Nature in responsible investments

What is nature?

• Nature: natural world, with an emphasis on its living components (IPBES).
• Biodiversity: variability among living organisms from all sources (Convention on Biological Diversity). Biodiversity is an essential component of nature, critical to maintaining a functioning and resilient natural system that can continue to provide services for society (see below).
• Ecosystem services: benefits people obtain from ecosystems and their biodiversity, such as the production of food, and prevention of flooding (Millenium Ecosystem Assessment).

Those definitions align with definitions adopted by the Taskforce on Nature-related Financial Disclosures glossary.

An unprecedented loss of biodiversity, a key component of nature, is occurring globally. As highlighted by IPBES, over one million animal and plant species are threatened with extinction, and 75% and 66% of terrestrial and marine environments respectively have been significantly altered by human activities. Biodiversity loss is intrinsically linked to climate change, with deforestation accounting for up to 13% of CO₂ emissions^[2], while healthy oceans absorb 25% of all CO₂ emissions^[3]. Resilient ecosystems also support the advancement of human rights, in terms of access to food, clean air and water, health, culture, etc. Furthermore, biodiversity loss is found to disproportionately harm the human rights of indigenous peoples, local communities, women and girls, children and youth, the poor, and those in vulnerable situations.  

Why is nature important for institutional investors?

The activities of all investees are connected to both positive and negative environmental outcomes, through their operations, products and services. Conversely, analyses have shown how dependent our financial systems are on nature. The European Central Bank identifes nearly 75% of all bank loan recipients in the Eurozone as companies that are highly dependent on at least one ecosystem service. The loss of biodiversity (a critical component of nature) thus translates into risks for businesses, investors, and the wider economy.  

Nature is also essential to achieving net zero climate targets. It has the potential to provide a third of the solutions required by 2030 and further build systemic resilience, but only if natural climate solutions are implemented rapidly and at scale^[4].

The Taskforce on Nature-related Disclosures (TNFD) has categorised nature-related risks across:

• Physical risks: chronic or acute risks resulting from the degradation of nature, often location-specific; for example, increased flood-risks from the loss of protective coastal habitats such as mangroves, or increased costs to mitigate the loss of wild pollinator insects. The World Bank estimates that loss of ecosystem services could result in a USD 2.7 trillion contraction of the world’s GDP in 2030, with USD 400 billion decline in crop outputs alone.
• Transition risks: misalignment of economic activities, prompted by changes in regulation and policy, legal precedent, technology, or investor sentiment and consumer preferences. For example, the due diligence expectations from the 2023 EU Regulation on Deforestation-free products and associated litigation risks.
• Systemic risks: arising from the breakdown of the entire financial and natural systems; for example the Network for Greening the Financial System  has noted that nature-related risks could have significant macroeconomic implications, and that failure to account for, mitigate, and adapt to these implications is a source of risk for financial stability.

Given the importance of nature for long-term financial performance, it therefore falls within an investor’s core fiduciary duty to address the nature-related risks stemming from biodiversity loss in its portfolios. The reversal of biodiversity loss also presents new opportunities: more than US$ 10 trillion of economic value could potentially be generated through solutions with a positive impact on nature.^[5]

A framework for action on biodiversity loss

The Kunming-Montreal Global Biodiversity Framework, adopted by 188 governments in December 2022 at the UN Biodiversity COP15, has provided governments and non-state actors with a framework for action to halt and reverse biodiversity loss by 2030. Its goals and targets seek to address the five key human-induced drivers of biodiversity loss identified by IPBES: land and sea use change, direct exploitation of natural resources, climate change, pollution, and invasive alien species. Addressing these drivers will be essential to building and securing resilient ecosystems that are able to function and provide the ecosystem services needed for global economic and social prosperity. Translating the Kunming-Montreal Global Biodiversity Framework, the Paris Agreement and the Sustainable Development Goals into robust policy and legislation will foster an enabling regulatory environment for the private sector and is essential to address the planetary crisis – encompassing climate change, biodiversity loss, and pollution.  

Relevant components for institutional investors

Financial sector action at the UN Biodiversity Conference, ‘COP15’

PRI’s Nature Programme

The aim of the PRI’s programme of activities on nature is to align investor action with the goals and targets of the Kunming-Montreal Global Biodiversity Framework, including contributing to halting and reversing biodiversity loss by 2030. Mobilising finance across all sources, including through the alignment of financial flows, is needed to address the US$ 4.1 trillion finance gap in nature by 2050.^[6]  The PRI has chosen to focus its programme of activities on “nature” as a framing concept that captures the importance of biodiversity and other physical components of natural systems, as well as the interactions within and between ecosystems. This brings in wider contextual factors, including social and economic actors, that impact and depend on nature.  

PRI activities intend to support the alignment of financial flows with the Kunming-Montreal Global Biodiversity Framework through three broad categories of action: 

• Capital allocation: Support investment practices that align financial flows with the conservation and restoration of nature.   

  Investors should adopt investment policies and practices aligned with the goals of the Kunming-Montreal Global Biodiversity Framework to both manage nature-related risks in their portfolios as well as seize new financial opportunities with positive impacts on nature. The PRI supports investors in integrating nature-related considerations in their investment policies and practices through capacity-building and peer-learning.

• Stewardship: Mainstream sustainable corporate practices through active ownership.

  The Kunming-Montreal Global Biodiversity Framework has mandated changes in the real economy with the mainstreaming of sustainable corporate practices to halt and reverse biodiversity loss. Stewardship can be used to influence investees and other stakeholders in the system for transformative change. Through active ownership, investors should ensure investees address and disclose their nature-related risks, opportunities, impacts and dependencies across their business strategy and their value chains, and align their responsible political engagement with global sustainability goals.

• Policy engagement: Call for the implementation of public policies that are aligned with the Kunming-Montreal Global Biodiversity Framework and drive positive outcomes for nature.

  The financial system and wider policy environment need to align with the Kunming-Montreal Global Biodiversity Framework, including through the removal of policy instruments that are exacerbating biodiversity loss (e.g., certain agricultural and fishery subsidies). As has been done for climate change and the implementation of the Paris Agreement, investors should engage with key stakeholders such as governments, UN entities, global standards and the International Financial Institutions, to shape meaningful policy reform and implementation. The PRI engages with policymakers and standard setters to promote an enabling environment, and is scoping a nature policy strategy to further support signatories. Consultation responses and letters published by the PRI are available; and policy briefings published ahead of the UNFCC Climate COPs are also available (e.g., COP28). The PRI is actively supporting global efforts to increase nature-related disclosure and reporting (including with the TNFD) and ensure harmonisation and interoperability of asks across markets.