Biodiversity and the Trustee's Dilemma

For charity trustees, biodiversity is now both a values question and a question of long-term financial risk, and the gap between the two is closing.

Among the many sustainability themes that have emerged over the past decade, biodiversity has perhaps been one of the most difficult for investors to engage with. Climate change, for all its complexity, has a relatively straightforward investment narrative: rising temperatures, physical damage, changing regulation and the transition away from fossil fuels all have obvious economic consequences. Most trustees have spent years discussing inflation, interest rates and equity valuations; rather fewer have found themselves contemplating the investment implications of declining pollinator populations over their morning coffee.


Why nature is becoming an investment question

However, that perception is gradually changing as investors develop a better understanding of the extent to which economic activity depends upon healthy natural systems. Fertile soils, reliable freshwater supplies, pollination and flood protection have historically been treated as abundant resources sitting quietly in the background of economic activity. As we see pressure on those systems increasing, it’s becoming harder to ignore the extent to which many core businesses rely upon them.


Where values and fiduciary duty meet

For charities, this creates an interesting overlap between values and fiduciary responsibility. Trustees have long considered environmental issues through the lens of responsible investment, particularly where they intersect with a charity's mission, reputation or stakeholder expectations. Biodiversity introduces an additional consideration because the question is no longer confined to whether protecting nature is desirable, but whether the degradation of natural systems could affect the long-term value of the assets charities are entrusted to steward. For trustees, this now has a regulatory frame: the Charity Commission's responsible investment guidance (CC14), revised in 2023 after the 2022 Butler-Sloss judgment, confirms that trustees may weigh factors beyond short-term financial return where they bear on a charity's purpose and long-term interests.

Research increasingly suggests that this is more than a theoretical concern. The World Economic Forum has consistently identified biodiversity loss and ecosystem collapse among the most significant long-term risks facing the global economy, while a growing body of work has highlighted the extent to which economic output depends upon nature and the services it provides. The Forum has put a figure on that dependence: more than half of global GDP, around $44 trillion of economic value, is moderately or highly dependent on nature. A 2023 update by PwC raised that estimate to 55% of global GDP, around $58 trillion.


Where biodiversity risk hides in a portfolio

The implications extend well beyond sectors traditionally associated with environmental issues. Agriculture may provide the most obvious example, given its reliance on healthy soils, predictable weather patterns and pollination, but biodiversity loss can also influence supply chains, infrastructure resilience, insurance costs, commodity markets and economic productivity more broadly. While few charity portfolios hold direct exposure to farmland, forestry or other natural assets, biodiversity risk can often appear in less obvious places. Consumer goods companies rely upon agricultural supply chains, insurers are exposed to physical environmental risks, infrastructure assets depend upon water availability and ecosystem resilience, and financial institutions provide capital to many of the sectors most directly affected by nature loss. In practice, most diversified portfolios are likely to have greater exposure to biodiversity-related risks than first impressions might suggest.

When viewed collectively, these effects begin to resemble the characteristics of a systemic risk rather than a series of isolated environmental challenges. This is one of the reasons biodiversity has moved steadily up the agenda for investors, policymakers and regulators alike.

The close relationship between biodiversity and climate change reinforces this point. Investors are therefore increasingly recognising that climate and nature are unlikely to be addressed successfully in isolation, however tempting it may be to create separate policies, separate frameworks and, where possible, separate committees.


TNFD: a common language for nature

Against this backdrop, the emergence of the Taskforce on Nature-related Financial Disclosures (TNFD) is perhaps unsurprising. The investment industry has many strengths, one of which is its ability to respond to complex problems with a framework, an acronym and a reporting template, occasionally in that order.

TNFD was established to help organisations assess and disclose how they depend upon nature and how nature-related risks may affect them.

Much as TCFD helped move climate considerations into mainstream governance and reporting, TNFD has the potential to perform a similar role for biodiversity. Its growing adoption is a useful indication of the direction in which investment practice is travelling.


Keeping a sense of proportion

A degree of perspective remains important. Biodiversity does not lend itself to a single, universally accepted metric in the way that carbon emissions often do, data quality remains inconsistent and methodologies continue to evolve. There is little attraction in producing highly precise biodiversity metrics if the industry has yet to reach consensus on precisely what is being measured and why.

For most charities, the most sensible response is therefore likely to be a proportionate one. Rather than rushing towards targets or disclosures for their own sake, trustees may find greater value in understanding how their investment managers approach nature-related risk. As is often the case in investment governance, asking thoughtful questions tends to be a more reliable starting point than searching for definitive answers in an area that is still developing.


Three questions trustees can ask

- How do our investment managers identify and assess nature-related risks across the portfolio?

- Do their stewardship and engagement activities take nature into account, not only climate?

- Where are our most material nature-related exposures likely to sit?


The fiduciary bottom line

The broader fiduciary question is relatively straightforward. If biodiversity loss has the potential to influence economic outcomes, affect portfolio risks or alter the environment in which businesses operate, then it sits comfortably within the range of issues that trustees should seek to understand. Doing so does not require specialist expertise in ecology, nor does it imply that biodiversity should take precedence over every other investment consideration. It simply reflects the reality that long-term investment outcomes are shaped by a wider range of factors than traditional financial statements alone can capture.

Anyone who remembers the early conversations around climate risk will recognise some familiar themes: the data is incomplete, the terminology continues to evolve, reporting frameworks are multiplying and opinions differ on precisely what should be measured and how. In other words, biodiversity appears to be progressing through the traditional stages of becoming an established investment issue.

Whether trustees approach biodiversity primarily through the lens of values or financial risk may ultimately matter less than it once did. Good stewardship has always required trustees to look beyond immediate market movements and consider the forces that may shape long-term outcomes. Biodiversity is rapidly becoming one of those factors.



Sources

World Economic Forum, Nature Risk Rising: New Nature Economy Report (2020)

PwC, Managing nature risks: From understanding to action (2023)

Charity Commission, CC14: Investing charity money: guidance for trustees (2023)

Butler-Sloss & Ors v Charity Commission [2022] EWHC 974 (Ch)

Taskforce on Nature-related Financial Disclosures (TNFD), recommendations (2023)