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    All Insights Perspectives

    Unlocking Hidden Investment Opportunities in Biodiversity

    UNLOCKING HIDDEN INVESTMENT OPPORTUNITIES IN BIODIVERSITY

    April 20, 2022  |  11 Minute Read

    Katya De Graaf

    Client Portfolio Manager, Fundamental Equity

    Katya De Graaf

    Sebastiaan Reinders

    Head of Innovation and Research, Sustainable Investing and Innovation Platform

    Sebastiaan Reinders

    Key Takeaways

    • Protecting biodiversity will be essential to advancing the sustainable transformation of the global economy, and a significant increase in private-sector investment will be needed to achieve it.
     
    • Many companies still have scant information about their impact on nature and ecosystems, complicating investors’ attempts to assess the risks and spot the opportunities related to biodiversity.
     
    • Innovative research, engagement with investee companies and a focus on biodiversity solution providers can help public equity investors identify the companies that are likely to become industry leaders in the low-carbon transition.

    Protecting biodiversity is a critical part of advancing the sustainable transition. Nature and the biological variety and variability of life on Earth have significant economic value. They are major drivers of sustainable growth and support the health of communities and the planet.

     

    Recognition of the importance of biodiversity to decarbonization and the response to climate change is growing, but the investment in conservation and remediation lags far behind annual needs. One reason for this shortfall is that many companies still have scant information about their impact on biodiversity or their efforts to address issues such as deforestation, degradation of ecosystems and animal welfare.

     

    This can make it difficult for investors to assess the risks and uncover the opportunities related to biodiversity, particularly in listed equities. We believe an investing strategy that focuses on solution providers, employs data gathering and analysis and includes engagement with investee companies can narrow this information gap and help investors find the listed companies that are developing innovative solutions to the world’s biodiversity challenges.

     

     

    Why Biodiversity Matters

     

    Biological diversity is the term used to describe the variety of life on Earth, from plants and animals to microorganisms and fungi. This includes genetic differences within species, such as breeds of cattle, and the variety of the planet's ecosystems. Biodiversity matters because it supports everything in nature that humans need to survive, including food, clean water, fuel, medi-cine and shelter.1 Our ability to provide these essentials for a growing global population depends on sustainable agriculture, pollinators, a healthy ocean and the genetic diversity of plants and animals.2

     

    More than half of the world’s total economic value generation is “moderately or highly dependent” on nature, according to a widely cited report from the World Economic Forum. Industries that rely directly on nature for their output, such as agriculture and construction, face clear risks from biodiversity loss. For example, 60% of coffee varieties are in danger of extinction due to climate change, disease and deforestation, threatening the farmers who produce the beans and a lucrative global market, the report shows. Even industries whose output is less directly dependent on nature, such as chemicals, tourism and consumer goods, can face significant “hidden dependencies” through their supply chains. In the cosmetics industry, for example, various products rely on the supply of shea butter, a product of the shea tree that is under threat from deforestation, parasites and pollinator loss.3

     

    Biodiversity also plays a critical role in the global drive to address climate change. Healthy ecosystems are essential to this effort because they absorb and store carbon dioxide (CO2) and other gases that are driving the increase in global temperatures. The ocean, for example, absorbs 25% of all CO2 emissions, making it the planet's largest carbon sink. Ocean habitats such as seagrasses and mangroves can sequester CO2 from the atmosphere at rates as much as four times higher than forests on land.4 Yet the capacity of nature to sequester carbon is being diminished by processes such as deforestation, land degradation, pollution and climate change.

     

     

    Narrowing the Investment Gap

     

    Despite the importance of biodiversity to most sustainability objectives, efforts to safeguard it are at an earlier stage of development than related efforts such as the response to global warming and climate change.5 There has been significant recent momentum, however. A major step forward was made late last year, when nearly 190 countries signed a landmark United Nations biodiversity agreement.6 The Kunming-Montreal Global Biodiversity Framework sets a range of targets for 2030, including cutting global food waste by half and ensuring effective conservation of at least 30% of the world’s lands, inland waters, coastal areas and oceans.7 This framework was bolstered in March of this year with the signing of an international treaty to protect marine biodiversity in international waters.8

     

    Critically, the Kunming-Montreal framework also seeks to increase funding for biodiversity, which currently covers only a fraction of the annual amount needed for conservation and restoration. It identifies a biodiversity financing gap of $700 billion per year, in line with recent estimates from the Paulson Institute, an independent think tank,9 and BIOFIN, a biodiversity finance initiative.10 To reduce this shortfall, the framework aims to mobilize at least $200 billion per year in biodiversity-related funding from public and private sources and seeks to boost the flow of investment to developing countries to $30 billion per year by 2030. To achieve these goals, it calls for leveraging private finance, promoting blended finance and encouraging the private sector to invest through impact funds.

     

    Another useful context for considering biodiversity investment is provided by the UN Sustainable Development Goals (SDGs), which have emerged as a common language for understanding how companies and portfolios are positioned for environmental and social impact. Of the 17 SDGs, the two most directly associated with biodiversity are 14 (life below water) and 15 (life on land). Little investment has been aligned with these two goals, however, and SDG 14 is the least funded of all, according to another World Economic Forum report.11 This shortfall could in turn threaten the UN’s entire sustainable development agenda because of the interdependence of these goals with many others. After all, resilient ecosystems are important to most economic sectors and activities. The UN has said that all 17 of its SDGs ultimately depend on healthy ecosystems and biodiversity.12

     

     

    Encouraging Companies to Report on Biodiversity

     

    Current funding for biodiversity comes mainly from governments, but this may change in the years ahead as corporations and investors come to recognize that sustainable economic growth cannot be achieved without preserving biodiversity and addressing climate change.13 We are already seeing growing interest in the risks and opportunities related to biodiversity from clients, investors and broader stakeholders.

     

    The scarcity of high-quality, consistent data related to biodiversity remains a major impediment to scaling up non-government investment. The Kunming-Montreal framework seeks to address this issue by calling for measures to ensure that businesses – especially large and transnational companies and financial institutions – monitor, assess and disclose their risks, dependencies and impact on biodiversity.

     

    Efforts are underway to provide guidance and stimulate corporate reporting on biodiversity, notably the Taskforce on Nature-related Financial Disclosures (TNFD), a market-led initiative that aims to deliver a risk management and disclosure framework by September 2023.14 In addition, the International Sustainability Standards Board (ISSB) has announced that it will include companies’ impact on biodiversity and ecosystems in updated reporting standards it plans to publish this year.15

     

     

    Cutting Through the Noise to Spot Opportunity

     

    The scarcity of reporting on companies’ biodiversity-related policies and activities makes public equity investing in this theme challenging. While standardized corporate disclosure on biodiversity remains a work in progress, companies are becoming increasingly vocal about the issue. We have used Natural Language Processing to sift through the reams of corporate communication to identify companies that are speaking and taking action on biodiversity.

     

    Our analysis shows that 21% of the companies in the MSCI ACWI Index16 mentioned biodiversity-related topics such as deforestation in their 2021 annual reports, up from 13% in 2017. In addition, the share of companies reporting an intention to take action related to biodiversity – a commitment, pledge, target or policy – or steps already taken tripled over the same period to 9%.

     

     

    Talking About Biodiversity and the Use of Related Terms in Annual Reports Is on the Rise

     

    Source: Goldman Sachs Sustainable Investment and Innovation Platform, MSCI. Based on analysis of annual reports from companies in the MSCI ACWI Index. As of Dec. 31, 2022.

     

     

    We uncovered further evidence of increased attention to biodiversity by analyzing companies’ earnings calls, both in presentations by management and from investors in question-and-answer sessions. Our analysis shows that at the end of 2017, biodiversity-related topics were discussed during the earnings calls of just 0.9% of the companies in the MSCI ACWI Index; in the first three quarters of 2022, that number hovered between 2.5% and 2.9%. While the trend toward increased discussion is clear in the chart below, the percentage of companies involved remains small. We believe this reflects the fact that many companies taking nature-related action still aren’t promoting their efforts in terms of biodiversity.

     

     

    Discussion of Biodiversity in Earnings Calls is Increasing

     

    Source: Goldman Sachs Sustainable Investment and Innovation Platform, MSCI, Refinitiv StreetEvents. Based on analysis of earnings calls held by companies in the MSCI ACWI Index. As of September 30, 2022.

     

     

    Finally, our analysis shows that the most vocal companies on biodiversity topics are concentrated in sectors that are often associated with a negative environmental impact such as utilities, materials and energy. Much of this discourse focuses on risks, both those that biodiversity decline can pose to the enterprise value of a business and the impacts and risks to climate and nature that can arise from the business itself.

     

    This type of analysis can help identify companies that are committing to sustainability goals, thereby potentially broadening the sustainable investment universe into hard-to-abate sectors. These are often not the companies typically held in sustainable and impact funds, but they are vital to the sustainable transformation of the economy. We believe those that succeed in implementing nature-positive business strategies could emerge as industry leaders driving the green transition.

     

     

    Resource-Intense Sectors Have Been the Most Vocal on Biodiversity

     

    Source: Goldman Sachs Sustainable Investment and Innovation Platform, MSCI. Based on analysis of annual reports from companies in the MSCI ACWI Index. As of Dec. 31, 2022.

     

     

    Uncovering the Developers of Nature-Positive Solutions

     

    Contrary to the vocal stance on biodiversity we found in companies in hard-to-abate sectors, many of the innovative firms developing biodiversity solutions are relatively quiet. We believe sustainable and impact investing strategies are particularly well suited to finding these innovators because they are adept at seeking out high-quality companies that are setting up new business models in areas such as soil remediation, sustainable agriculture and seafood production, the energy transition and reducing the need for virgin materials. We believe that business models focused on nature conservation will expand soon and become attractive to a wider range of investors.

     

    The visibility of these companies’ contributions and commitment to preserving biodiversity can vary widely. In some cases, minimizing a company’s impact on nature is part of its operating license. A salmon farmer in the environmentally sensitive fjords of the Faroe Islands in the North Atlantic aims to make its salmon production net positive in its impact on the marine environment by 2030. The company has signed a pledge to adhere to UN sustainable ocean principles.

     

    In other areas, a company’s dependence on biodiversity may be less direct without diminishing the ambition to mitigate its impact on nature. In 2020, a French provider of energy-related solutions published the world’s first biodiversity footprint assessment across its entire value chain using the Global Biodiversity Score developed by CBC Biodiversité. The company is also using the TNFD framework in creating a strategy to reduce pressures on the key drivers of biodiversity loss.

     

    A Norwegian company that makes machines for recycling beverage containers is a good example of a company developing effective nature-positive solutions that doesn’t currently talk about its activities within the context of biodiversity. It operates a materials recovery business and develops reverse vending machines to collect cans and bottles at retailers. It makes a positive environmental impact by enabling closed-loop recycling systems and reducing waste in the food chain.

     

    Business models built around themes such as water stewardship, natural resources management and environmental protection are crucial to mitigating biodiversity decline, with water pollution and single-use plastics just two of the problems that must be addressed.17 Companies in the waste-management sector can play a key role in the prevention of habitat destruction. Other companies providing important solutions include a US water stewardship company that produces renewable and sustainable biopolymers used to make plastic products biodegradable and compostable.

     

    In a recent report on biodiversity, analysts at Goldman Sachs Global Investment Research said they expect rising investor support for three major business models with direct ties to biodiversity protection: consulting and remediation; landowners and management; and substitution business models that replace extraction with new structures reducing the demand for natural raw materials or a company’s physical footprint.18 Here again, many of these companies do not yet position themselves as biodiversity solution providers, nor do they set biodiversity targets or report on positive impact in these terms.

     

    Direct dialogue with companies is another aspect of impact investment strategies that can provide an additional edge in obtaining important information related to biodiversity and help identify solutions providers. Asset managers can also encourage investee companies to disclose more and highlight activities that benefit biodiversity.

     

    The Earth’s ecosystems are inextricably linked to climate goals such as decarbonization and efforts to address social inequality, given the role of natural capital in feeding, housing and clothing the global population. The landmark UN biodiversity framework signed in December 2022 helped shine a spotlight on the urgent need for action as well as investment, which currently covers a small fraction of annual needs. Investors in listed equities have a crucial role to play in narrowing this investment gap. Managing the risks created by the decline of biodiversity and spotting the opportunities opened up by global conservation and remediation efforts requires an innovative approach to overcome the scarcity of relevant corporate disclosure. Analysis, engagement and a focus on solution providers can help public equity investors identify the companies that are likely to become industry leaders in the sustainable transformation of the global economy.

     

     

     

     

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    1. “What is biodiversity,” WWF website. As of March 7, 2023.

    2. “Biodiversity: Assessing the Financial Links to Natural Capital,” Goldman Sachs Global Investment Research. As of September 21, 2022.

    3. “Nature Risk Rising: Why the Crisis Engulfing Nature Matters for Business and the Economy,” World Economic Forum in collaboration with PwC. As of January 19, 2020.

    4. “The ocean – the world's greatest ally against climate change,” United Nations website. As of March 7, 2023.

    5. “The Sustainable Development Goals Report 2022,” United Nations. As of July 7, 2022. The report shows that progress toward the primary biodiversity SDGs – 14 and 15 – is lagging behind others.

    6. “Press Release: Nations Adopt Four Goals, 23 Targets for 2030 In Landmark UN Biodiversity Agreement,” United Nations. As of December 19, 2022.

    7. “COP15: Nations Adopt Four Goals, 23 Targets for 2030 in Landmark UN Biodiversity Agreement,” Convention on Biological Diversity. As of December 19, 2022.

    8. “UN delegates reach historic agreement on protecting marine biodiversity in international waters,” UN press release. As of March 5, 2023.

    9. “Financing Nature: Closing the Global Diversity Financing Gap,” Paulson Institute in partnership with The Nature Conservancy and the Cornell Atkinson Center for Sustainability. As of July 12, 2022. The report estimates the average annual biodiversity gap to 2030 at $711 billion.

    10. “Investing in the Planet’s Safety Net,” BIOFIN. As of December 7, 2022. The report estimates the biodiversity financing shortfall at $681 billion per year. BIOFIN was initiated by the United Nations Development Programme and the European Commission at the 11th meeting of the Conference of the Parties to the Convention on Biological Diversity (CBD COP 11) to channel financial resources towards global and national biodiversity goals.

    11. “SDG14 Financing Landscape Scan: Tracking Funds to Realize Sustainable Outcomes for the Ocean,” World Economic Forum. As of June 8, 2022.

    12. “UNEP and Biodiversity,” United Nations Environment Programme website. As of September 2020. The SDGs are a 15-year global action plan for protecting the environment, ending poverty and reducing inequality.

    13. “GS Sustain: Biodiversity – Assessing the Financial Links to Natural Capital,” Goldman Sachs Global Investment Research. As of September 26, 2022.

    14. An initiative to create the TNFD was announced in July 2020, and it was formally launched a year later. The TNFD has been endorsed by G7 finance ministers and environment and climate ministers as well as the G20 Sustainable Finance Roadmap. Goldman Sachs contributes to this initiative as a member of the TNFD Forum, a global multi-disciplinary consultative group.

    15. “International Sustainability Standards Board (ISSB) describes the concept of sustainability and its articulation with financial value creation, and announces plans to advance work on natural ecosystems and just transition,” press release from the International Financial Reporting Standards Foundation. As of December 14, 2022. The ISSB is part of the IFRS Foundation, an accounting-standards body.

    16. The MSCI ACWI Index is MSCI’s flagship global equity index.

    17. “Schneider Electric publishes the world's first end-to-end biodiversity footprint,” Schneider Electric press release. As of October 8, 2020.

    18. “Models of drivers of biodiversity and ecosystem change,” Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services website. As of February 15, 2023. The five drivers of biodiversity loss identified by IPBES are pollution, land and sea use, direct exploitation of organisms, climate change and invasive species.

    19. “Biodiversity: Assessing the Financial Links to Natural Capital,” Goldman Sachs Global Investment Research. As of September 21, 2022.

     

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    Esta presentación es estrictamente privada y confidencial, y no podrá ser reproducida o utilizada para cualquier propósito diferente a la evaluación de una inversión potencial en los productos de Goldman Sachs Asset Management o la contratación de sus ser-vicios por parte del destinatario de esta presentación, no podrá ser proporcionada a una persona diferente del destinatario de esta presentación.

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    Kuwait: This material has not been approved for distribution in the State of Kuwait by the Ministry of Commerce and Industry or the Central Bank of Kuwait or any other relevant Kuwaiti government agency. The distribution of this material is, therefore, restricted in accordance with law no. 31 of 1990 and law no. 7 of 2010, as amended. No private or public offering of securities is being made in the State of Kuwait, and no agreement relating to the sale of any securities will be concluded in the State of Kuwait. No marketing, solicitation or inducement activities are being used to offer or market securities in the State of Kuwait.

    Oman: The Capital Market Authority of the Sultanate of Oman (the "CMA") is not liable for the correctness or adequacy of information provided in this document or for identifying whether or not the services contemplated within this document are appropriate investment for a potential investor. The CMA shall also not be liable for any damage or loss resulting from reliance placed on the document.

    Qatar This document has not been, and will not be, registered with or reviewed or approved by the Qatar Financial Markets Authority, the Qatar Financial Centre Regulatory Authority or Qatar Central Bank and may not be publicly distributed. It is not for general circulation in the State of Qatar and may not be reproduced or used for any other purpose.

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    The CMA does not make any representation as to the accuracy or completeness of these materials, and expressly disclaims any liability whatsoever for any loss arising from, or incurred in reliance upon, any part of these materials. If you do not understand the contents of these materials, you should consult an authorised financial adviser.

    United Arab Emirates: This document has not been approved by, or filed with the Central Bank of the United Arab Emirates or the Securities and Commodities Authority. If you do not understand the contents of this document, you should consult with a financial advisor.

    Date of First Use: April 20, 2023. 310394-OTU-176574

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