Climate change and biodiversity loss are closely linked and mutually reinforcing. As climate change alters the habitats and ecosystems that support life on Earth, biodiversity loss reduces the resilience and adaptability of nature to cope with climate impacts, perpetuating a vicious cycle that is having an increasingly detrimental effect on the planet.
Biodiversity loss affects climate change by weakening the capacity of nature to regulate the climate and store carbon. Forests, wetlands and oceans are natural carbon sinks that absorb and store large amounts of greenhouse gas emissions; however, when these ecosystems are destroyed by human activities, as they are currently, they release carbon into the atmosphere, contributing to global warming.
The dual climate and biodiversity crises: What it means for our future
The loss of biodiversity, be it through climate change and/or human interference, poses very real threats to the health and well-being of humanity. The World Economic Forum estimates that more than half of the world’s GDP depends upon nature and its services (including for water quality and disease control).. And consider that more than a quarter of the global population already experiences food insecurity. By 2025, half of the global population will face water insecurity – and South Africa will not be exempt. We will also have to deal with the increased spread of diseases as population migration and density increases. Not to mention that global heat records are being broken with alarming frequency. The year 2023 is on track to become the hottest year ever recorded. Globally, more than five-million people die each year because of excessive temperatures. These are just some of what these crises mean for everyday life
Investing for impact
Climate change is also influencing the financial world as asset managers struggle to assess the impact of physical climate risks on their investment portfolios. S&P Global Sustainable research estimates that over 90% of the world’s largest companies have at least one asset which is financially exposed to climate risks.
Business is taking action though. Currently, over 4,000 companies, covering over a third of the global economy’s market capitalisation, having either set, or committed to setting, Paris Agreement-aligned or Net Zero emissions targets via the SBTi (Science Based Targets initiative). A very high proportion (of these targets) are from listed companies in the developed world including Europe, North America and Japan. This is impressive, but we should also recognise that companies from these nations should be doing this (and more) when you consider their disproportionate national emissions. Four developed regions – North America, Europe, Japan and Australia – are responsible for around 53% of cumulative global CO2 emissions. Africa in its entirety has contributed only 4.8%, with South Africa accounting for approximately 1.5%.
The responsibility of remedying our biodiversity and climate crises doesn’t rest entirely with companies. Investors have a key part to play, too, by directing resources to where they’ll be managed responsibly. Cue impact investing in the listed equity universe.
Developed market-listed equities provide the most viable way to identify and mobilise significant amounts of capital into progressive companies that are intent on generating positive impacts and providing relevant solutions for a sustainable, more resilient future. Through the mobilisation of such capital, the market should reward impactful companies with superior share price appreciation. That is the essence of impact investing.
There’s a perception around impact investing that one must sacrifice financial returns and forego performance to do good. This is not true. Impact investing is a strategy that aims to generate positive, intentional impacts in the real economy alongside positive financial returns by investing in the best quality and most forward-thinking companies that contribute to solving social and environmental challenges. This shared approach to growing wealth while leaving a positive footprint is one that investors need to determinedly champion if we are to avert the very worst scenario of global warming and its related impacts.
Considering how detrimental both climate change and the loss of biodiversity are to the economy and our collective future, it’s time we got serious about this.