that by providing a consistent framework for companies and financial institutions to disclose the nature-related impacts, dependencies, risks and opportunities they are exposed to.
The TNFD follows the same structure as its climate counterpart – the Task Force on Climate-related Financial Disclosures (TCFD) – and is aiming for similar, if not accelerated levels of support and uptake following its recent release in September 2023. The TNFD’s disclosure recommendations are structured around four pillars – governance, strategy, risk/impact management, and metrics and targets – and aligned with both the TCFD and the International Sustainability Standards Board (ISSB)24.
Investors can also use engagement with companies as a lever to enact change. Building on the success of Climate Action 100+, an investor-led initiative ensuring the world’s largest Greenhouse Gas (GHG) emitters take action on climate change, Nature Action 100, was announced by investors at COP15. Its aim is to drive corporate action to reduce nature and biodiversity loss25.
If private sector investment in nature is to increase by several orders of magnitude in the coming years, then 2024 will be critical in determining its success. There are high expectations that the same approaches and tools that have mobilised investors in the fight against climate change, will encourage them to act on nature and biodiversity.
This communication is general in nature and provided for information/educational purposes only. It does not take into account any specific investment objectives, the financial situation or particular needs of any particular person. It not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful for them to access.
This communication has been prepared by Barclays Private Bank (Barclays) and references to Barclays includes any entity within the Barclays group of companies.
(i) is not research nor a product of the Barclays Research department. Any views expressed in these materials may differ from those of the Barclays Research department. All opinions and estimates are given as of the date of the materials and are subject to change. Barclays is not obliged to inform recipients of these materials of any change to such opinions or estimates;
(ii) is not an offer, an invitation or a recommendation to enter into any product or service and does not constitute a solicitation to buy or sell securities, investment advice or a personal recommendation;
(iii) is confidential and no part may be reproduced, distributed or transmitted without the prior written permission of Barclays; and
(iv) has not been reviewed or approved by any regulatory authority.
Any past or simulated past performance including back-testing, modelling or scenario analysis, or future projections contained in this communication is no indication as to future performance. No representation is made as to the accuracy of the assumptions made in this communication, or completeness of, any modelling, scenario analysis or back-testing. The value of any investment may also fluctuate as a result of market changes.
Where information in this communication has been obtained from third party sources, we believe those sources to be reliable but we do not guarantee the information’s accuracy and you should note that it may be incomplete or condensed.
Neither Barclays nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation.