These days, it is easy enough to show which fund has the smallest and which fund has the biggest carbon footprint. The methodology for measuring what investors and lenders are committing themselves to is also becoming increasingly standardised. Compiling a stranded asset index is a piece of cake. Having dealt with the fossil industry, it is now time to give other nature destroyers a more prominent place on investors’ agendas!

External effects

The recently published IPBES report leaves no room for doubt: biodiversity is under a lot of pressure. Whichever way you look at this, you can bank on it that large listed companies are responsible for a large part of this problem.

It is common knowledge that the biggest threat to biodiversity comes from economic activity. For economists this is really just another form of the same problem: external effects. The effects of companies’ activities on our natural system entail no or very few costs for these companies. That is why they can fell forests, kill insects with poison or discharge polluted water in areas of natural beauty without any concern. It is not necessary for them to think about the damage that their actions might cause, let alone think about possible alternatives. Because it does not cost them anything!

Complex issue

Correcting or putting a price on external effects is relatively straightforward if the damage is easily traceable in terms of location and extent and if it is also easily quantifiable. This works quite well for climate change. Greenhouses gases can be measured without any ambiguity and we even know the size of our ‘budget’ on a global level. That is why we can calculate a greenhouse gas price.

Biodiversity is a much more complex issue than climate change.

Biodiversity, however, is much more complex than climate change. Biodiversity can be defined as the variety and variability of all life on earth, from the smallest, genetic level to the level of a complete ecosystem. Effects on biodiversity are often local and specific in nature and it is therefore more difficult to put a price on and monitor these effects than greenhouse gas emissions.

For companies two issues are important when it comes to ecosystems: to what extent do companies depend on the ecosystem and to what extent does their production affect the ecosystem. In the literature on this subject, this relates to ‘services’ provided by the ecosystem: how do we benefit from our natural environment and will we be able to continue to use these services in the long term? We should define the use of ecosystems in the broadest possible sense: everything, ranging from mining products, and water to plants and animals. In other words, everything that can be taken from nature for human use. To this we could add activities that are unrelated to production but do cause damage, such as leisure activities.

Of course it is no problem for us to establish which sectors make a lot of use of the ecosystem and could also potentially cause a great deal of damage to biodiversity: land use by the agricultural sector, extraction of natural resources by the mining and forestry sectors, oil and gas production, dumping of waste or destruction of the natural environment due to the activities of the refining, chemical or transport sectors. But the effects on biodiversity can vary enormously. If new trees are planted in the right way, forestry, for instance, does not need to cause any harm. The same applies to agriculture, which can be quite harmless provided that the soil is not exhausted, and no poison is used, for instance.

But often the effects are much more difficult to establish. For example: what impact do nitrogen emissions of a factory that is located close to a nature reserve have on pollination by insects?

I wonder if anyone would want to invest in a nature destroyers index
Hans Stegeman, Head of Research and Investment Strategy

How to deal with nature destroyers?

These are the real questions that need answering. We certainly have a rough idea about these issues. The starting point is insight into a company's raw material or land use, which then provides the beginning of insight into the impact of an investment.

If we have insight, investors can see what they are doing. Aha, that profitable chemical company actually has quite a destructive impact on the environment. And that financially attractive investment in a palm oil plantation contributes to the destruction of a large area of tropical rain forest. That is probably not so great for our future. And goodness, that mining company is really destructive for the local ecosystem, because they do not have any sort of policy to prevent that.

Show us to what extent you contribute to the destruction of our natural environment. Then, hopefully, the realisation that this is unacceptable as well as the question “what are we going to do about this?” will follow.

But as far as I am concerned, that is only a small beginning. I am all for developing a nature destroyers index. I wonder if anyone would want to invest in that.

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Serving as a catalyst in the transition to a balanced economy, Triodos Investment Management invests only in companies that contribute to a sustainable society through their products, services, and business practices. Download our whitepaper ‘Impact investing through listed equities and bonds’ and find out how we do this through our investments in listed equities and bonds.