Addressing ecosystem restoration is just as pressing as tackling CO2 emissions and can generate billions of dollars of investment opportunities, as Ulrik Fugmann and Edward Lees, co-heads of the Environmental Strategies Group, explain.
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Much of the focus in the debate on climate change and the environmental challenges has been on dealing with carbon emissions, but we believe there is much more at stake: Our natural capital, in the form of ecosystem services – the benefits humans derive from ecosystems – is under threat. The strains on the oceans, the soil and our urban areas are building with the world population estimated to grow by two billion between now and 2035.
Exhibit 1: The four categories of ecosystem services – Provisioning services; Regulating services; Supporting services, and Cultural services
Source: The Millennium Ecosystem Assessment defined these four categories of ecosystem services that contribute to human well-being, each underpinned by biodiversity
The United Nations forecasts that 68% of the world’s population will live in urban areas by 2050 (versus 55% today). This will create greater demand for power generation as well as waste and pollution management.
When the footprint of consumption worldwide exceeds biocapacity, humans are overshooting, or exceeding, the regenerative capacity of the Earth’s ecosystems. Currently, it is estimated that mankind is using natural resources 1.75 times faster than ecosystems can regenerate – or, put another way, consuming 1.75 Earths/year.
Policymakers are now recognising that restoring, protecting and preserving ecosystem services is critical. At the same time, technology is enabling new solutions, ranging from smarter agriculture to flood protection, that safeguard livelihoods and prosperity.
This is underscored by the fact that some of 50% of the world’s GDP – worth USD 44 trillion – depends highly or moderately on nature or its services. Key systemic risks are very much around natural capital. Examples include climate change, but also biodiversity loss and pandemics.
Ecosystem restoration across oceans; land, food & agriculture; and sustainable communities entails significant opportunities. It is estimated that more than USD 2 trillion a year in investment is needed to restore marine, land and urban ecosystems between 2020 and 2030 and that this will create USD 6 trillion in annual business opportunities.
Encouragingly, the risks and threats – which include around a million species facing extinction – have gained more and more attention from policymakers and market regulators and solutions are being included in stimulus bills such as the latest trillion-dollar spending plans by the Biden administration.
Looking at solutions in more detail, there are conservation areas – where work is done on slowing the rate of degradation – and development areas where problems are solved and work is done to support regeneration. There are three broad restoration categories:
Interesting developments include improving the biodegradability of plastics and forms of recycling plastics chemically. One effect of such an approach is to reduce the use of oil in plastics production.
A further area is the development of new ways of feeding ourselves using less water and fewer pesticides, reducing our water footprint and spillage of nitrogen into waterways. This matters in the context of the increasing water stress resulting from climate change, but also population growth.
Ecosystem restoration represents a very broad range of opportunities spanning pollution control and treatment; ways to improve resource efficiency; the search for alternatives to pesticides, but also transportation; recycling; and consultancy and testing. This breadth requires in-depth investment research, also because typically there are no individual companies focusing just on one aspect.
Often, the solutions are part of a product range going beyond ecosystem restoration. To underscore the point, there are no listed biodiversity loss companies. As a result, stock selection requires deep expertise across multiple environmental technologies. Opportunities can be found across market capitalisations, sectors and geographies and outside of mainstream indices.
At BNP Paribas Asset Management, investing in ecosystem restoration is part of a range of environmental strategies including an energy transition strategy focused on renewable energy production, energy technology & efficiency, and energy electrification and infrastructure.
The broadest of our three equity strategies combines an environmentally themed approach around the energy transition and ecosystem restoration with a focus on absolute returns including holding long and short positions. Short positions are in companies facing transition risks and companies with inferior technologies and business models.
We believe our environmental strategies can help address climate change, assigning capital to a growth market that for decades will require trillions of dollars to achieve the size needed to restore, protect and preserve Earth’s resources and achieve the transition to a sustainable, net-zero and inclusive economy. For investors, they represent a profitable way to be part of the solution.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher than average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity, or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.