The economics of harming biodiversity will increasingly drive social impact

Written By: Joanna Frontczak Impact Equity Senior Analyst Vontobel Asset Management

& Elena Tedesco Impact Equity Portfolio Manager Vontobel Asset Management

Joanna Frontczak and Elena Tedesco from Vontobel Asset Management discuss how companies can increase their biodiversity, why they should, and provide examples of some that have successfully done so

While the “E” in ESG has taken prominence in impact investing over the past years, the “S” has only recently been coming to the fore, shining a light on social factors such as poverty, healthcare, education and inequality. For many, social factors are still a philanthropic luxury rather than an actionable investment focus. However, the economics of harming biodiversity could trigger a rethinking on how we measure financial success and how we can achieve some of the most important social impact goals.

Lack of net-zero equivalent is a drag on social agenda
Part of the issue of “S” having taken a backseat to the ESG agenda so far, is a lack of systematic regulatory zeal, taxes, and incentives on social matters that would be comparable to the commitment environmental issues have received. There is no net-zero equivalent on the social front as of today. For example, there is no carbon tax equivalent that punishes companies for a lack of adequate female representation at top management level despite the productivity cost less diverse teams incur. At the same time, some social factors have grabbed attention more than others as companies strive to brush up on their public image. For example, an increasing number of companies make an effort to demonstrate how they are contributing to society by way of good HR practices, gender equality and good working conditions. Then, there are factors that have always been top of mind in some sectors such as employee safety in the construction sector for instance. Aside from the demand-driven corporate actions on social issues that are already under way, regulatory scrutiny is likely to spill over from environmental issues to the social realm.

How to measure social impact
Positive social outcomes are more difficult to grasp and measure than environmental ones. Meaningful social impact investing generates positive change in society, such as improved food chains, broader access to health care systems and increased financial inclusion. The UN Sustainable Development Goals (SDGs) provide a helpful framework for setting investment goals and measuring investment outcomes. These goals help to identify impact areas which can be used to inform investor portfolios by systematically selecting companies that contribute tangibly to solving issues. The SDGs should be translated into impact areas that are tied to concrete key performance indicators against which companies can be evaluated for portfolio inclusion. Only companies that generate most of their revenues via products and services that represent real solutions or that contribute to the specified goal should be eligible for inclusion in impact funds to ensure high impact potential of the portfolio.

Biodiversity takes centre stage on core social issues
Biodiversity in particular is set to receive more attention since, according to the United Nations, the current erosion of biodiversity and ecosystems is undermining progress towards 80% of SDG targets related to water, land, marine life, health and poverty.¹ Studies have found that reducing biodiversity loss acts as a powerful multiplier across the entire SDG agenda taking into account benefits across goals and adverse trade-offs. For example, conservation and sustainable use of land help to combat hunger, nutrition inequality, food security as well as so called “hidden hunger” caused by malnutrition on a global scale (SDG 2). Furthermore, healthy ecosystems serve as a base for the livelihood of rural populations and play a crucial role in ending poverty (SDG 1). Finally, restoration of biodiversity can help increase equality within and among different countries by stemming resource depletion by aggressive agricultural practices and maintaining jobs outside of urban centres (SDG 10).

A company example is the Netherland-based DSM, which is active in the areas of sustainable food ingredients as well as human and animal health and nutrition care. To improve its operational footprint, DSM monitors areas of high biodiversity value around its sites (27% of all production sites are adjacent to protected areas) and responsibly sources high-risk raw materials such as palm oil derivatives, wood-based materials, fish oils and sugar through recognised certification schemes. DSM produces Veramaris® a natural algal oil used as alternative feedstock for fish farms. One ton of Varamaris saves 60 tons of wild fish from having to be caught to produce salmon feed, protecting marine biodiversity in the oceans and rivers. The company has also developed nutritional solutions for animals which address environmental risks indirectly affecting biodiversity: Bovaer® reduces methane emissions from ruminants by at least 30%. VevoVitall® reduces ammonia emissions by up to 18% in swine, and protease feed enzymes like ProAct improve protein feed utilisation in poultry and subsequently reduces their nitrogen emissions to the environment.

Another example is Deere & Co – the world’s largest agricultural equipment manufacturer, providing tractors and other farm equipment with software applications that enable farmers to increase crop productivity and sustainability. Improving the yield per hectare also makes more land available for non-agricultural applications, fostering greater biodiversity. The equipment itself provides a significant amount of data that can be used for monitoring, early detection of anomalies (e.g., plant diseases) and targeted application of solutions (e.g., fertilisers, pesticides) to reduce overall consumption and the impact of agriculture on the environment. Deere is also investing heavily in soil sensors that help to identify the composition, moisture and carbon sequestration process. In terms of soil compaction, it can be significantly reduced through less regular field run up thanks to Deere’s more efficient machinery. Environmentally friendly innovation is required to fight soil erosion and biodiversity loss and Deere is well positioned to offer such integrated solutions. This then also helps to reduce social concern such as hunger and poverty.

While quantitative data on biodiversity is still patchy at this moment in time, an increasing number of international corporations will want to improve their footprint in this area. In addition, accurate and transparent data tracking for the purpose of complying with increased transparency and enhanced disclosure rules will become more important. Regulatory scrutiny is soon likely to hit other socially relevant factors that harbour attractive impact and return potential to investors who are willing to commit their capital to companies driving innovation and change in the social realm.

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1. EPRS, March 2017, https://www.europarl.europa.eu/RegData/etudes/ATAG/2017/598628/EPRS_ATA(2017)598628_EN.pdf