The critical role of ESG investing in biodiversity preservation

The critical role of ESG investing in biodiversity preservation

The narrative around portfolio companies and investor interest in environmental, social, and governance (ESG) has predominantly been focused on greenhouse emissions over the past decade. Strategies on emissions reduction and decarbonisation were the primary concern. However, the recent trend indicates a sharp rise in the importance of biodiversity preservation and ecosystem restoration.

Position Green director Thomas Engmose and manager Julie Aamodt recently delved into why ESG due diligence has justifiably broadened its scope to encapsulate nature in a firm’s sustainability profile.

Biodiversity has taken centre stage in the ESG investment agenda, as businesses increasingly grapple with the harsh realities of biodiversity loss and ecosystem destruction. This was highlighted in the last UN Biodiversity Conference (COP15) held in Montreal in December 2022. Global targets were established, soon to be integrated with existing disclosure frameworks. Governments, regulators, and central banks are swiftly bringing in new requirements for companies to address nature-related risk in their supply chains.

Companies, particularly those relying on natural resources and operating in areas of high biodiversity, face considerable risk. Loss of biodiversity poses real and substantial threats. Market, regulatory, and reputational risks are part of the equation. With the emergence of the Taskforce on Nature-related Financial Disclosures (TFND) and initiatives by the EU, new guidelines and regulations related to biodiversity and nature-related risk are becoming increasingly prevalent.

The imminent EU’s Corporate Sustainability Due Diligence Directive will bring new due diligence obligations for companies across supply chains. It will require them to report and tackle adverse impacts, including those related to biodiversity.

So, how can investors help mitigate biodiversity loss and protect natural capital? Engmose and Aamodt explained that by shifting capital flows towards nature-positive economic activities. Being aware of their portfolio’s impact on biodiversity and potential financial risks, investors can incorporate biodiversity considerations into their business strategies, risk management, and reporting.

The impact of nature and biodiversity on a company’s performance or value is a critical consideration. It’s increasingly recognised that sustainable business practices, biodiversity protection, and ecosystem regeneration can significantly affect a company’s financial performance.

Engmose and Aamodt stated that those effectively managing their impacts on biodiversity can reap benefits such as reduced risks and an enhanced reputation, making them more attractive to investors seeking long-term sustainability and resilience.

Companies reliant on natural resources like oceans, forests, and arable agriculture face direct material impact. Indirect impacts include supply chain disruptions and increased costs due to degraded or scarce resources. Regulatory, reputational, and market risks also pose a threat.

Investors are increasingly seeking companies committed to biodiversity conservation and sustainable business practice. ESG due diligence plays a vital role in this, allowing investors to evaluate these areas before investing.

So, can ESG due diligence positively impact biodiversity? Engmose and Aamodt were positive it can. A thorough due diligence analysis helps investors make informed decisions and aids companies in avoiding repelling potential investors while securing their sustainable future. This process reviews a target company’s impact on biodiversity and efforts to manage these impacts, helping protect biodiversity and natural capital.

Biodiversity is closely linked to climate change and other environmental issues. By investing in companies with robust biodiversity management policies and practices, investors can protect natural capital, support long-term sustainable development, and mitigate financial risk.

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