Should you care about biodiversity?

Investors have a role to play in habitat and species protection

Biodiversity is in the spotlight nowadays as previous international agreements expire, making 2020 a year of assessment and target-setting for politicians, legislators and businesses. What exactly is biodiversity and why is it important? The term refers to the variety of plant and animal life or a specific habitat, and is vital to the functioning of our ecosystems and society. It confers a wealth of benefits, from protecting water resources and improving soil fertility to absorbing carbon emissions and ensuring climate stability. Many businesses are directly or indirectly dependent on these ecosystem services, for example, for the production of raw materials and supply chains.

Ineffective government response

A new global plan for biodiversity was scheduled to be adopted in October 2020 at the fifteenth Conference of the Parties to the UN Convention on Biological Diversity (COP 15) in Kunming, China. However, given the global Coronavirus crisis, COP 15 has been postponed to 2021. The targets set to halt the biodiversity loss by 2020 will not be met, according to a recent assessment by IPBES (Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services).

Countries have been unable to identify the main drivers behind biodiversity loss, implement adequate legislation or gather the necessary financial resources to stop the exploitation of species, the report concludes. The IPBES report paints a worrying picture, with more species than ever before threatened by extinction and many ecosystems changing rapidly. Calculations show that approximately 1 million of the world’s 8 million species are at risk of extinction within a few decades unless powerful measures are put in place to stop the negative development.

Effective investor response

In a world of limited budgets, economic resources and slow economic growth, the already limited public financing for biodiversity could be difficult to sustain, let alone expand. Building on public private partnerships to invest in natural wealth can help transform biodiversity conservation into an engine of growth, a growth that is more inclusive and greener.

Stakeholders in the private sector are coming to appreciate the value of ecosystems and the role they play in accelerating economic growth. The private sector invests in biodiversity conservation to create value, ensure supply chains and improve their business models. Governments and SSAs invest in biodiversity conservation because it is part of national wealth and economic activities. Financial institutions and banks are also ramping up to provide financing, knowledge and long-term funding for biodiversity conservation.

Nordea’s STARS products

While Nordea’s STARS strategies do not invest into forestry or farmland directly, we do invest in companies that could have a material impact on biodiversity depending on which sector they operate in. We believe that biodiversity is a fundamental component of long-term business sustainability since businesses rely on natural resources as inputs and depend on healthy ecosystems. We integrate biodiversity in our company ESG analysis and consider whether biodiversity is a material issue that needs to be addressed either in their operations, including the supply chain or via their products.

Case study: Palm oil plantations

In the consumer staples sector, we consider risks related to palm oil production and we have a separate position on palm oil sourcing. We are concerned that the environmental and social issues associated with unsustainable palm oil production could have a material impact on companies across the palm oil value chain. Unsustainable palm oil production is associated with deforestation and land and labour rights issues, which we believe represent significant risks to our investee companies. Companies may be exposed to climate-related risks due to the association between unsustainable palm oil production and deforestation, a significant contributor to greenhouse gas emissions. Deforestation, as well as land and labour rights, can present significant reputational risks to investee companies, which can lead to a loss of their license to operate if not managed properly. We support the Roundtable on Sustainable Palm Oil’s (RSPO) role in promoting a more sustainable palm oil industry, and we encourage investee companies with material exposure to the industry to become members of the RSPO and apply the RSPO’s Principles and Criteria. However, as a minimum first step, we expect companies across the palm oil value chain, including producers, refiners, traders, consumer goods manufacturers, retailers and banks, to adopt and implement a publicly available No Deforestation, No Peat and No Exploitation (NDPE) policy.

Nordea Asset Management is the functional name of the asset management business conducted by the legal entities Nordea Investment Funds S.A. and Nordea Investment Management AB (“the Legal Entities”) and their branches, subsidiaries and representative offices. This document is intended to provide the reader with information on Nordea’s specific capabilities. This document (or any views or opinions expressed in this document) does not amount to an investment advice nor does it constitute a recommendation to invest in any financial product, investment structure or instrument, to enter into or unwind any transaction or to participate in any particular trading strategy. This document is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instruments or to participate to any such trading strategy. Any such offering may be made only by an Offering Memorandum, or any similar contractual arrangement. Consequently, the information contained herein will be superseded in its entirety by such Offering Memorandum or contractual arrangement in its final form. Any investment decision should therefore only be based on the final legal documentation, without limitation and if applicable, Offering Memorandum, contractual arrangement, any relevant prospectus and the latest key investor information document (where applicable) relating to the investment. The appropriateness of an investment or strategy will depend on an investor’s full circumstances and objectives. Nordea Investment Management AB recommends that investors independently evaluate particular investments and strategies as well as encourages investors to seek the advice of independent financial advisors when deemed relevant by the investor. Any products, securities, instruments or strategies discussed in this document may not be suitable for all investors. This document contains information which has been taken from a number of sources. While the information herein is considered to be correct, no representation or warranty can be given on the ultimate accuracy or completeness of such information and investors may use further sources to form a well-informed investment decision. Prospective investors or counterparties should discuss with their professional tax, legal, accounting and other adviser(s) with regards to the potential effect of any investment that they may enter into, including the possible risks and benefits of such investment. Prospective investors or counterparties should also fully understand the potential investment and ascertain that they have made an independent assessment of the appropriateness of such potential investment, based solely on their own intentions and ambitions. Investments in derivative and foreign exchange related transactions may be subject to significant fluctuations which may affect the value of an investment. Investments in Emerging Markets involve a higher element of risk. The value of the investment can greatly fluctuate and cannot be ensured. Investments in equity and debt instruments issued by banks could bear the risk of being subject to the bail-in mechanism (meaning that equity and debt instruments could be written down in order to ensure that most unsecured creditors of an institution bear appropriate losses) as foreseen in EU Directive 2014/59/EU. Nordea Asset Management has decided to bear the cost for research, i.e. such cost is covered by existing fee arrangements (Management-/Administration-Fee). Published and created by the Legal Entities adherent to Nordea Asset Management. The Legal Entities are licensed and supervised by the Financial Supervisory Authority in Sweden and Luxembourg respectively. The Legal Entities’ branches, subsidiaries and representative offices are licensed as well as regulated by their local financial supervisory authority in their respective country of domiciliation. Source (unless otherwise stated): Nordea Investment Funds, S.A. Unless otherwise stated, all views expressed are those of the Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches, subsidiaries and representative offices. This document may not be reproduced or circulated without prior permission. Reference to companies or other investments mentioned within this document should not be construed as a recommendation to the investor to buy or sell the same but is included for the purpose of illustration. The level of tax benefits and liabilities will depend on individual circumstances and may be subject to change in the future. © The Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches, subsidiaries and/or representative offices.