A Biodiversity Q&A

Key takeaways

• Over half of GDP is moderately or highly dependent on nature, yet ecosystems are being degraded at rates that are unsustainable.
• Climate change is a driver as well as a consequence of biodiversity loss, though there are different challenges with biodiversity, such as measuring rates of loss or improvement.
• There are meaningful things that companies can do to reduce biodiversity harm that can also be revenue opportunities, such as improving efficiency and substituting high-impact products for lower-impact ones.

A conversation between Jeff Schulze, Ben Buckley and Anna Cala

Biodiversity has been garnering more attention as investors, asset owners and governments tackle the consequences of climate change and recognize how businesses and communities depend on healthy ecosystems to help make products and services and support everyday life. ClearBridge Investment Strategist Jeff Schulze, CFA, recently sat down with Portfolio Analyst Ben Buckley, CFA, and Senior ESG Associate Anna Cala to discuss what it means for investors.

Jeff Schulze: What exactly is biodiversity?

Anna Cala: The more technical version of biodiversity is the variety of life on earth at all levels. Different species, animals, plants — organisms that together make up healthy ecosystems. A little more simply, you can just think of it as nature, or nature loss.

In 2019, a global assessment report came out stating that over half of gross domestic product (GDP), US$44 trillion, is moderately or highly dependent on nature.1 This includes the fish we eat, the land we need for cattle and the natural pollination we need for crops. Fifty percent of all drugs are derived from natural resources. The global population, as it continues to grow and overconsume, is degrading ecosystems at alarming rates. We are warming oceans, reducing natural forests, and this is weakening nature’s ability to provide resources that are required for our societies to survive. We simply can’t keep degrading the natural world at the current rate. By definition, that’s unsustainable.

Jeff Schulze: Is biodiversity a relatively new term?

Anna Cala: This really first gained international recognition in the early 1990s. The U.N. held a conference on environment and development in Rio de Janeiro, and out of that came the Biodiversity Convention as well as the Convention on Climate Change. The Convention on Climate Change has overshadowed this issue around biodiversity up until the last few years, as the world has started to realize we can’t solve the issue of climate change without addressing this issue of biodiversity loss.

Then, last year, the U.N. Biodiversity Conference came out with the Global Biodiversity Framework, and this was adopted by almost 200 companies. People are calling it the Paris Agreement for nature, and it’s a 10-year roadmap for a nature-positive economy.

One of the main targets is “30 by 30,” aiming to protect 30% of marine and land by 2030. We are already starting to see biodiversity-related policies and regulations, and we expect there to be more coming out of the Global Biodiversity Framework, as the full financial cost of biodiversity is just starting to be priced.

Jeff Schulze: What is driving biodiversity loss?

Ben Buckley: To go back a few years, 10,000 years ago when we invented agriculture, we started to reshape the world around us. That has only accelerated and was supercharged by industrialization 300 years ago. Population growth has been significant, and so has wealth generation. However, it has created a stressor on the natural environment around us.

Some have broken it down to five key drivers of biodiversity loss. The big one is land use change: deforestation, habitat loss primarily for agricultural production. About half of the world’s habitable land is taken up by agriculture. This is the main driver of land use: we need to feed 8 billion people. The challenge is feeding that many people without doing it in a way that continues to degrade nature.

The second is overexploitation, for example of existing land. It could also be overfishing. About one billion acres of farmland around the world has been abandoned because the soil is so degraded. Also overhunting, depletion of water tables, all of which impacts local ecosystems.

The third is climate change itself. That manifests in a number of ways, such as ocean acidification, impacting shellfish, whose shells are getting thinner. Warmer waters also impacts salmon: in Canada they are struggling to respond to higher temperatures. They need cold water to survive.

The fourth one is pollution, which is mainly agrochemicals running off from farmland and impacting ecosystems, as well as plastic pollution, for example impacting the marine ecosystem.

The fifth one is invasive species. Top of mind, here in New York, the spotted lanternflies came to the U.S. just under 10 years ago from China and have had really explosive growth in the Northeast. It’s affecting crop yields. People are worried about the vineyards on Long Island.

Jeff Schulze: How are climate change and biodiversity loss connected?

Anna Cala: Climate change is a driver of biodiversity loss, but biodiversity loss is also causing climate change. As we’re cutting down more forests, we’re removing natural carbon sinks. But there are different challenges with biodiversity than what we’re currently tackling with climate change.

For one, there is no one metric to measure the rate of loss of biodiversity the way there is for climate change, which is GHG emissions or carbon emissions. Biodiversity is also very localized, while emissions are global. Reducing emissions anywhere in the world can contribute to tackling climate change. Whereas overfishing in the Mediterranean Sea has very different effects and requires very different solutions than deforestation of the Amazon in Brazil.

For these two reasons it’s harder to measure biodiversity loss and address these issues. But, on a positive note, because it’s more local and the effects are more tangible, it can be less political to address than climate change.

Jeff Schulze: What sort of conversations is ClearBridge having with companies about biodiversity loss?

Ben Buckley: Our analysts in the food and beverage and restaurants and food retail sectors spend a lot of time thinking about sustainability of sourcing, labor practices and environmental practice in their supply chain. Examples would be having robust sourcing policies. For example, one large retailer has since 2011 restricted sales of red-listed seafoods or highly endangered seafoods. It just refuses to sell them. They continue to review that list every year and work with stewardship certifications as well. Same with another large retailer and their sourcing of timber and lumber. In the late 1990s, this company joined the Forest Stewardship Council to focus on ensuring there’s no deforestation associated with the wood they sell in their stores.

A bit more off the beaten path is a herb and spice company. What’s interesting about the herb and spice supply chain is that it’s not these large-volume agricultural commodities that are being traded through multiple brokers. It requires working more directly with local farmers.

One of this company’s top five items is vanilla, which is very difficult to grow. Eighty percent of it comes from Madagascar, one of the most biodiversity-rich places in the world. Vanilla needs rainforest conditions to grow. It needs moisture. But deforestation is a massive challenge there so the company has been doing a lot of work on it. They try to have a positive impact on the local communities and environment through sustainable sourcing and working with local communities to provide direct support to the thousands of farmers, to train them on practices that will avoid the need to clear additional forests. They have moved from being around 10% sustainably sourced vanilla, five years ago, to now 100%. That’s a very tangible, less well-known example of the kind of work that these companies can be doing when they put their mind to it.

Jeff Schulze: Are there revenue opportunities for companies that are addressing biodiversity loss?

Ben Buckley: Relative to climate change, with biodiversity there is no clean energy industry with large addressable market numbers that investors can get excited about. Honestly, if most economic activity is having a negative impact on nature in some way or form, it’s more about just doing less harm.

But there are meaningful things that can be done to reduce that harm. Efficiency is a big piece of that, such as substituting a high-impact product for a lower-impact product. One example would be microplastics. Substituting away from plastic bottles can have a meaningful impact, and that’s a good investment thesis for companies that make aluminum cans. These can be infinitely recycled and replace plastic bottles. It’s a big investment opportunity to take share from plastic bottles over time as plastic loses favor with consumers and we see more regulations to restrict it.

The other type of revenue opportunity is impact reduction. A big area for that is agricultural technology, which, as a group of technologies, is predicted to double by 2030. One large agriculture machinery company, for example, has an increasing share of its sales coming from precision ag technologies. They have, for example, machine vision incorporated into their herbicide spraying machine. It goes along the field and it can actually see the plants, tell the difference between a healthy crop and a weed, and it will spray the weed with herbicide and leave the plant alone. This is a much more targeted use than blanket spraying, and it can improve yields for the farmers. Herbicides, pesticides, fertilizer — these are expensive inputs for farmers, and it can greatly increase the efficiency of the use of those chemicals in agriculture. That’s an exciting area.

The third one concerns treatment of pollution as well. One company is treating water from industrial customers to ensure that there aren’t microplastics when it’s discharged back to nature, removing toxins. Those are three examples of revenue opportunities that we see growing as there’s more attention paid to biodiversity.