Agriculture
The state of our soil – a crisis in modern agriculture
Modern agriculture is having a devastating impact on soil biodiversity, human health and climate change
Read more
Over half of global GDP is highly or moderately dependent on nature
Biodiversity
And the vital role of investors
Scroll
Latest articles
Listen to our podcast
Tackling the complex problem of deforestation
Deforestation
Addressing the issue of deforestation requires attention to the economic development of communities as well as simply conservation
Water, water everywhere – why our oceans need to be restored
Oceans
The blue heart and blue lungs of the planet are vital for our survival
Read the latest article
keep Scrolling
Brought to you by
Podcast
ARTICLES
More on biodiversity
More episodes
Federated Hermes’ Amplified podcast recently hosted six episodes on the subject of biodiversity. It started by defining biodiversity and establishing its importance in a business context, before focusing on specific elements such as water, deforestation and agriculture.
Read our comprehensive paper on how investors can help tackle the biodiversity challenge
Our commitment to nature
Find out how Federated Hermes is tackling biodiversity loss through its investments and its commitment to deliver sustainable wealth creation
Investing for life and the planet
Biodiversity loss – sizing up the problem
Background
The business case: why investors must pay attention to biodiversity
Implications
Future solutions – protecting nature through corporate change
Responses
Further reading
‘A very serious situation’ – tackling mass extinction on Earth
Wildlife
The pollinator crisis is just one area where species extinction is set to hit the bottom line if companies don’t take action
‘The carbon sponge’ – we mustn’t forget the role of soil in tackling climate change
Soil
A focus on cutting emissions misses the point when it comes to understanding what a healthy biosphere could do to sequester carbon
The biodiversity domino effect
Call to action
Submerged cities may feel 100 years away, but the emergency has already begun
A letter from our CEO: the biodiversity crisis needs our support
Further Reading
Biodiversity is pivotal to life on Earth but is in sharp decline. Investors must understand the challenge so they can play their part in addressing it
While the natural damage of biodiversity loss is significant, so are the economic consequences
Companies can help protect the environment, but this requires adopting new processes that are easier said than done
Homepage
Writer: Gareth Jones
The decline in biodiversity is one of the biggest challenges facing the world, and no industry will be immune from its impact. In its simplest form, biodiversity is the variety of life spanning plants, animals, insects and other organisms. Here’s why biodiversity loss has wide-ranging impacts with serious implications – not only for society, but for businesses and markets.
Biodiversity is pivotal to life on Earth but is in sharp decline. Investors must understand the challenge so they can play their part in addressing it.
The water cycle, clean air and the provision of food are fundamental to all life on Earth. Moreover, healthy soil and the regulation of nutrients are pivotal to enabling food crops and other plants to grow.
Our economies and societies are deeply embedded in nature; it is our life-support system
The benefits
Many medicines – especially anti-infectives and anti-cancer agents – originate from plants, fungi or bacteria, with many more nature-derived medical solutions yet to be discovered.
Nature is also crucial in saving lives.
Research shows a strong connection between the time spent in nature and reduced stress, anxiety and depression.
The environment brings benefits to physical, mental and spritual well-being.
Following the impact of Covid-19, it should be appreciated how healthy levels of biodiversity can help prevent new infectious diseases. Covid-19, SARS and Ebola all moved from animals to humans. The destruction of habitats through land-use change brings humans and animals into ever closer contact, which increases the risk of new infectious diseases being transmitted from animals to humans.
Biodiversity can help prevent new infectious diseases.
Biodiversity enables ecosystems to be resilient and adaptive to changes in external conditions. This capacity is essential as temperatures, precipitation patterns and the frequency and intensity of extreme weather events shift due to climate change.
Biodiversity is also pivotal in managing climate change.
The problem
Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), Global Assessment Report on Biodiversity and Ecosystem Services (2019). WWF and ZSL, Living Planet Report (2020). Conservation International, biodiversity hotspots. World Economic Forum and AlphaBeta, The Future of Nature and Business (2020).
Mauris maximus mollis risus id dignissim. Maecenas eu nisi vitae nisi lobortis semper. Mauris maximus mollis risus id dignissim. Maecenas eu nisi vitae nisi lobortis semper.
Analysis shows that the decline of biodiversity and ecosystems will undermine progress toward 80% of the UN’s Sustainable Development Goals and will have wide-ranging impacts on society and businesses . The causes of this biodiversity loss have been identified as changes in land and sea use, exploitation of organisms, climate change, pollution and invasive alien species. These issues all need addressing. Now is the time for societies and businesses to account for biodiversity loss and address the problem in policy and economic planning. That’s the only way we will be able to prevent further damage and repair the world’s ecosystems.
68%
Moreover, the Living Planet Index shows that mammal, bird, amphibian, reptile and fish population sizes have decreased by an average of 68% per year between 1970 and 2016 .
1,000,000
A global study revealed that one million out of eight million known species are at risk of extinction .
Despite its importance to life on Earth, current levels of biodiversity are in sharp decline
36
Conservation International has identified 36 areas where the risk of biodiversity loss is particularly high. While the hotspots only cover 2.4% of the world’s surface, they contain over half of all endemic plant species and more than 40% of endemic bird, mammal, reptile and amphibian species .
At risk areas
United States of America, Mexico, Colombia, Ecuador, Peru, Venezuela, Brazil, Democratic Republic of Congo, South Africa, Madagascar, India, Malaysia, Indonesia, Philippines, Papua New Guinea, China, and Australia
Source: UN Environment Programme WCMC, Biodiversity A-Z
1
2
3
4
Map of mega-diverse countries
HOMEPAGE
Next article
Date: 25 April 2022
For companies, the health of their supply chains will be critical to their long-term profitability. For sectors in agriculture, food and beverages, this is especially true. The decline of pollinators due to pesticide use, climate change and habitat loss could pose significant risks to food security. Moreover, industrialised farming practices that result in the degradation of topsoil and water pollution are vulnerable to crop failures. The resulting damage to supply capacity are potential price shocks, prolonged shortages and devastating regional famines.
Supply-side risk
Reputational risk
Legal risk
Organisations that do not address their impact and dependence on nature also risk reputational damage. Consumers are increasingly critical of companies found responsible for deforestation, oil spills and any biodiversity decline. For instance, last year six European supermarkets announced that they will stop selling Brazilian beef due to concerns over links to deforestation in the Amazon rainforest. Biodiversity loss might also damage an organisation’s local relationships. Local communities play a critical role in securing a company’s license to operate in a region. In many countries, indigenous communities are also effective stewards of the land and local biodiversity. Engaging positively with these communities is key to ensuring that the materials are being sourced sustainably and allowing the organisation to retain operation in the region in the long term.
As well as reputational risk, companies that fail to address their impact on biodiversity will experience policy and legal pressures. Climate regulation across the world is advancing. Various countries have clamped down on the use of single-use plastic, with the regulatory landscape likely to expand to hold companies accountable for ongoing environmental damage. For instance, the UK government is looking to introduce legislation requiring companies to conduct due diligence on their supply chains to ensure there are no ties to illegal deforestation . Firms are also facing litigation risk. In 2010, the Deepwater Horizon oil spill released 130 million gallons of crude oil into the highly biodiverse Gulf of Mexico. The clean-up and litigation costs amounted to $65bn . As the importance of biodiversity becomes a public policy priority, the regulatory risks and litigation costs for companies associated with biodiversity loss are only likely to increase.
Key Findings
Lorem ipsum dolor sit amet, consectetur adipiscing elit. Fusce in elit eu leo varius commodo et semper mi. Morbi varius convallis nulla a condimentum. Suspendisse laoreet pharetra ex sit amet laoreet. Nullam a mi arcu. Praesent sed turpis velit.
Lorem ipsum dolor sit amet, consectetur adipiscing elit. Fusce in elit eu leo varius commodo et semper mi. Morbi varius convallis nulla a condimentum.
The risks
implications
While it is immediately apparent that biodiversity plays an essential role in the wellbeing of nature, biodiversity is also invaluable to businesses. Estimates place the value of ecosystem services and natural capital at between $125tn and $145tn per annum , while over half of global GDP is highly or moderately dependent on nature . Companies cannot afford to overlook their impact and dependence on nature. Doing so poses risks from an economic and reputational perspective.
“Estimates place the value of ecosystem services and natural capital at between $125tn and $145tn per annum”
Companies that do not pivot to a nature-positive economy also risk failing to capitalise on opportunities and falling behind their competitors. In 2020, the World Economic Forum concluded that “nature-positive” solutions can create almost 400 million jobs and over $10tn in business opportunities by 2030 . Companies should therefore be proactive and innovative in developing nature-positive solutions. Doing so will improve the resilience of their business models and enable them to realise significant future business opportunities. Overall, there is no sector left unaffected by biodiversity loss. It is time for organisations to recognise their dependency and impact on the environment so they can develop solutions.
Getting ahead of the curve
The five main drivers of biodiversity loss
Direct exploitation of organisms
Climate change
Pollution
Invasive alien species
Change in land and sea use
Costanza, Robert, et al. “Changes in the global value of ecosystem services.” Global environmental change 26 (2014): 152-158 World Economic Forum and PWC, Nature Risk Rising (2020). The Guardian, Supermarkets drop Brazilian beef products linked to deforestation. Reuters, British supermarkets threaten Brazil boycott over proposed forest law. The Guardian, BP’s Deepwater Horizon bill tops $65bn. World Economic Forum and AlphaBeta, The Future of Nature and Business (2020).
5
6
Source: Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services
The human impact on nature cannot be addressed overnight. The value of biodiversity and ecosystem services, which include clean air and water, healthy soils, and climate stability, is vast but often difficult to quantify for society and businesses. To implement change, companies need to understand the problem, develop a strategy, and then set targets for the future. Implementing these processes may not always be a simple task, but following these steps can help.
The next step will be seeing the type of projects that funds support
Companies can help protect the environment, but this requires adopting new processes and practices
Developing a strategy
Once organisations understand their material dependencies and impact on biodiversity, they can start developing measures that will reduce, and potentially reverse, the negative impacts. Companies should integrate these considerations into their strategic decisions. For instance, they could target geographical areas and commodities where they have a high dependence and footprint. A key facilitator of this process needs to be governance and accountability. Boards should work to understand their key risks and take responsibility for ensuring that their company’s operations and supply chain make a positive contribution to nature. To reinforce this process, companies should set targets to track their progress. For example, they could target a net-positive impact on biodiversity by regenerating farmland or winding-down activities in specific mining sites. To ensure they are on track to meet their goals, they should regularly report on their approach through a disclosure framework. By regularly reporting their progress, companies can assess whether they are successful in achieving their desired outcomes and identify parts of their process that need refinement.
Before corporates can develop a strategy and set targets for their organisations, they need to understand how biodiversity relates to their business models. For instance, those in the consumer goods and retail sector might identify that their business is dependent on ecological variables such as pollination, soil quality and water flow. Understanding a company’s relationship with nature will be vital to identifying where their most material challenges are. There is significant up-front time and cost necessary to implement such reporting systems, so frameworks and metrics will need to accurately assess the risk posed to companies in order to justify the investment.
Understanding the problem
Looking into the future
While some companies have already started implementing these processes, most are still only beginning to reduce their environmental impact. For instance, some banks and asset managers have taken positive steps by setting up funds dedicated to preventing deforestation. While the initial investment is promising, the next step will be seeing the type of projects the funds end up supporting. Even though there is room for optimism, there are also risks to be aware of. Attributing a financial value to the cost of biodiversity does help to quantify the scale of the problem, but it also risks allowing nature to be treated as just another form of capital. Natural capital is very different to human and manufacturing capital as it is not substitutable, is not easily replaceable, and cannot be remanufactured. Nature needs to be treated cautiously, as a finite resource. As companies march forward with implementing their sustainability strategies, they should not forget that everything is interconnected. If nature is permanently damaged, there will be long-lasting implications for climate change, society, and the economy
• engagement to understand the relevance of nature to a company, with the objective of achieving nature positive outcomes • increased collaborative engagement to reverse bio diversity loss • encourage systems based strategies that address interconnected sustainability challenges
Investor stewardship
Outcomes
• nature loss reversed and company contributes to positive outcomes for biodiversity • mitigation of a range of risks • company operations and supply chain operate within planetary boundaries
Target
• to have a net positive impact on biodiversity throughout operations and supply chain
• of a company's impacts and dependencies on biodiversity and ecosystem services
Measurement
Strategy
• focused on material impacts • supply chain engagement • nature-positive innovation • regenerative agriculture • no deforestation • nature-based solutions
Governance
including board oversight and advocacy for the protection of nature
in line with emerging best-practice frameworks
Disclosure
Summary of Federated Hermes’ engagement priorities and expectations
BIOSOLUTIONS: the final episode of our six-part podcast series on biodiversity looked to the future and the solutions being worked on to address current problems. Previous episodes outlined the magnitude of the task, tackling issues such as deforestation, soil erosion and the threat of species extinction.
The ocean may be the original World Wide Web. It connects and carries everything. Covering most of the planet’s surface and containing over half of all life on Earth, it plays a central role in regulating our climate, producing oxygen and sequestering carbon. Yet, climate change, pollution and overfishing have severe ecological consequences on marine ecosystems. Failing to protect the oceans will have far-reaching effects, not only on the global economy, but potentially humanity’s survival.
Plastic is a well-known risk to the ocean and one that stems from our use of plastic on land. “We need to work out how we're going to reuse and recycle plastic and how we're going to value it more, so we don't just discard it,” says Barnes. However, a bigger issue facing the ocean is acidification. The ocean is absorbing such a substantial percentage of the carbon that we release into the atmosphere that marine habitats are being destroyed. Additional causes of acidification include agricultural and industrial run-off from badly regulated and poorly managed factories across the globe.
The risks facing our oceans
100,000
It has been estimated that plastic pollution costs the lives of close to 100,000 marine mammals per year.
The blue economy: ripe for innovation
8 million tonnes
Over 8 million tonnes of plastic end up in the ocean every year, causing more than $8bn worth of damage to marine eco-systems.
Read more about ocean biodiversity in our Q2 2021 Public Engagement Report
Our oceans under threat
MArine mammals
80%
of all pollution in the ocean comes from people on land.
2050
Some estimate that by 2050, oceans will carry more plastic than fish.
Finally, industrial methods are putting immense pressure on the world's oceans. The problem extends to inland fisheries, where freshwater fish are highly threatened. More than 40% of known fish species are found in freshwater, even though freshwater habitat covers less than 1% of the globe.
3 billion
Around 3 billion people worldwide depend on wild caught and farmed seafood as a major source of protein.
90%
More than 90% of global fish stocks are overfished.
7
1/3
One in three freshwater species of vertebrates, invertebrates and plants are threatened with extinction.
8
So what does this mean for investors? Oceans contribute $1.5tn annually in value-added to the overall economy, and this number could reach $3 trillion by 2030. In fact, most global trade occurs by sea, and about 80% of tourism is in coastal areas. It is estimated that over three billion people depend on the oceans for their livelihoods. Innovation in the blue economy needs to be sustainable and regenerative because so much relies on a healthy ecosystem. “You're not going to have a $270bn fishing industry if there aren't any fish, and you're not going to have tourists going to the coast and wanting to be in the sea if it is full of algae and plastic pollution,” says Barnes. He also highlights that the ocean is the largest absorber and sequester of the CO2 we produce. Between 50-80% of the world’s oxygen comes from the ocean, mostly from oceanic phytoplankton during photosynthesis. UNESCO estimates that conversion and degradation of these ecosystems could release billions of tons of CO2 and other greenhouse gases into the ocean and atmosphere.
Our World in Data, https://ourworldindata.org/ocean-plastics WWF Australia, https://www.wwf.org.au/news/blogs/plastic-in-our-oceans-is-killing-marine-mammals#gs.dtvtss United Nations, https://news.un.org/en/story/2017/02/552052-turn-tide-plastic-urges-un-microplastics-seas-now-outnumber-stars-our-galaxy Ellen Macarthur Foundation, https://ellenmacarthurfoundation.org/the-new-plastics-economy-rethinking-the-future-of-plastics-and-catalysing WWF, https://www.worldwildlife.org/industries/freshwater-systems WWF, https://www.worldwildlife.org/industries/sustainable-seafood The World Bank, https://datatopics.worldbank.org/sdgatlas/archive/2017/SDG-14-life-below-water.html United Nations, https://www.un.org/sustainabledevelopment/blog/2019/05/nature-decline-unprecedented-report/ The World Bank, https://www.worldbank.org/en/topic/oceans-fisheries-and-coastal-economies#1 World Resources Institute, https://www.wri.org/events/2021/5/building-sustainable-coastal-and-marine-tourism-economy United Nations, https://www.un.org/sustainabledevelopment/oceans/ National Ocean Service, https://oceanservice.noaa.gov/facts/ocean-oxygen.html UNESCO, https://unesdoc.unesco.org/ark:/48223/pf0000375565
9
10
11
12
13
Chris Gorell Barnes and Will Pomroy were speaking to Federated Hermes’ Amplified podcast
Engagement to prevent biodiversity loss
“Ensuring a healthy marine ecosystem is the single most important thing we need to do to protect life on earth and to mitigate the climate crisis”
“What is difficult both from an engagement and a corporate action perspective is that so much of the impact on biodiversity is wound up with government tax reliefs, tax incentives or taking place with implicit support of governments”
For professional investors only. This is a marketing communication. The views and opinions contained herein are those of the author(s), and may not necessarily represent views expressed or reflected in other communications, strategies or products. The information herein is believed to be reliable, but Federated Hermes does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. This document has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. This document is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Figures, unless otherwise indicated, are sourced from Federated Hermes. This document is not investment research and is available to any investment firm wishing to receive it. The distribution of the information contained in this document in certain jurisdictions may be restricted and, accordingly, persons into whose possession this document comes are required to make themselves aware of and to observe such restrictions. Issued and approved by Hermes Investment Management Limited (“HIML”) which is authorised and regulated by the Financial Conduct Authority. Registered address: Sixth Floor, 150 Cheapside, London EC2V 6ET. HIML is a registered investment adviser with the United States Securities and Exchange Commission (“SEC”). Distributed in the EU by Hermes Fund Managers Ireland Limited which is authorised and regulated by the Central Bank of Ireland. Registered address: 7/8 Upper Mount Street, Dublin 2, Ireland, DO2 FT59.
“If we can manage to understand the science more clearly and be able to unlock the opportunity around blue carbon, we can have a huge return for our investors and a positive impact on the environment”
He explains that because the oceans have such tremendous potential for regeneration, the crisis in the oceans is actually the world’s biggest solvable problem. “If you get an area of ocean that has been overfished and destroyed and then you protect it and create a marine protected area, it comes back to life.”
says Chris Gorell Barnes, founder of the Blue Marine Foundation and founding partner of Ocean 14 Capital.
8 million
Engagement is a powerful tool to address a company’s impact on biodiversity, but there are hurdles, according to Will Pomroy, Lead Engager at Federated Hermes's SDG Engagement and Small and Mid-Cap Equities Fund. Engagement can also be a challenge with suppliers who are far upstream in a company’s supply chain. This area tends to be very opaque, diminishing transparency and the opportunity for influence. Often, it is necessary for government to spur change through regulation. “We have seen several regulatory interventions coming from policy bodies, in particular the European Commission, where the single-use plastic directive is coming into force over the next few years,” says Pomroy. “That will have some pretty significant impact on the plastics contribution to marine pollution.”
Engagement is a powerful tool to address a company’s impact on biodiversity, but there are hurdles, according to Will Pomroy, Lead Engager at Federated Hermes's SDG Engagement and Small and Mid-Cap Equities Fund. Engagement can also be a challenge with suppliers who are far upstream in a company’s supply chain. This area tends to be very opaque, diminishing transparency and the opportunity for influence. Often, it is necessary for government to spur change through regulation. “We have seen several regulatory interventions coming from policy bodies, in particular the European Commission, where the single-use plastic directive is coming into force over the next few years,” says Pomroy. “That will have some pretty significant impact on the plastics contribution to marine pollution.” Chris Gorell Barnes and Will Pomroy were speaking to Federated Hermes’ Amplified podcast
Agriculture, soil, livestock farming and biodiversity are inseparably linked, and many of the risks associated with the decline of nature are concentrated in the agricultural industrial complex. This is in large part because modern agriculture is heavily mechanised. Tilling, compacting and the excessive use of pesticides damage soil processes and productivity. Degenerated soil is more susceptible to erosion by wind and water, leading to a reduction in its natural fertility. Healthy soils are considered a non-renewable resource because it takes centuries to form just one inch of topsoil. Topsoil, the uppermost layer, is a living ecosystem with the highest density of fungi, bacteria, earthworms, insects and other species. This ecosystem facilitates the breakdown of nutrients for plants, enables water purification and supports pest control. As a result, our food security is linked to soil health. However, so is climate change. Organic matter within soil is a critical carbon store and is thought to be the second largest after the oceans. Yet conversion of forests to farmland can reduce the soil’s uptake of carbon substantially. The statistics around soil degradation and loss are alarming. Over the last 40 years, Earth has lost around one third of all arable farmland.
Modern agriculture is having a devastating impact on soil biodiversity, human health and climate change. Investors and companies need to adopt a holistic understanding of their role
Is regenerative farming the fix?
Regenerative agriculture is the solution to these destructive practices. It focuses on increasing biodiversity, improving watersheds (drainage basins) and enhancing ecosystems through practices such as no-till farming, cover cropping, diversified cropping, silo pasture and ally cropping. Globally, farmers are starting to adopt these practices as they understand the effect that soil quality has on their yields, and awareness is growing in the wider community too.
The economic consequences of modern agriculture have been profound. For farms, there is a profitability crisis because farmers are having to use more and increasingly expensive inputs, synthetic fertilisers and agrochemicals to make up for the loss of soil quality and produce the same yields they did the year before. Meanwhile, the widespread use of fertilisers and pesticides may have increased crop yields, but has had an unsustainable impact on the environment. “We have human health consequences where there are now serious concerns about the links between the toxicity of our natural environment because of agrochemical uses and various human diseases including cancers,” says Voysey. Modern agriculture is a significant part of the climate problem. It is also a major driver of biodiversity loss because modern industrial systems thrives on creating monocultures in order to maximise yield.
Far-reaching consequences
Corporate responsibility is key
Andrew Voysey and Mark Lewis were speaking to Federated Hermes’ Amplified podcast.
Episode four of our six-part podcast series on biodiversity looked the interactions between agriculture, soil, livestock farming and biodiversity. Other episodes looked at biodiversity issues relating to species extinction, deforestation and water.
What are the benefits of regenerative agriculture for the global food system?
Sowing the seeds of change
“Soil and agronomic scientists look at our modern industrial approach to farming and produce statistics like ‘we have 60 good harvests left if we continue to degrade the soil in the current way’”
says Andrew Voysey, Head of Impact and Carbon at Soil Capital. “That is a statistic for understanding the direction of travel rather than the precise end of the world, but it tells you something pretty stark about how our current way of producing food is delivering economically, human health-wise and environmentally.”
“Losing one species is connected to all other species, and we do not fully understand how all the implications of that biodiversity loss are going to be. There are no monocultures in nature, everything is dependent on everything else”
says Mark Lewis, Managing Partner at Trailhead Capital, an investment firm focusing on regenerative food and agriculture. Our food habits have already transformed the balance of life on Earth in a fundamental way. Of the mammals on earth, 60% are livestock, and of the birds, about 70% are chicken and poultry. About three-quarters of agricultural land today goes towards producing feed for animals that are then fed to humans.
“Now what we are starting to see, which is very exciting, is not only farmers connecting these practices with their profitability, but those beyond the farm gate, like food buyers, investors and governments, starting in different ways to acknowledge that building soil health is actually going to be core to the food system that we need”
The Guardian, https://www.theguardian.com/environment/2015/dec/02/ arable-land-soil-food-security-shortage The Guardian, https://www.theguardian.com/environment/2018/may/ 21/human-race-just-001-of-all-life-but-has-destroyed-over-80-of-wild-mammals-study Our World in Data, https://ourworldindata.org/global-land-for-agriculture
To drive a systems-wide change in how food is produced, investors need to start thinking about what the risks are and develop a holistic understanding of how these underpin their business model, both in their investments and their stewardship with companies. Companies with significant agricultural supply chains should support regenerative agriculture through a clear strategy and through risk governance that measures and discloses the outcomes on biodiversity, soil health, carbon sequestration and other key indicators. They should set targets to source ingredients from regenerative agriculture and work with farmers through long-term partnerships to support the transition to regenerative farming. There is enormous opportunity out there for companies and investors. The food system is undergoing a transformation and there is a lot of disruptive potential. Investors should consider where they are placing their capital and whether it is going towards companies that are cognisant of these trends.
To drive a systems-wide change in how food is produced, investors need to start thinking about what the risks are and develop a holistic understanding of how these underpin their business model, both in their investments and their stewardship with companies. Companies with significant agricultural supply chains should support regenerative agriculture through a clear strategy and through risk governance that measures and discloses the outcomes on biodiversity, soil health, carbon sequestration and other key indicators. They should set targets to source ingredients from regenerative agriculture and work with farmers through long-term partnerships to support the transition to regenerative farming. There is enormous opportunity out there for companies and investors. The food system is undergoing a transformation and there is a lot of disruptive potential. Investors should consider where they are placing their capital and whether it is going towards companies that are cognisant of these trends. Andrew Voysey and Mark Lewis were speaking to Federated Hermes’ Amplified podcast.
Most people know that deforestation is an issue for climate change, but there is less awareness of the critical role that forests play in preserving biodiversity. Rainforests are home to an abundance of wildlife. Indonesia’s forests, for example, house 10% of all known mammal species and 17% of all known bird species. However, deforestation is taking its toll on our ecological systems. Preventing this damage means overcoming several complex socio-economic hurdles.
Urbanisation
The tension between environmental conservation and development is a complex one. For instance, the Amazon rainforest has several types of landscapes that pose different conservation challenges. While the regions with green, lush forests are familiar to many, there is also substantial urban development where deforestation took place 30/40 years ago. There are 29 million people living in the Brazilian Amazon, and the vast majority live in towns or cities. How the social and economic forces interact with one another varies depending on the region, as different communities have different requirements from the land. Conservation in developed areas might involve greater work with locals to prevent further expansion. Settlements that are in the process of urbanising require clarity around land ownership as they transition. Ana Yang, Executive Director of the Sustainability Accelerator at Chatham House, emphasises the development aspect of protective measures in the Amazon. “Who am I to tell a family that they have to stay there, continue a traditional 'lifestyle' and do forestry management, which is really hard work. If they want to have modern mod cons, to have the same life as I do, then we have to give them that choice.
The first issue with protecting rainforests is that it needs to be undertaken at scale. Preserving small areas of rainforest alone will not work, as many animals require large, undisturbed tracts of land. For this reason, in Indonesia, one of the bases for conservation efforts has been linking up different national parks to allow animals to travel back and forth. In this way, the focus is on an entire landscape rather than just a single area. Another essential consideration when attempting to prevent deforestation is protecting the livelihoods of those affected by your efforts, says Pek Shibao, from the climate change group within the UK government's development finance institution, CDC. “Over the past decades, I think we have often been guilty in the development space of creating schemes for protecting forests and also schemes for economic livelihoods, but not tying the two together.
Importance of scale
Unintended consequences
Complexity also exists when it comes to cleaning up company supply chains. Doing so requires information, but in the Amazon, for example, there is a whole host of small-scale informal suppliers who are hard to track. Are you ensuring a fair transition if these suppliers are excluded? “When we started dealing with cattle, maybe 70% of cattle industry was informal and small,” says Yang. “And then, because of investment from the National Development Bank, and because of the signals that the environmental movement and investors sent, there was a consolidation of the cattle industry. So now something like four companies own 50% or more of the entire market.” The need for information also has an impact on the ability of governments to regulate, according to Shibao. “One of the main barriers to regulation in Indonesia, where I did a lot of my work concerning palm oil, was there was just no visibility and no central database on where these palm oil plantations were located.
In part three of our six-part podcast series on biodiversity, we focused on the problem of deforestation and how it is impacting biodiversity loss. Other episodes looked at biodiversity issues relating to species extinction, agriculture and water.
“If people who are living on the land feel disenfranchised by large organisations who are coming in to either protect the land or monetise it through carbon credits, those efforts can't be supported or sustainable. We need the buy-in and the support of the people who are actually there and whose livelihoods depend on the land.”
“Whatever conservation regulation or package that we have, you need to have some kind of social and economic return because otherwise it just doesn't gain traction.”
Rainforest Action Network, https://www.ran.org/indonesia_s_rainforests_biodiversity_and_endangered_species/ Chatham House, https://www.chathamhouse.org/2021/10/rethinking-brazilian-amazon/01-introduction
29 million
people live in the Brazilian Amazon, and the vast majority live in towns or cities.
“The government first had to create a unified database and a map of where all these areas were. That effort took many, many years and was one of the key ingredients towards stronger regulation.”
Pek Shibao and Ana Yang were speaking to Federated Hermes’ Amplified podcast
Today, up to one million of eight million known species in the world are at risk of extinction and average species population sizes fell by sixty eight percent between 1970 and 2016. According to their global study of nature, the Intergovernmental Platform on Biodiversity and Ecosystem Services says that human activity has “severely altered” 75% of terrestrial environments and there has been a 47% decline in global indicators of ecosystem extent and condition against their estimated natural baselines. I could go on. The implications of biodiversity degradation are far reaching. Our economies and societies are deeply embedded in nature, rather than existing alongside it. Biodiversity of our natural world is our own life support system through ecosystem services it enables and sustains. The water cycle, clean air and the provision of food are fundamental to all life on earth. Many medicines, especially anti-infectives and anti-cancer agents, originate from plants, fungi or bacteria. But there is another factor to biodiversity that is often overlooked. And that is the astonishing economic benefits we derive from a healthy and thriving bio-diverse planet.
“In a world where geopolitics has come to dominate our thoughts, I hope we also retain the focus on the biodiversity and climate crises”
It is now widely acknowledged that biodiversity loss is as great a challenge to our world as the climate crisis.
A responsibility…and an opportunity
By Saker Nusseibeh, CBE, CEO of Federated Hermes Limited
As investors, we have both a responsibility and an opportunity to help halt and – where possible – reverse biodiversity loss. Which is why we have launched a Biodiversity Fund in collaboration with the Natural History Museum in London, of which I am honoured to be an ambassador. Drawing on extraordinary insights from its Biodiversity Intactness Index and the work of some of the Museum’s 350 scientists, we hope to establish a bridge between observed biodiversity impacts, and the products and services that investment companies enable. As investors, we can go further through active engagement with companies. Through our own stewardship activities we are calling upon companies to commit to net-positive impact on biodiversity throughout their operations and supply chains.
Evidence has been growing that shows habitat conservation generates more economic benefits than habitat conversion, such as clearing rainforests for farm-use.
The case for investment
Working in partnership
But the investment industry alone cannot solve the biodiversity crisis, much like it cannot solve the climate crisis. That is why gatherings like COP 15 are so important. It was encouraging to see Biodiversity take centre stage at COP 26 in Glasgow last year, where more than one hundred global leaders made a commitment to halt deforestation. The one hundred and ten nations that signed the pledge represent eighty five percent of the world’s forests. COP 15, which held its first part virtually in October, sees global governments come together to sign up to a post-2020 Global Biodiversity Framework, which aims to reverse the current loss of biodiversity and ensure that it is put on a path to recovery by 2030. The second part of the meeting hopes to accelerate global actions against climate change and biodiversity loss. I would like to see central banks step up here as well. I concur fully with those asking them to recognise biodiversity loss as a potential source of economic and financial risk and commit to developing a response strategy.
The Food and Land Use Coalition says that changing agricultural and food production methods could unlock $4.5tn per year in new business opportunities by 2030, while also preventing trillions of dollars’ worth of social and environmental harms. According to a report on ConservationTools.org by the Pennsylvania Land Trust Association, the overall benefit:cost ratio of an effective global program for the conservation of remaining wild nature is at least 100:1. There is no more obvious case for investment that offers both the opportunity for sustainable wealth creation and for contributing to building a better future for our planet.
The UN Environment Programme states that for every dollar spent on nature restoration leads to at least nine dollars of economic benefits.
In a world where geopolitics has come to dominate the news agenda – and all our thoughts – I hope we also retain the focus on heading off both the biodiversity and climate crises. We have come a long way in tackling the climate challenge but only now are we really seeing a wider move to tackle our many biodiversity issues. An awful lot more needs to be done on both if we are to overcome the worst of their consequences.
A need for focus
The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. Any investments overseas may be affected by currency exchange rates. Past performance is not a reliable indicator of future results and targets are not guaranteed.
The fund has environmental and/or social characteristics and so may perform differently to other funds, as its exposures reflect its sustainability criteria. This is a marketing communication. This document does not constitute a solicitation or offer to any person to buy or sell any related securities, financial instruments or products; nor does it constitute an offer to purchase securities to any person in the United States or to any US Person as such term is defined under the US Securities Exchange Act of 1933. It pays no regard to an individual’s investment objectives or financial needs of any recipient. No action should be taken or omitted to be taken based on this document. Tax treatment depends on personal circumstances and may change. This document is not advice on legal, taxation or investment matters so investors must rely on their own examination of such matters or seek advice. Before making any investment (new or continuous), please consult a professional and/or investment adviser as to its suitability. All figures, unless otherwise indicated, are sourced from Federated Hermes. All performance includes reinvestment of dividends and other earnings. Federated Hermes Investment Funds plc (“FHIF”) is an open-ended investment company with variable capital and with segregated liability between its sub-funds (each, a “Fund”). FHIF is incorporated in Ireland and authorised by the Central Bank of Ireland (“CBI”). FHIF appoints Hermes Fund Managers Ireland Limited (“HFMIL”) as its management company. HFMIL is authorised and regulated by the CBI. Further information on investment products and any associated risks can be found in the prospectus, the fund supplements or the key investor information documents, the articles of association as well as the annual and semi-annual reports. In the case of any inconsistency between the descriptions or terms in this document and the prospectus, the prospectus shall prevail. Details of the Manager’s Remuneration Policy and Sustainable Policies are available on the Policies and Disclosures page at https://www.hermes-investment.com/ie/hermes-irelandpolicies-and-disclosures, including: (a) a description of how remuneration and benefits are calculated; and b) Sustainability related policy and disclosures. These documents are available free of charge (i) at the office of the Administrator, Northern Trust International Fund Administration Services (Ireland) Limited, Georges Court, 54- 62 Townsend Street, Dublin 2, Ireland. Tel (+ 353) 1 434 5002 / Fax (+ 353) 1 531 8595; (ii) at https://www.hermes-investment.com/ie/; (iii) at the office of its representative in Switzerland (ACOLIN Fund Services AG, Leutschenbachstrasse 50, CH-8050 Zurich www.acolin.ch). The paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1/am Bellevue, P.O. Box, CH-8024 Zurich. The information provided herein does not constitute an offer of the Fund in Switzerland pursuant to the Swiss Financial Services Act ("FinSA") and its implementing ordinance. This is solely an advertisement for the Fund pursuant to FinSA and its implementing ordinance. The costs for hedged share classes will be higher than the costs for non-hedged share classes. Refer to the prospectus or offering documents before making any final investment decisions and consider all fund characteristics and not just ESG characteristics. Issued and approved by Hermes Fund Managers Ireland Limited (“HFMIL”) which is authorised and regulated by the Central Bank of Ireland. Registered address: 7/8 Upper Mount Street, Dublin 2, Ireland, DO2 FT59. HFMIL appoints Hermes Investment Management Limited (“HIML”) to undertake distribution activities in respect of the Fund in certain jurisdictions. HIML is authorised and regulated by the Financial Conduct Authority. Registered address: Sixth Floor, 150 Cheapside, London EC2V 6ET. Telephone calls may be recorded for training and monitoring purposes. Potential investors in the United Kingdom are advised that compensation may not be available under the United Kingdom Financial Services Compensation Scheme.
For professional investors only.
The Earth is currently undergoing a mass extinction event. Factors such as climate change, habitat loss, pollution and the use of pesticides are all contributing to the loss of flora and fauna, with major implications for businesses as well as the planet. “There are hundreds of species at threat, if not thousands,” says Professor Jill Atkins, chair in Financial Management at Sheffield University Management School.
Financial solutions
One novel financial solution to address the loss of animal species has been the launch of social impact bonds. One example is The Rhino Impact Investment (RII) Project, where payments have been tied to the restoration of endangered rhino populations in five target locations. Over the past three decades, the population of rhinos has dropped from 60,000 to around 5,500, largely due to poacher activity. Their growing scarcity has only made rhino horns more expensive and attractive to poachers. Under the impact bond model, investors were asked to provide $50m in capital for projects seeking to restore the rhino populations. If targets are met, then investors will be repaid at a premium. Looking to the future, Nnamdi Okolo, researcher at Sheffield University Management School, says:
Since the extinction of wildlife has costs associated with it, businesses need to treat it as a financial risk and incorporate it into their accounting, says Atkins. She argues that accounting is not just about numbers and reporting on financial statements, but about discharging accountability. This means paying attention to the concept of double materiality. This covers financial materiality, meaning companies in the agricultural industry need to be concerned about the financial materiality of potential pollinator decline on their bottom line. But it also it means companies discharging accountability for their impacts on nature – on natural capital. Atkins comments:
Extinction accountability
Professor Jill Atkins and Nnamdi Okolo were speaking to Federated Hermes’ Amplified podcast
In part five of our six-part podcast series on biodiversity, we focused on the problem of species extinction. Other episodes looked at biodiversity issues relating to deforestation, agriculture and water.
“The crisis is not just limited to mammals; it’s fish, it’s insects. We’re in the middle of an ‘insect apocalypse’, with 70%, 80% of insect populations being wiped out in the last 20 years or so. It’s a very serious situation.”
The problem is exemplified by the pollinator crisis. The populations of bees and other pollinators are declining around the world, yet honeybees are essential for the pollination of flowers, fruit and vegetables. The US Department of Agriculture has in the past estimated that bees support about $20bn worth of crop production there annually. Atkins cites an example in China, where a lack of pollinators in one province meant crops had to be hand pollinated. Extrapolate this across the globe, and the scale of the challenge is clear. She asks:
“Where they may be having a negative impact on pollinators and bees, then they need to do something and act”
Alongside the private sector, the public sector needs to be mobilised. Government at local and national levels need to work together to provide a complete view of accounting. This overview is essential for designing solutions as species are interrelated and combine to have an impact on natural capital.
“If the model is successful after the first five years, then it is going to begin in South Africa on three investment-ready sites. If that is successful again, then it will be expanded into areas like Kenya.”
The Guardian, https://www.theguardian.com/environment/2017/oct/18/warning-of-ecological-armageddon-after-dramatic-plunge-in-insect-numbers The Guardian, https://www.theguardian.com/environment/2013/may/08/honey-bees-threatened-colonies-extinct-2012
c.5,500
The population of rhinos, down from 60,000, largely due to poacher activity
“Can you imagine hand-pollinating all the crops needed every year to feed the human population?”
Looking to the future, Nnamdi Okolo, researcher at Sheffield University Management School, says:
A reframing of the carbon reduction debate could pay dividends in the fight against climate change. That was the message of a recent briefing to investors by Walter Jehne, cofounder of NGO Regenerate Earth. Jehne, a soil microbiologist who works with graziers, farmers, scientists, businesses and local, state and federal governments to find innovative ways of restoring biosystems, highlighted how the debate on climate had missed a wider point. “For decades, we’ve fixated on reducing fossil fuel usage,” he said. “And rightly so. But by doing that we’ve only really looked at the human side of the equation.”
Practical solutions
For investors faced with these tipping points, the question is what can be done. Here, Jehne pointed to practical examples around the world, where NGOs such as Regenerate Earth and other advocates have worked with governments, farmers, city planners, companies and landowners to find ways of regenerating soils. This could be as simple as finding the appropriate mix of crop seeds for farmers to sow in pre-monsoon dry spells, or it could be planting trees and vegetation in urban areas to lower the ambient temperature. In each case, said Jehne, the solutions can create their own positive feedback loops – both in terms of regulating hydrology, combatting rising temperatures and sequestering carbon. This, in turn, means they can also serve the longer-term profit motives of investors. “We’ve got levers all along the train,” he said. “There are practical steps we can take and we’re responsible for taking them."
To understand what this might mean in practice, Jehne took a long-term planetary historic perspective, where he outlined the concept of the soil carbon sponge. This is the mixture of mineral and organic detritus that covers the earth and which, over hundreds of millions of years, has evolved in tandem with the planet’s microbial and plant life. In doing so, it developed the ability to sequester vast amounts of carbon dioxide from the atmosphere and, crucially, to act as a buffer against extreme weather events. Today, said Jehne, the current biodiversity crisis is being acted out in the context of human interaction with this soil carbon sponge.
The soil carbon sponge
“The opportunity – and it’s a tremendous one – is to consider what nature can do with our help to sequester more carbon”
“Through our activities, largely in just the past 70-100 years or so, we’ve wreaked havoc on this living element through fire, extractive agriculture, fertilisers, biocides, irrigation and bare-soil fallowing”
For many parts of the world, the damage is now so extensive that the soil is no longer effective in sequestering carbon dioxide or mitigating against hydrological extremes. “Over half of the world’s rainfall and cloud is driven by precipitation nuclei produced by vegetation. When we reduce vegetation we break that cycle, creating dry, degraded soils less able to sequester carbon and more likely to drive extreme weather events,” said Jehne.
“Whether that’s regenerating grasslands, revegetating urban areas or simply planting the right kinds of trees in the right areas, there are actions we can take beyond just reducing emissions to address that ten-billion-tonne global carbon deficit we all face”
To conclude, Jehne highlighted how, to quote author Jared Diamond, archaeology is littered with the ruins of failed civilizations that collapsed as they degraded their soils, and with them the water, food and biosystems those civilisations relied on for their survival. “In the words of President Franklin D. Roosevelt: ‘The nation that destroys its soil destroys itself’,” said Jehne.
“Only by reversing the degradation of soils can we head off climate catastrophe. Just as nature created this biosystem, so we can regenerate it.”
“The critical thing is not how much rain we get but what happens with that rain”
“Does it infiltrate into our soils so it becomes part of an in-soil reservoir, available for plant growth and biodiversity? Or do we create an environment where the rain runs off, evaporates or runs into the sea and effectively becomes lost?” Given the human impact on the soil carbon sponge in the past hundred years, the result and reality for humans in the coming decades is water insecurities, intensification of wildfires and diseases, further degradation of soils and social and strategic instability, said Jehne. As examples of this, he highlighted drought in Syria, wildfires in Australia and Canada and extreme or unseasonal temperature rises in India. Together, they serve as climate-change tipping points that act as warnings of things to come.
“For decades, we’ve fixated on reducing fossil fuel usage,” he said. “And rightly so. But by doing that we’ve only really looked at the human side of the equation.”
Sonya Likhtman, EOS engager, outlines how and why investors can be a powerful voice for halting and reversing biodiversity loss.
“All life on earth and all businesses, to varying degrees, are dependent on the common goods provided by nature”
Submerged cities and mass extinctions may feel 100 years away from anything we’ll ever have to witness in our lifetimes but for large swathes of nature and many communities, the emergency has already begun.
In 2020, we signed the Finance for Biodiversity Pledge, which now has 98 signatories that represent over €14tn. The Finance for Biodiversity Foundation was set up to support a call to action and collaboration between financial institutions on this important issue., We continue to co-chair the Finance for Biodiversity Foundation Engagement and Public Policy Advocacy working groups. During 2021 and 2022 we contributed to the pre-COP15 discussions on the Global Biodiversity Framework (GBF) on behalf of the Finance for Biodiversity Foundation. We emphasised that the GBF should explicitly reference the role of the financial sector in halting and reversing biodiversity loss and stressed that the framework should require the alignment of public and private financial flows with the goals and targets of the GBF. We also asked governments to create an enabling regulatory environment so that the financial and private sectors can address biodiversity-related risks and opportunities.
There is growing awareness in the financial sector of the interlinked climate and biodiversity emergencies, and the potential impacts on economies and markets. Research suggests over 50% of global GDP is highly or moderately dependent on nature. Failure to act on these issues could result in collapsing food systems and loss of livelihoods, posing a systemic risk to the global economy. All life on earth and all businesses, to varying degrees, are dependent on the common goods provided by nature. However, the role that nature plays has often been under-appreciated by companies and their investors – not only for its intrinsic and societal value, but also for the economic value that it underpins. Covid-19 has been a wake-up call that our health, and that of our economies, are dependent on the health of the world’s ecosystems. The destruction of habitats through land-use change brings humans and animals into ever closer contact, which increases the risk of new infectious diseases being transmitted from animals to humans.
The common goods of nature
Closing the funding gap
Many companies and investors have been slow to wake up to the problem of biodiversity loss and, as a result, we are facing a global biodiversity funding gap of >$800m per annum. The financial industry can play a key role in closing this gap through capital allocation and stewardship. In 2021, we published a white paper, Our Commitment to Nature , which set out our engagement priorities and outlined the extent to which investors’ and companies’ current approaches to nature are unsustainable.
In 2021, we published a white paper, Our Commitment to Nature, which set out our engagement priorities and the extent to which investors’ and companies’ current approaches to nature are unsustainable.
Sonya Likhtman, Lead Engager, EOS
We continue to make the business case for action and see investor engagement with companies as a key route by which biodiversity loss can be halted and reversed. We continue to call on companies to commit to having a net-positive impact on biodiversity throughout their operations and supply chains by 2030 at the latest. We expect this goal to be accompanied by strong governance, effective measurement, an impactful strategy, and regular disclosure. We have also looked at the specific role that marine ecosystems play in regulating our climate and providing key services, such as the production of oxygen, and carbon sequestration. We identified five engagement themes for ocean sustainability: addressing the climate crisis, tackling pollution, transitioning to sustainable food systems, reversing the loss of biodiversity and protecting human rights. With a small group of investors, we are also working to establish a Nature Action 100 initiative, which will facilitate collaborative engagement with companies that have the greatest impact on biodiversity.
IPBES Report (2019), EOS, Our Commitment to Nature (2021), WWF and ZSL, Living Planet Report (2020), Seven ESG Trends to Watch in 2021 | S&P Global (spglobal.com). Global Canopy, The Little Book of Investing in Nature (2021). Our Commitment to Nature | UK Institutional (hermes-investment.com) Our oceans under threat | UK Institutional (hermes-investment.com)
The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future results. For professional investors only. This is a marketing communication. The views and opinions contained herein are those of Sonya Likhtman, EOS engager, and may not necessarily represent views expressed or reflected in other communications, strategies or products. The information herein is believed to be reliable, but Federated Hermes does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. This document has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. This document is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Figures, unless otherwise indicated, are sourced from Federated Hermes. This document is not investment research and is available to any investment firm wishing to receive it. The distribution of the information contained in this document in certain jurisdictions may be restricted and, accordingly, persons into whose possession this document comes are required to make themselves aware of and to observe such restrictions. Issued and approved by Hermes Investment Management Limited (“HIML”) which is authorised and regulated by the Financial Conduct Authority. Registered address: Sixth Floor, 150 Cheapside, London EC2V 6ET. HIML is a registered investment adviser with the United States Securities and Exchange Commission (“SEC”). Distributed in the EU by Hermes Fund Managers Ireland Limited which is authorised and regulated by the Central Bank of Ireland. Registered address: 7/8 Upper Mount Street, Dublin 2, Ireland, DO2 FT59.