Biodiversity loss

What Is Biodiversity Loss?

Biodiversity loss refers to the decline in the variety of life on Earth, encompassing genetic diversity within species, the diversity of species themselves, and the diversity of ecosystems. This phenomenon is a critical concern within the broader category of Environmental, Social, and Governance (ESG) investing and sustainable finance, as it represents a significant environmental risk that can have profound economic impacts. Biodiversity loss involves the extinction of species, the degradation of habitats, and the disruption of natural processes that are vital for maintaining healthy planetary systems. The continued decline in biodiversity poses a direct threat to natural capital, which underpins global economic activity and human well-being.

History and Origin

While the concept of species extinction is as old as life on Earth, the widespread recognition of biodiversity loss as a human-induced crisis and a global policy concern emerged more recently. The term "biodiversity" itself was popularized in the mid-1980s, highlighting the interconnectedness of biological variety. A pivotal moment in global recognition was the 1992 Earth Summit in Rio de Janeiro, which led to the signing of the Convention on Biological Diversity (CBD). This international treaty, ratified by 196 nations, aims to conserve biological diversity, promote the sustainable use of its components, and ensure the fair and equitable sharing of benefits arising from genetic resources.¹⁵, ¹⁶

Subsequent scientific assessments have underscored the severity and acceleration of biodiversity loss. For instance, the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) published a landmark report in 2019, stating that nature is declining globally at rates unprecedented in human history, with approximately one million animal and plant species facing extinction.¹³, ¹⁴ These scientific findings have increasingly drawn attention from economic and financial institutions, recognizing that environmental degradation, including biodiversity loss, poses material risks to financial stability and economic growth.

Key Takeaways

• Biodiversity loss is the reduction in the variety of life at genetic, species, and ecosystem levels.
• It is considered a major global risk with significant implications for the economy and society.
• The decline impacts vital ecosystem services such as pollination, water purification, and climate regulation.
• Addressing biodiversity loss requires substantial investment and changes in economic practices across sectors.
• The financial sector is increasingly recognizing biodiversity loss as a material risk, influencing investment decisions and risk management strategies.

Formula and Calculation

Biodiversity loss is not typically quantified by a single universal formula or calculation in the same way a financial metric might be. Instead, its assessment involves complex ecological models and indicators that track changes in species populations, habitat extent, and ecosystem health. Researchers and policymakers often use various indices to measure aspects of biodiversity, such as:

• Species Extinction Rates: Calculated as the number of species lost over a specific period, often compared to historical or background rates. $$\text{Extinction Rate} = \frac{\text{Number of Species Extinct}}{\text{Time Period}}$$
• Habitat Loss: Quantified by measuring the reduction in the area of natural habitats (e.g., forests, wetlands) over time, often using satellite imagery and geographic information systems (GIS). This can be expressed as a percentage decrease. $$\text{Habitat Loss Percentage} = \frac{\text{Initial Area} - \text{Current Area}}{\text{Initial Area}} \times 100\%$$
• Living Planet Index (LPI): This index tracks changes in the relative abundance of vertebrate species populations globally. It is an aggregate measure, not a direct count of species lost, but rather an indicator of overall population health.

These metrics contribute to understanding the scale and pace of biodiversity loss, informing efforts in conservation and sustainable development.

Interpreting Biodiversity Loss

Interpreting biodiversity loss involves understanding its multifaceted impacts on natural systems and human society. A decline in biodiversity signals a weakening of ecosystem services, which are the benefits that humans receive from ecosystems. For example, a reduction in pollinator species can directly affect agricultural productivity and food security. The economic impact of biodiversity loss is substantial; a World Bank report estimated that the collapse of select ecosystem services could lead to a global GDP decline of $2.7 trillion annually by 2030.¹⁰, ¹¹, ¹²

From a financial perspective, interpreting biodiversity loss means assessing the associated physical risks (e.g., supply chain disruptions from resource scarcity) and transition risks (e.g., policy changes, market shifts towards nature-positive practices). Investors and companies are increasingly scrutinizing their exposure to biodiversity-related risks, recognizing that failure to address these issues can lead to financial penalties, reputational damage, and decreased valuation. Understanding these dynamics is crucial for developing robust sustainable investing strategies.

Hypothetical Example

Consider "AgriCorp," a large agricultural company operating globally. Traditionally, AgriCorp has relied heavily on monoculture farming and extensive pesticide use to maximize crop yields. Over time, this approach leads to significant local biodiversity loss, particularly impacting insect pollinators and soil microorganisms.

In this hypothetical scenario, AgriCorp begins to experience declining yields in regions where natural pollination services have diminished, forcing them to consider costly artificial pollination methods or invest in the restoration of natural habitats. Additionally, the degraded soil quality necessitates increased use of expensive synthetic fertilizers. The company also faces pressure from regulators introducing new environmental protection policies and from consumers demanding more sustainably produced goods. This situation illustrates how biodiversity loss, initially perceived as an environmental issue, translates directly into increased operational costs and supply chain risk for the company, ultimately affecting its profitability and competitive standing.

Practical Applications

Biodiversity loss has significant practical applications across finance, markets, and regulation:

• Investment Screening: Asset managers and institutional investors are integrating biodiversity criteria into their investment screening processes, identifying companies with high biodiversity footprints or those actively contributing to conservation. This is a growing area within impact investing.
• Risk Assessment: Financial institutions conduct due diligence to assess biodiversity-related risks in their portfolios, including physical risks (e.g., dependence on vulnerable natural resources) and transition risks (e.g., regulatory changes, shifting consumer preferences). This forms part of their broader market risk analysis.
• Product Development: New financial products are emerging, such as "nature bonds" or green bonds, designed to finance projects that yield positive biodiversity outcomes. The United Nations Environment Programme (UNEP) reported that global annual finance flows fueling nature-negative activities are close to $7 trillion, highlighting a massive opportunity for redirecting capital towards nature-positive solutions.⁹ Conversely, the UNEP has also highlighted the significant funding gap for nature-based solutions, estimating that investments need to triple by 2030 and quadruple by 2050 from current levels to meet global targets.⁶, ⁷, ⁸
• Corporate Reporting: Companies are increasingly expected to disclose their biodiversity impacts and dependencies, driven by frameworks like the Taskforce on Nature-related Financial Disclosures (TNFD), aligning with evolving standards of corporate governance.
• Sovereign Debt Analysis: The stability of national economies, and thus their sovereign debt ratings, can be influenced by their natural resource base. A Cambridge University report highlighted how ecological destruction could lead to credit rating downgrades and increased borrowing costs for nations.⁵

Limitations and Criticisms

While the importance of addressing biodiversity loss is gaining traction, several limitations and criticisms exist regarding its integration into financial analysis and decision-making. One significant challenge is the difficulty in accurately quantifying biodiversity and its financial value, leading to complex and sometimes inconsistent economic impact assessments. Unlike carbon emissions, which can be measured in a single metric (tons of CO2 equivalent), biodiversity is multidimensional and context-specific.

Critics also point to the "biocrastination" effect, where biodiversity loss is consistently ranked as a long-term risk rather than an immediate concern by global experts, as seen in the World Economic Forum's Global Risks Report.³, ⁴ This perception can lead to a lack of urgent action and insufficient investment compared to the scale of the problem. Additionally, there are concerns about "nature washing," where companies or financial products claim to be "nature-positive" without delivering tangible, verifiable benefits, undermining the credibility of sustainable finance efforts. Furthermore, the interplay between biodiversity loss and climate change is complex, with some solutions for one potentially exacerbating the other if not carefully managed.

Biodiversity Loss vs. Ecosystem Collapse

While closely related and often used interchangeably, "biodiversity loss" and "ecosystem collapse" refer to distinct, albeit interdependent, concepts.

Biodiversity Loss

• Focus: The reduction in the variety of life on Earth, including genetic diversity within species, the number of different species, and the diversity of ecosystems. It is about the variety and abundance of living organisms.
• Scale: Can occur at various scales, from local species decline to global extinction events.
• Impact: Weakens ecosystem resilience and reduces the raw material for ecosystem services.

Ecosystem Collapse

• Focus: The breakdown of the fundamental structure and function of an ecosystem, leading to a loss of its characteristic biota, ecological processes, and the services it provides. It is about the system's ability to function.
• Scale: Typically refers to a specific ecosystem (e.g., coral reef collapse, forest ecosystem collapse).
• Impact: Results in the cessation of vital services (e.g., water purification, flood regulation, pollination), often with severe consequences for human populations dependent on that ecosystem.

Biodiversity loss can be a driver or a symptom of ecosystem collapse. A significant reduction in biodiversity within an ecosystem makes it more vulnerable to collapse, as the loss of species can remove critical functional roles. Conversely, the collapse of an ecosystem will inevitably lead to further biodiversity loss within that specific area. Understanding this distinction is crucial for effective environmental policy and financial risk assessment.

FAQs

How does biodiversity loss affect the global economy?

Biodiversity loss impacts the global economy by degrading essential ecosystem services such as clean air and water, fertile soil for agriculture, and natural defenses against extreme weather events. This degradation can lead to increased costs for businesses, reduced productivity in key sectors like agriculture and fisheries, and higher risk management expenses for governments and corporations. A World Bank report in 2021 indicated that the global economy could face annual losses of $2.7 trillion by 2030 due to the collapse of some ecosystem services.¹, ²

Can investments help address biodiversity loss?

Yes, investments can play a crucial role in addressing biodiversity loss. Sustainable investing and impact investing specifically channel capital towards nature-based solutions, conservation efforts, and companies adopting nature-positive practices. Examples include investing in sustainable agriculture, ecological restoration projects, and companies that demonstrate strong ESG factors related to environmental stewardship.

What are some major causes of biodiversity loss?

The primary direct drivers of biodiversity loss include changes in land and sea use (e.g., deforestation for agriculture), direct exploitation of organisms (e.g., overfishing, illegal wildlife trade), climate change, pollution, and invasive alien species. These drivers are often exacerbated by underlying causes such as unsustainable consumption patterns, economic inequalities, and failures in governance.