Investing in restoration: why biodiversity and land management matters for your portfolio

World Environment Day is celebrated on the 5th June. This year, it focuses on “Our Land, Our Future”, discussing strategies for land restoration, desertification and drought resilience. The United Nations has run World Environment Days for over 50 years. They are designed to be a way to focus policymakers, businesses and consumers on specific issues. Previous initiatives have included plastic pollution, the restoration of ecosystems, and bringing people and nature back into balance.

Unquestionably, land restoration – which includes activities such as reforestation, soil conservation, and enhancing biodiversity – is a vital part of climate change mitigation. Perhaps the most obvious blight has been the destruction of rainforests for timber, farming and heavy industry. Rainforests absorb vast amounts of carbon dioxide from the atmosphere, around 7.6bn metric tonnes each year*. Every year, more of them are lost and the earth loses its power to regulate carbon emissions further.

In a speech ahead of this year’s World Environment Day, Inger Andersen, executive director of the United Nations Environment Programme, said: “Every dollar invested in restoration can bring up to US$30 in ecosystem services. Restoration boosts livelihoods, lowers poverty and builds resilience to extreme weather. Restoration increases carbon storage and slows climate change. Restoring just 15% of land and halting further conversion could avoid up to 60% of expected species extinctions.” 

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These are worthy aims, but investors will rightly ask why it is important for their ISA or SIPP. The answer is that companies need to be addressing these issues to stay ahead of regulation and ensure their business practices are ‘future-proof’. Many companies are reliant on natural resources to some extent and need to show that they are managing them responsibly, with an eye to the sustainability of the business. Ignoring these risks is likely to see companies falter over the long-term.

As it stands, most of the world’s top 500 companies have a climate target**. Emissions targeting and reporting is well-advanced, helped by regulation. However, just 5% of the largest companies have targets for biodiversity**. Having a strategy for the use of natural resources is becoming increasingly important, while taking steps to preserve natural carbon capture, such as the rainforests, can be a useful tool for companies in lowering their net carbon emissions.

How companies are affected

The World Environment Day shows the likely direction of travel for policymakers and therefore for companies. It shows how the climate agenda is likely to broaden out beyond simple emissions goals. These issues are already affecting companies.

For example, water management is an issue for multiple sectors. All water companies need a drought resilience plan to ensure that they can continue to provide safe water in the event of prolonged periods of no rain. The impacts of climate change have proved unpredictable, and the UN says inadequate water supply is an increasing problem on every continent***.

In a recent blog, US company WTW points out that water is also vital for food and drink companies. It says: “Water is a vital and irreplaceable resource across the food and drink manufacturing chain. The sector is highly water-dependent: from agriculture to production sanitation, water as an ingredient, and in processing operations such as heating, refrigeration and packaging, food and drink relies on water at every stage.”

Chemicals companies are also heavily reliant on water, but the sector also contributes to drivers of nature loss, such as pollution, carbon emissions, freshwater use and land conversion across its value chain**. It would be a key target for further regulation and investors need to ensure that companies are adequately managing the risks involved.

There has been progress from chemicals companies. In 2022, for example, 196 parties signed up to the Kunming-Montreal Global Biodiversity Framework, with the global goal to halt and reverse nature loss by 2030 and full recovery by 2050**. Companies are trying to get ahead of regulators, who are moving towards mandatory nature-related disclosures from companies. There is a growing recognition that climate change and nature loss are two sides of the same problem and need to be addressed together.

A final point is that these issues also hit the government bond market. Brazil, Colombia, and Ecuador have joined forces to issue 'Amazonia Bonds', designed to support conservation efforts for the Amazon rainforest. The bonds are backed by institutions such as the World Bank and the Inter-American Development Bank****. Brazil has also recently issued its first ‘green bond’, aimed at funding the sustainability ambitions of the government^.

For investors

The key for investors is to ensure that their fund managers are holding the companies in which they invest to account. Areas such as biodiversity and nature loss are an increasing part of mainstream ESG (environmental, social and governance) analysis. Columbia Threadneedle, for example, incorporates this analysis into its CT Responsible Global Equity fund and its engagement with companies. The Janus Henderson UK Responsible Income fund has direct exclusions for mining, fossil fuels, plus certain chemicals and pollutants.

A number of the ‘innovation’focused funds will hold companies that present solutions to some of the crises highlighted by the UN. One of the largest holdings in the IFSL Marlborough Global Innovation fund, for example, is US water technology group Xylem^^. It operates in more than 150 companies, developing smart technology solutions to manage water usage.

On the fixed income side, the Rathbone Ethical Bond fund is the one of the oldest ethically managed bond funds on the market. It buys bonds from companies, charities, the UK government and non-governmental organisations, with Rathbone’s in-house ‘Greenbank’ having a veto on holdings. It says it “avoids investing in activities that make the planet or its inhabitants worse off, and actively supports those projects that are doing good in the world”. It targets companies that are managing their environmental impacts successfully, including consumption of resources and discharges to land and water.

Climate change is not just about carbon emissions. Companies will need to be agile in managing a wide range of risks, as policymakers look more broadly at areas such as land and water usage, biodiversity and deforestation. Forward-thinking fund management groups are already engaging with companies on these issues to ensure the companies in their portfolios are one step ahead.

*Source: Euronews, 31 March 2023
**Source: World Economic Forum, April 2024
***Source: United Nations, Water Scarcity
****Source: Finimize, April 2024
^Source: The World Bank, 8 February 2024
^^Source: fund factsheet, April 2024
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.

Published on 22/05/2024