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Season 2

Episode 7: Why biodiversity loss matters to governments and investors

S2 Episode 7: Why biodiversity loss matters to governments and investors

Transcript: Season 2, Episode 7: Why biodiversity loss matters to governments and investors

Disclosure: The opinions expressed by Eurasia Group analysts in this podcast episode are their own, and may differ from those of Citigroup Inc and its affiliates.

Caitlin Dean: Welcome to Living Beyond Borders, the podcast from Citi Private Bank and GZERO Media that examines the risks and opportunities in our rapidly changing world—from global politics to economics—and what it all means for you.

I’m Caitlin Dean, Head of the Geostrategy Practice at Eurasia Group.

When it comes to the environment, climate change, and sustainability - the need to protect the planet is urgent. That means global leaders - in business and government - must truly step up and commit to change, not just in political but practical terms. And the world heard that from the likes of John Kerry, Greta Thunberg, and Frans Timmermans of the European Commission at the UN’s Climate Conference, COP26, in November.

[JOHN KERRY: There’s a heavy lift ahead but what we know is given the proposals that have been put on the table, if we do them all, we would be at 1.8 degrees by 2050.

GRETA THUNBERG: It should be obvious that we cannot solve the crisis with the same methods that got us into it in the first place.

FRANS TIMMERMANS: I please implore you, please embrace this text so that we can bring hope to the hearts of our children and grandchildren.]

Just before that meeting, there was another UN summit on sustainability - this one focusing on biodiversity in particular, the idea that human choices have impacted plants and animals around the world. The world lost around ⅔ of its wildlife species in the last 50 years, according to the World Wildlife Fund.

Citi estimates that around 44 trillion dollars of economic value generation is moderately or highly dependent on nature. And so today we’re going to talk about what real action on species loss and more could mean.

Joining me now are three guests. We have Anita McBain, Managing Director at Citi Research, heading up EMEA/ESG Research. Hi Anita.

Anita McBain: Hi there Caitlin.

Caitlin Dean: Harlin Singh, Global Head of Sustainable Investing at Citi Global Wealth, welcome Harlin.

Harlin Singh: Thanks for having me.

Caitlin Dean: And Mikaela McQuade, Director of Energy, Climate and Resources at Eurasia Group. Thanks for being here Mikaela.

Mikaeka McQuade: Pleasure being here.

Caitlin Dean: So let's just level set to begin with. Mikaela, today, November 2021, post-COP26, where do we when it comes to the global fight against climate change?

Mikaeka McQuade: In terms of where we're at in mid-November 2021, we're in a better place than we were even just two weeks ago, in terms of the policy and political and private sector momentum behind addressing both climate change causes and its impacts. And I say that because we've just wrapped the 26 Conference of Parties, or as all of us know it as COP26 in Glasgow. We’ve seen a renewed global agreement to limit greenhouse gases. We established new rules for an international carbon market to try and ease the flow of capital and investment and drive de-carbonization abroad.

Mikaeka McQuade: But we've also successfully brought together a lot of bilateral and multilateral deals, including from the private and public sector that may not have been possible without COP26 as a whole. We saw a spate of new announcements and commitments from countries to limit their reliance on fossil fuels, to curb deforestation, and to increase climate finance through a number of vehicles around the world to try and accelerate our collective progress. And I think leaving the conference, it's important to note that there are countless questions remaining as to how the countries that came forward with more ambitious pledges, will meet them. But for now the fact that some 90% of the world's GDP is covered by national pledges to achieve net zero greenhouse gases by around the year 2050 is significant.

Mikaeka McQuade: Now, that agreement in and of itself at COP, isn't going to save the planet, but it is pretty critically important in terms of a step forward for deeper and faster and more wide reaching actions required to avoid the most catastrophic impacts of climate change.

Caitlin Dean: And in what ways has the pandemic in impacted or accelerated some of these trends?

Mikaeka McQuade: I think in many ways the pandemic was a test as to whether or not climate change policy support was a bull market phenomenon and nearly everything that we've seen over the past two years has disproven that. Political support and general policy direction has largely been lasting and consistent through the pandemic, and even in some places where you've seen kind of high level commitments to build back better from the pandemic and shuttle public funds into green recovery efforts, that effort has been red redoubled. And I think that overall our expectation is and this is born largely true is that governments in developed economies especially are going to charge on with climate action. And they're going to have a lot of support from kind of sustained momentum and commitment from the investment community, from sub-national governments and from non-state actors.

Mikaeka McQuade: I think in terms of the pandemic's impact on government agendas from this point forward, it's really important to understand the fiscal hole resulting from pandemic response measures and the truly catastrophic effects of COVID-19 on the global economy will be important to contextualize in climate action as well. Because just as governments are tasked with doing more to limit greenhouse gas emissions on shorter timeline, they're doing so with less fiscal fire power available as government revenues have been so significantly constrained.

So I think the implication here is that governments are increasingly and will increasingly turn to the private sector and to investors to drive and to pay for a lot of that de-carbonization that they wish to see.

Caitlin Dean: Harlin, why is this being called a super year for sustainability? And what does that mean for the investment world?

Harlin Singh: So I think it's being called a super year for sustainability for a number of different reasons, technically, for the two COPs that were this year. Obviously, Mikaela, gave us quite a few details on COP26, which just we're just on the back of, but we also had COP15 or the biodiversity COP just last month. And to actually kind of add some more fuel to the fire there, we also had our, IPCC report out over the summer, which indicated that climate change is not just very real and very catastrophic, but also unequivocally caused by humans to the point where the UN Secretary General referred to it as a code read for humanity.

What it means for the investment world to your point, right, is that there is a significant place for investors in terms of addressing climate, in terms of addressing biodiversity loss, in terms of addressing social inequality. And that's, when we think about kind of what the pandemic did to accelerate all of this, it's not just on climate but it's also on a just transition and thinking about how different countries and different demographics are grappling with both the physical risks posed by climate change, as well as the cost associated with adapting to those risks and transitioning from those risks. They were saying some $4 trillion of annual investment capital is needed to address climate solutions alone.

So there's a lot of opportunity for investors to play a role, to think about different parts of the capital stack in which to get involved, to catalyze change, to test new technologies and to continue to encourage companies and policy makers to move the needle. So one of the areas over the last two weeks that were really interesting was to see private and public sector really kind of working together to these commitments, right? It wasn't just public sector commitments, but the private sector was very much involved and very much committed to putting dollars to address these big issues. So certainly a lot more opportunity, I think, for the investment worlds moving forward.

Caitlin Dean: Anita, one place we're seeing increasing awareness and one that you've looked at closely is biodiversity. Mikaela gave us the broad overview on climate, can you do the same for where the world stands on biodiversity loss and what exactly we mean by that?

Anita McBain: Climate is a driver of biodiversity loss, and we were really encouraged with the Glasgow climate pact that seeks to reinforce the importance of ensuring integrity of all ecosystems, including forests, the ocean and the cryosphere, with the protection of biodiversity and the importance of climate justice.

So to your question, climate change and biodiversity loss are inextricably linked. We cannot achieve one without the other. We will not achieve or reach net zero emissions without negative emissions. This is a term often used by the scientists to describe removing atmospheric CO2. So understanding the risks to investment portfolios, for example, for more changing climate, physical and transition risk are rapidly advancing. Future investment solutions, we're now starting to see, are starting to demonstrate or evidence and awareness of the key dependencies and impacts on nature accelerated by lots of incoming regulation and extreme weather events. This window of opportunity remains open, and we were encouraged by some of the pledges that were made at the COP specifically on deforestation.

So deforestation or land use change is one of the biggest drivers of biodiversity loss as a result of fragmentation, habitat destruction, and we're starting to see that this real ambition now to tackle deforestation, to halt and reverse this decade. And we're starting to see greater interest from both investors and clients and corporates, trying to unpick those key dependencies and impacts.

To echo what Harlin just said, 2021, and also this decade, has now been recognized as a critical called period for us now to halt and reverse biodiversity decline. Since 1970, over the past 50, 51 years, we've witnessed a rapid loss of biodiversity, marine biodiversity and terrestrial biodiversity. So we're starting to see the language, the integration and awareness of this twin crisis.

If these natural assets are not managed sustainably, we could see irreversible damage to ecosystems, local livelihoods, critically endangered biodiversity, and climate change. The second point here to the question is we are now starting to see many more comparisons with the climate crisis and linking it, especially in the physical sense and the corporate and investor journey, to biodiversity loss, drawing that direct link to systemic risk. And the third point to your question is there has been a real acceleration now with regard to ESG and sustainable investment strategies, which has resulted in a growing awareness of this deep interconnectivity. And we've witnessed a real up-skilling as well within the investor community.

Caitlin Dean: So that was a really good overview of how climate change and biodiversity loss are linked. How should we think about both of those issues through a business and investing perspective?

Anita McBain: So if we want to put it through this ESG prism or this business lens, according to the earth system scientists, we have crossed four out of the nine planetary boundaries, specifically biosphere integrity, which looks at biodiversity loss and species extinction, climate change, land system change, and bio geochemical flows, which impacts the phosphorus and nitrogen cycles. The earth system scientists stress that the window of opportunity is still open. A statistic that always makes me sort of stop in my tracks is that we, as a species, are an estimated not 0.01% of biomass on the planet, yet as the earth system scientists highlight, human activity now rivals geological forces, and we're close to these vital tipping points, which could result in tipping cascades.

So this interconnectivity between us as humans as a species and the impact that we're having on the planet, so how we are affecting biodiversity, ecosystem function, and ecosystem services. Ecosystem services underpin the global economy. The World Economic Forum estimates that $44 trillion of global GDP is either highly dependent or moderately dependent on ecosystem services. If we start to see these ecosystems collapse or decline, it's going to affect the global economy. So there's a growing awareness now of the financial materiality linked to biodiversity loss.

Certainly where I sit here in Europe, it has been catalyzed by recent regulation, such as the EU Sustainable Finance Action Plan and the Sustainable Finance Disclosure Regulation, and even France's Article 29, but we have seen global leaders, we have seen President Biden announce that the US will seek to protect 30% of biodiversity by 2030. So we're starting to see this urgent need for investors, for businesses to understand how they are dependent on these ecosystem services and also equally how they are impacting these ecosystem services.

Caitlin Dean: Harlin, let's just get to some specifics. So when we think about which industries are most impacted around the globe by changes in nature, which stand out to you?

Harlin Singh: I think that the two industries that I would say are probably the most impacted by changes in biodiversity are healthcare and food systems. So when we think about just food alone, 75% of food crops rely on animal pollination. And I think most people have read about the decline in bees. Bees are declining at an unbelievably rapid pace, so much so that the decline in the population has become a national security threat, in so far as that threats our food systems. So certainly the food and agriculture industry, hugely reliant upon biodiversity, as well as healthcare. So some 70% of cancer drugs are natural or inspired by nature. These industries rely heavily on various sources of ingredients from nature to produce medicines and treatment for a variety of different diseases.

And then of course, industry. When we think about extractive resources and the impact on biodiversity, but also the need for those resources, there's certainly a huge potential impact for them. Something like steel, which is used significantly in the manufacture of wind turbines, for example, extractive, hugely impactful on biodiversity, but also hugely necessary for the energy transition. When we really think about it, almost every industry is probably touched by biodiversity loss, interacts in some way with nature. And all of those industries are both impacted by a decline in what exists in nature, but also the potential impact from regulators and policy makers in terms of how they interact with nature. And then going back to kind of some of what Anita was alluding to in terms of the business and investing world, investors are certainly becoming more discerning around biodiversity loss.

Most investors had been motivated by climate. That had largely been the motivating factor. So a lot of focus on emissions. Emissions have a huge, obvious impact on biodiversity loss, but there's also an increasing awareness of the other impacts a business may have outside of just emissions. Even when you think about emissions and their relation to biodiversity loss and the huge amount of sequestration that the hold, that the forests hold, there's certainly a focus now in terms of how businesses are also interacting with these ecosystems, as well as what their overall emissions are.

Caitlin Dean: So it seems like there's a tension between some of the industries that are impacted by biodiversity loss and some of the industries that are causing it, but in some instances, those could be the same industries. So how do we think about the short term versus the long term decision making here?

Harlin Singh: Yeah, I think this is the age old question for ESG and sustainability broadly, where most investors are focused on short term quarterly returns and quarterly profits, whereas sustainability is really thinking about long term decision making. Even with something like agriculture, where harvesting, logging, hunting, fishing all have a huge impact on biodiversity loss, it could lead to shorter term revenues. The population's growing, there's a greater need for food, but in the long run, the impact on soil health and the yield of crop that will thereby be impacted is a huge consideration. So I think a lot of businesses are starting to really think about that. If nothing else, this year has really done is put a huge focus on what human impact has done to the environment already and put some really good clarity in terms of what the future holds.

So I think that there will be some movement between this focus on short term to a little bit more of a focus on long term decision making by companies. And we're starting to see that through investor engagement and focus on governance, who's in board seats, who's making decisions for companies, how they're evaluating things like their supply chains, their emissions, their overall footprint and interaction with everything, with their full ecosystem, right. But that's still a little bit of a long road. It's a total change in mindset and culture in terms of how we think about investments generally.

Caitlin Dean: And Mikaela, turning to the public sector a bit, how much are governments and political leadership around the globe concerned about these issues?

Mikaeka McQuade: Well, I think we have to be careful here to distinguish between how much governments and political leaders are concerned about the issue and how far they are prepared to go to address it, because I think inherently the answers to those questions are really different. In terms of the political attention given to biodiversity, it's only growing. And that's evidenced by a ground swell of enduring political activism, targeting issues of biodiversity, as well as a deeper policy emphasis on environmental issues more broadly.

Global policy making is generally accelerating. In terms of one real impetus behind this, I would point to an important political factor that I think is critical to understand how we have gotten to where we have with biodiversity and where we're likely to go. And that is that issues of biodiversity tend to be visible and tangible and local.

If you contrast this to something like the fight against climate change and invisible gases that are hard to conceptualize in terms of our ability to make a dent in a very global problem, issues of biodiversity offer exceptionally tangible and powerful symbolism and imagery. And this can either be a headwind or a tailwind to political action, either used against those who aren't perceived to be doing enough or by those looking to build support for conservation and protection efforts and I think that's really important to understand where global activism and political pressure builds from here.

I think it's also really important to understand that when you consider the pressure on policy makers, biodiversity and conservation offers a really important area of agreement across the political spectrum. It's less divisive and partisan than issues like climate change and it offers all parties a really important opportunity to demonstrate some form of environmental credibility. So, when we think about the Overton window for policy and political action and when you think about how durable those changes are going to be from government to government, if there's a party switch or not, that's a really important factor to consider the general trajectory of biodiversity efforts around the world.

Caitlin Dean: So Anita, which sectors are most at risk that people might not be aware of or might not have thought of?

Anita McBain: Biodiversity loss reduces the quantity, the quality, ands resilience of ecosystem services and it can present risks to corporates and investors across multiple sectors and geographies, as Harlan mentioned earlier. And just to quote Professor Partha Dasgupta, the author of the Economics of Biodiversity that was published by Her Majesty's treasury in February 2021, we are all asset managers and tackling biodiversity loss is now regarded as a portfolio management problem.

So to the question, there are several sectors actually that are directly dependent on nature. And Citi, we published a report and we identified six industries based on the research done by the World Economic Forum, real estate, mining and metals, chemicals and materials, supply chain and transport, retail and consumer goods, and lifestyle, aviation, travel, and tourism, that are directly dependent on nature.

And if we just take forest risk commodities as an example. So, forest risk commodities are usually categorized as Palm oil, beef, soy, timber, and they are part of most of these supply chains in most of these industries. So, the World Economic Forum talked about this gross value ad and how these sectors are highly dependent on nature, but more than 50% of their supply chain is highly or moderately dependent. And it shows the importance now of evaluating dependencies across supply chains. We've taken nature for granted, we've treated it as free, and now we have start to really evaluate that, assign a value to nature to better understand, so we don't just deplete our oceans, destroy the forests. So, it's a really important point here to understand these sectors and their dependencies and impacts.

Caitlin Dean: So what are some of the main areas that investors and governments should consider tackling first?

Anita McBain: So, just going back to the recent COP that we've just come out of, there were accelerations in commitments to tackle deforestation, a number of deforestation pledges and declarations were announced. And we, as part of our research and also the work that we're doing with academics, find that deforestation degradation is the first and the best place to start. This is an urgent decade of action. We have more than enough data to get started. And tackling deforestation is vital because the continued deforestation and degradation of the world's remaining intact tropical forests for the conversion to agricultural land, beef, soy, palm, timber is not only a significant contributor to global greenhouse gas emissions, it is also a major cause of ecosystem degradation and the resultant ecological loss.

Forests cover approximately one third of the world's land area and they deliver multiple benefits to society, including the purification of water and air, climate regulation, disaster resilience, and disease control. And forests play a vital role in the global carbon cycle and sequester and store enormous amounts of carbon, which makes them critical in tackling climate change. But they also provide livelihoods to millions of people around the world and are home to an estimated 80% of the world's terrestrial biodiversity.

Agriculture is the biggest driver of deforestation and degradation and estimates vary on the exact share, but range from between 60 to 80%. So, destroying these precious and intact habitats impacts biodiversity, impacts livelihoods, and contributes to climate change. And according to some research by Forest Trends, half of all global deforestation is also the result of illegal conversion of forests to industrial farming. And this major issue not only drives environmental damage, but can also lead to significant economic loss.

Caitlin Dean: And Mikaela, what are you seeing in terms of policy decisions that governments are making when it comes to the different threats to nature?

Mikaeka McQuade: Well, as Anita mentioned earlier, I think you're seeing high level commitments and international agreements from policy makers and world leaders that are material and we'll turn translate into a renewed and hopefully sustained focus on biodiversity in national policy and planning.

That said, I think that translation is going to be really difficult. But a lot of compelling action has already been taken. So you do have a bit of a blueprint for those countries looking to take biodiversity a little bit more seriously. But similarly to climate change, on biodiversity, you have a tragedy of commons, which is to say that it will only continue to suffer from exploitation if humans continue to use resources and cause impacts to the environment to their individual advantage without considering the good of society.

So, for those actors responsible for impacts to biodiversity right now, most are not held accountable for those changes to the environment in part because of the policy construct and in part because they don't generally have control over the main drivers of degradation or change, or they feel that they cannot or should not be able to take responsibility for the cumulative effects of actions greater than their own and I think that those are the policy pressures that leaders are trying to address.

So, all of the policy tools available, most of which are known and just need to be implemented, need to focus on all of the issues that Harlan and Anita have been talking about that you need to minimize the impacts and offset the rest. You need to ensure accountability, responsibility, and transparency. You need to protect ecosystems and you need to repair damage done either to the environment or to the population of critical species.

Where the political challenge will come from is that whether you're curbing extractive resources or limiting what can be done in certain areas or protecting nature or animals, with those interventions, you're inherently limiting the way that people will live, work, or play. And to the very jarring facts and figures presented by Anita and Harlin, that limitation is inherently necessary, but isn't going to be without political challenge.

And I think one area of optimism is how far companies and investors have really come in pricing in that risk. If they are assigning a value to nature, it makes it just a little bit easier for governments to do the same. So, expect more action on this front.

Caitlin Dean: Anita, what are some ways that industries can best adapt and continue to grow while remaining committed to ESG principles?

Anita McBain: We’re certainly seeing the emergence of new skills. We're certainly seeing corporates investors, key stakeholders, access the science, listen to the world's best scientists so that they are appraised of the latest facts. We're seeing real advances now in technology that allows corporates, allows investors to do very granular analysis using geospatial analysis of above-ground biomass, below-ground biomass in forests for example. We're seeing drivers and strong messaging coming out from regulators, and we've got very, very forward looking ESG frameworks now that can inform all the key stakeholders, corporates, and investors to rapidly up-skill and get to the point to where they need to be.

And in the report that we published at Citi on biodiversity, we also published a whole list of questions that investors can use to engage with their portfolio companies. And we certainly see this role of effective oversight and ownership or governance, if you like.

We always used to think about it as being climate governance, but now we're starting to see this evolve into more of an environmental or ecological governance perspective. So if these companies are exposed to key forest-risk commodities, how do they demonstrate they've got the necessary skillset in place? The governance structure in place, the individuals who are best equipped to deal with those solutions.

Caitlin Dean: And Harlin, how far have the financial sector and the private sector in general, come on these issues? And where do you see the most progress?

Harlin Singh: Well, first of all, they're paying attention, right? I would say probably five years ago, biodiversity loss was not really much of a conversation for ESG investors. And today it's very much a big part of the conversation. And not just for investors who are focused on sustainability in the ESG, but for all investors. Certainly there is a risk to investors. There's a risk to the private sector for ignoring these issues in these areas.

The regulators are at bare minimum, putting pressure on companies, on businesses to evaluate the risk factors. Are changing the narrative for investors in terms of traditional risk factors, to really start to incorporate both climate and biodiversity loss into their overall kind of decision-making process.

For asset managers, certainly the pressure is there to start to think about how asset allocation is impacted by these risks. But there's also more movement towards innovative financing solutions that are bringing together both private and public sector to work together, to fund solutions.

I think that the development and the progress within the ESG industry overall, over the last two years, right? We've seen a significant move from just evaluating how companies do business to limit portfolio risk, to also evaluating what companies are doing. Companies that are actually providing whether it... are in the business of thinking about sustainability within farming, within soil health, and irrigation, within oceans and ocean preservation, fishing, right? Identifying those businesses.

So certainly, I think that the financial and private sectors have come a long way in terms of how they're thinking about risk, what different... Whether biodiversity loss or climate are presenting new risks to portfolios, or risks that have not been previously accounted for, or perhaps had to be accounted for in the past. To also, innovation in terms of financing structures around, bringing that investment capital into the conversation, moving that investment capital into the right way. Either funding businesses that are really innovative in this space, or funding structures that are seeking to encourage companies to improve their standards around biodiversity loss.

Caitlin Dean: What do investors and businesses need to be thinking about next, what's the next frontier for them?

Harlin Singh: I think it's quantification of the risk, right? So certainly that accountability and transparency that Mikaela was talking about, the data that exists that Anita was talking about. All of that needs to still be translated into a number, in terms of how it's going to impact asset prices. So I think that investors really need to be thinking about who's making those decisions on their behalf, how they're thinking about these material issues, and how they're being priced into investment advice.

Caitlin Dean: And Mikaela, let's end with you. Since the Paris Agreement, many commitments have been made by governments and private sector leaders. How can we ensure that those promises turn into action?

Mikaeka McQuade: As with all issues, transparency and accountability are fundamental to the shift from promises to action. And that is just as true for policy makers as it is for the investors that Harlin just alluded to. Increasingly, you're going to have to drive evidence-based policy and regulation to have a more comprehensive view to these issues, to both curb their impacts, and begin to repair the damage already done.

One thing we actually didn't touch too terribly much on, was tapping the potential of indigenous and local community voices. Which is so critically important, when you consider that at least a quarter of global land area has traditionally been owned, and managed and used by indigenous peoples in a sustainable manner. Including almost 35% of protected areas. And that's a really key avenue to both utilize local knowledge and practices, but also build support across regions and sectors for very lasting and durable change.

And I think it goes without saying, that governments are going to have to lean on private sector momentum to redouble the nature positive private sector action and partnerships that we've seen a lot of so far. But as Anita and Harlin both mentioned, they're going to play a really critical role in this conversation for the decades to come.

Caitlin Dean: Thanks so much to all three of our guests for today. Anita McBain, managing director at Citi Research, heading up EMEA/ESG Research. Harlin Singh, Global Head of Sustainable Investing at Citi Global Wealth. And Mikaela McQuade, director of Energy, Climate and Resources at Eurasia Group, it's a pleasure having you.

Anita McBain: Thank you very for having me today.

Harlin Singh: Thanks for having me.

Mikaeka McQuade: It's my pleasure. Thanks for having me.

That’s it for this episode of Living Beyond Borders. Stay tuned throughout the fall as we look at the biggest issues impacting your world - and your money. Next time, looking ahead to the outlook for 2022.

Caitlin Dean: I’m Caitlin Dean. Thanks for listening.

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