Understanding biodiversity as an emerging asset class

Biodiversity is emerging as an asset class and will increasingly be a consideration to a company’s long-term risk and opportunity set, says Aaron White, vice-president of sustainable investments with CIBC Asset Management.

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Biodiversity refers to the variety of life on Earth and how that life interacts 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,” White said.

Investors should be aware of potential nature-related impacts, evolving regulations, and increases to disclosure requirements when considering investments, he said.

“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,” he said.

According to White, research indicates that over 55% of global GDP is highly or moderately dependent on nature, placing biodiversity concerns at the forefront of economic and investment considerations.

The Kunming-Montreal Global Biodiversity Framework, established at the COP15 conference in 2022, aims to reduce risks to biodiversity on 30% of land and water by 2030, he noted.

As a result, White expects governments will “increasingly hold companies accountable for negative environmental impacts.” This could mean requirements for companies to pay for the total cost of a product, including social and environmental costs associated with its use and disposal. 

“It is critical for investors to understand this trend and the momentum behind regulation and disclosure to establish an accurate view of investment opportunities,” he said.

Greater recognition of the importance of biodiversity reflects the shift toward a circular economy, White noted — an economy that promotes sustainability. For example, in 2022 the United Nations reached an agreement with 175 nations to address plastic pollution. 

“Companies moving away from a heavy reliance on plastic may be better positioned over the long term than their peers,” White said.

He also noted a move toward nature-focused disclosure standards. “While voluntary for now, we anticipate they will follow the same trajectory of climate-related reporting and become mandatory,” he said. 

He added that, beginning in 2025, nature and biodiversity disclosures will be required in the European Union (EU) under the Corporate Sustainability Reporting Directive.

“Think most multinational and large corporations around the world,” White said. “Companies will need to disclose how their strategy is aligned to the Kunming-Montreal framework and the EU Biodiversity Strategy for 2030. ” 

Subsequently, White sees potential for growth in the emerging asset class of “nature-based” investments.

“These investments often carry a dual benefit of contributing to global climate targets through the sequestration of carbon while preserving biodiversity,” he said.

Sectors most prone for disruption include the agricultural, forestry, materials and eco-tourism industries, he said.

He expects the nature-based investment space to grow over the next decade, becoming “an anchored asset class” in private market investors’ portfolios.

“There is a wide-ranging set of opportunities around leveraging nature,” White said, citing sustainable agriculture and carbon sequestration as examples.

The focus on biodiversity will ultimately benefit investors by providing “strong risk-adjusted return potential,” he said, as well as “social and environmental impacts and benefits.”

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