Investments’ Environmental Impacts on Ecosystems & Biodiversity

Sarah Simon

10 min Read Time | August 10th 2021

Key Takeaways

1

Financial institutions finance companies that may harm or restore/conserve ecosystems and biodiversity.

2

When assessing the impact of investments, make sure to focus on environmental impacts to contextualise the impact (i.e., assessing CO2 emissions or others). Social impacts and impacts from energy finance are covered in separate topics.

3

Make sure to analyse the depth, breadth, and persistence of the impact. Make sure the readers can clearly identify the scale by providing the amount of deforestation that took place

What is it?

Following the COP 21 Paris Agreement to limit the rise in world temperature to 1.5°C, the impact from financial markets gave rise to new challenges and opportunities. It is not about the “business case for sustainability.” Rather, the focus is on the “sustainability case of business.” In other words, the Finance sector is expected to deliver a positive impact. Indeed, there is a growing acceptance among the financial sector that the ambitious SDGs cannot be achieved without financial support from all players.

Both in private and public markets, investors can be the drivers for change. Via coalitions and funds allocations, they can push companies to better their products, processes, and strategies. Ultimately, this may lead to a positive impact on the ecosystem and biodiversity. Incorporating impact-related aspects in this framework requires contemplating both positive & negative externalities.

For instance, biodiversity-positive investments include funding the enhancement of existing biodiversity and/or restoring biodiversity to a determined previous state.

Other types of investments can reduce or avoid negative impacts, such as addressing economic activities that harm biodiversity and ecosystems or investing in interventions to prevent future harm. However, these investments must be critically assessed to avoid remediation, and the analysis must consider the whole picture.

It is vital to assess the entire impact, thus, total investments impacting biodiversity and ecosystems.


Companies have a wide array of environmental impacts, depending on their activities, such as through:
  • Investing in forest-risk sectors (beef, palm oil, pulp & paper, rubber, soy, and timber) leads to increased greenhouse gas emissions, drought, land infertility, soil erosion, flooding, biodiversity loss, etc.

  • Oil & gas exploration and production that lead to land alterations, habitat destruction, biodiversity loss, among others.

  • Sourcing and depleting marine life, causing aquatic ecosystem destruction.


If you are unsure about debt financing and equity investments, please refer to this guide.


Sources

https://www.worldwildlife.org/threats/deforestation-and-forest-degradation
https://ourworldindata.org/what-are-drivers-deforestation
https://www.pachamama.org/effects-of-deforestation#:~:text=The%20loss%20of%20trees%20and,of%20problems%20for%20indigenous%20people
https://cop23.unfccc.int/sites/default/files/resource/101_submission%20Talanoa%20Dialogue%20v29March18.pdf
https://link.springer.com/arti...
https://www.government.nl/documents/reports/2019/09/25/report-positive-impacts-in-the-biodiversity-footprint-financial-institutions

SDG poster UN emblem PRINT 2020

SDG Choice

It depends on the solution and where it has an impact. Some commonly used SDGs are:

✅ SDG 14
✅ SDG 15

Impact measurement

Ideally, the introduction should include:

What?

  • What risk sector and impact are the note analyzing? i.e., Palm Oil, Rubber, Pulp & Paper, Fishing. Therefore, per typology of impact: deforestation, endangered species, droughts, soil infertility, overfishing, among others.

  • Why is it important to discuss this commodity?

Where? When?

  • The geographical context of where those activities are taking place. If the core analysis discusses the impact of a company regarding reforestation or ecological devastation in Indonesia, then the introduction should provide the context of the impacts that Indonesia has experienced specifically.

  • Is it a recent issue? Is it a rooted phenomenon?

Quantifiers?

  • For instance, if dealing with deforestation, how much money has been invested for the cultivation of forest products by the major banks in general?

  • In this light, how much land is cleared every year in that country?

  • What is the impact? In other words, how much is the commodity accounting in terms of ecological or biodiversity loss?

For example: “the palm oil sector is responsible for 2.3% of the world’s deforestation, which increases to 5% in tropical regions4 orBeef and soy production accounts for more than two-thirds of the recorded habitat loss in Brazil’s Amazon and Cerrado regions5.

Note: Please note that all the above depends on data availability, retrievability, and relevance.

The core analysis should capture the company’s impact concerning the broader issue by providing the following information:

  • How much money did the company provide through funding, investment, loans, underwriting, and/or credit? (2018-onward amounts, even aggregated, or previous years showing current impact).

  • Both equity and debt financing can be considered as an investment, as long as the sum is over USD or EUR 100 million. Equity investments can be considered as long as it reaches a 5% holding.

  • What main company(s) received the funds? You may discuss the companies activities that received the largest sums or have a large stake owned by the financial institution.

  • How much is deforestation/biodiversity loss/habitat destruction linked to the company that received these funds?

  • Alternatively, how much restoration or creation is linked to the company that received these funds? To avoid remediation, the analysis must consider the total net impact, i.e., reforestation efforts compared to total deforestation.

  • What is the environmental impact of the activities that have taken place? How is the environment affected?

  • Try to be as specific as you can: where is the ecosystem & biodiversity destruction or restoration taking place, and since when?

No matter what the company’s activities are, you may go back to the Logical Model if needed.

To help readers assess the impact scale and value, you should contextualise the impact. For instance:

  • How extensive is the company’s deforestation compared to the industry it is part of? (Learn more about comparisons here.)

  • In evaluating the impact on climate, how much CO2 could these forests absorb if they were still there and how much CO2 is released by cutting them down?


Also, ask yourselves the following questions:

1/ The breadth of the impact

  • Is the impact local, national, or global?

  • How many species or people are concerned?

2/ The depth of the impact

  • Is the biodiversity or people concerned deeply affected, or does the issue just marginally impact them?

  • Are the changes brought by the issue profoundly changing society or the planet?

3/ The persistence of the impact

  • How long would the impact described last for? Months? Years? Decades?

  • How reversible is the impact described in the impact analysis? Can it be easily stopped/extended?


Find more about evaluating the scale of the impact in Step 5: Assess scale and value.

Related
Articles

Based on the article you've just read, here are some more we think you'd be interested in.

9 Min read

Investments’ Social Impacts

10 Min read

Investments’ Environmental Impacts from Energy Financing

9 Min read

Investments

How to treat the topic of investments and its environmental and social impact.

World Green Background Sustainability small

Let’s take action together

With the right investment companies having a positive impact on the planet are able to flourish. Our community forms part of that mission by measuring their impact.

Join Us