Understanding Biodiversity as an Emerging Asset Class

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Welcome to Advisor To Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject matter experts themselves. 

Aaron White, vice-president of sustainable investments at CIBC Asset Management.  

There has been significant momentum over the last several years in garnering recognition of the importance of biodiversity for the economy, and its intersection with the climate. Biodiversity essentially refers to the variety of life on earth and how they interact within complex ecosystems. We’re in a period of rapid decline across the globe that without intervention will result in environmental, social and economic consequences.  

At the same time, research is indicating that over 55% of global GDP is highly or moderately dependent on nature. The potential implications of nature degradation can be wide ranging, from water shortages impacting supply chains that increase costs for companies, to the destruction of forests, threatening the long-term security of commodities and natural resources. Investors are beginning to recognize that assessing how governments and companies are mitigating and managing their exposure to environmental risks, including biodiversity and nature, is crucial for developing a long-term view of investment risk.  

This recognition by governments and corporations contributed to the watershed moment in 2022 at the COP15 conference in Montreal, which will serve as an inflection point for market participants. The conference ended with the Kunming-Montreal Global Biodiversity Framework, an agreement to significantly reduce risks to biodiversity in 30% of land and water on earth by 2030. This will lead to increased regulatory scrutiny around how companies and individuals react with the environment and place emphasis within domestic markets around the world to preserve ecosystems to curb the acceleration in biodiversity loss that we have seen over the last 50 years.  

We expect governments may increasingly hold companies accountable for negative environmental impacts. This could mean increased regulations requiring companies to pay the total cost of a product, including any social and environmental costs related to the use and disposal of their products. It is critical for investors to understand this trend and the momentum behind regulation and disclosure to establish an accurate view of investment opportunities. 

Underlying this trend is a broader shift towards a circular economy, where minimizing waste and promoting the sustainable use of natural resources is the goal. An example of limiting a company’s environmental impact is reducing plastic use. In 2022, the United Nations reached a monumental agreement with 175 nations endorsing a resolution to end plastic pollution and establish a legally binding agreement this year, in 2024, that will encompass the full lifecycle of plastic use, including its production, design and disposal. This means that companies moving away from a heavy reliance on plastic may actually be better positioned over the long term than their peers.  

At the same time, the disclosure environment is rapidly shifting. Building on the success of climate-related disclosures, we’re seeing an expansion of nature-focused disclosure standards. While voluntary for now, we anticipate that they will follow the same trajectory of climate-related reporting and become mandatory. Several standards are being developed through initiatives that include science-based targets for nature, and the Taskforce on Nature-related Financial Disclosures, which has published its disclosure recommendations for global businesses and financial institutions to assess, report and act on their nature-related dependencies, impacts, risks and opportunities.  

Perhaps most importantly, beginning in 2025, the Corporate Sustainability Reporting Directive will mandate nature and biodiversity disclosures by companies with significant presence in the EU or those listed on EU exchanges. Think most multinational and large corporations around the world. Companies will need to disclose how their strategy is aligned to the Kunming-Montreal framework and the EU Biodiversity Strategy for 2030.  

With an increasing focus on nature and biodiversity and a wave of more data and transparency coming to markets, it’s critical that investors understand how these factors may impact their portfolios.  

We’re also seeing the development of new and unique opportunities for investors in an emerging asset class: nature-based solutions. This will direct capital to businesses focused on the protection, restoration, conservation and sustainable use of ecosystems. These investments often carry a dual benefit of contributing to global climate targets through the sequestration of carbon, while preserving biodiversity.  

Sectors most prone for disruption include the agricultural, forestry, materials and eco-tourism industries. The maturation of the voluntary carbon markets and the emergence of biodiversity credits will help projects in the nature-based solution space access capital. We are at a tipping point where we anticipate significant growth of this market led by its support for climate objectives, and the intersectionality with biodiversity protection. 

So, what does all this mean?  

Nature and biodiversity is not only emerging as an investable asset class, but it will also be an increasing consideration to a company’s long-term risk and opportunity set. As a result, investors must be aware of potential nature-related impacts, evolving regulations, and increases to disclosure requirements. Companies that do not adequately manage these risks and implement strategies anchored in environmental and social sustainability may over the medium to long term underperform their peers.  

We continue to anticipate significant growth in the nature-based solutions market, with many emerging asset managers launching private market solutions to take advantage of this opportunity. Leveraging everything from new and emerging sustainable agriculture opportunities to the sequestration of carbon via kelp farms that not only sink kelp but also utilize some of those materials to reduce emissions in animal feed. There are a wide ranging set of opportunities around leveraging nature, removing manmade intervention in the economy, and ultimately benefiting both investors from strong risk-adjusted return potential to social and environmental impacts and benefits for the overall society.  

We look to see this space emerge over the course of the next five to 10 years to become an anchored asset class in private market investors’ portfolios.