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Council Member Shines Light on Risk of Biodiversity Loss

Council Member Shines Light on Risk of Biodiversity Loss

April 13, 2022

ESG factors play an increasingly important role for both investors and managers as concerns about global sustainability take on even more importance. And when it comes to the environment, active management plays an essential part in achieving goals and mitigating risks. As the Council showed in its paper, “Sustainable Investing is an Active Process,” the fully active approach allows for a “more nuanced consideration of a wider range of quantitative and qualitative factors.”

Now Active Managers Council Steering Committee member Franklin Templeton is shining light on an under the radar risk factor— biodiversity loss. It’s a threat that financial institutions, corporations, and governments are not paying enough attention to according to a new series of articles called “Facing up to the Biodiversity Challenge.” Writing that biodiversity loss “competes with climate change as the principal challenge for sustainable finance,” the series outlines the risks posed by biodiversity loss and the steps that the public and private sectors can take to mitigate them. It also calls for stakeholders to apply the same sense of urgency to biodiversity loss that is applied to fighting climate change.

Authors David Zahn and Karolina Grotowska explain that biodiversity— or nature in all its forms and interactions— is an “integral part of nature’s capital” providing foundations for the economy, health, and welfare. However, they write that the current model of economic development is “destroying natural capital at an unprecedented rate” and that business continuity could be threatened if these risks remain ignored. By not acting, the authors suggest that risks will arise in markets, reputation, transition, and the physical planet, such as deforestation.

There are signs that financial institutions are taking biodiversity concerns more seriously. The authors write that there is “a growing call among our clients to address biodiversity loss, as it can threaten financial returns.” They also think that “asset managers will be looking to devote more resources” to analyzing data about an investment’s impact on biodiversity. The authors say that biodiversity must be factored into portfolios going forward.

Active management will be key in factoring those biodiversity concerns into portfolios. An active approach is needed to gauge risks to corporate reputations, supply chains, credit ratings and more. In addition, active managers pay close attention to global policy developments that will impact biodiversity concerns such as upcoming summits and the EU’s 2030 biodiversity strategy.

For more information, check out the full article here.

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