“Biodiversity is a local issue”

Alix Chosson, ESG analyst specializing in climate and the environment at Candriam, sets the stage: “Half of global GDP depends on biodiversity, so the massive extinction of biodiversity we are experiencing will have an impact on the resilience of our economies.” She distinguishes between physical risks, the consequences of the acceleration of ecosystem degradation or disruption of the water cycle, soil and water pollution, and transition risks, related to a shift toward an economy that would better account for biodiversity protection. However, as Alix Chosson notes, “While transition risks are well identified regarding climate-related issues, because regulations have been put in place, this is not the case for biodiversity issues, so we remain focused on physical impacts. Even in heavily protected areas, we observe highly impactful activities on biodiversity, such as trawling or certain extractive activities.”

Double Materiality is Central to Biodiversity In this context, the notion of double materiality — the impact of human activities on biodiversity and the consequences of biodiversity degradation on these activities — which is strongly advocated in Europe, is central to biodiversity. “In order to fully integrate biodiversity into our investment processes, we need to take both aspects into account: impact and dependency,” adds Alix Chosson.

Among the areas where these biodiversity risks have already materialized is the water sector. “The energy sector, for example, has a significant need for water, to produce hydroelectric power or to cool power plants. Therefore, difficulties in accessing water have impacts on electricity production, as seen during the drought in Europe in 2022, which led companies to reduce or even halt their production, resulting in financial losses for them,” points out Elouan Heurard, ESG analyst specializing in biodiversity at Candriam. Additionally, new regulatory constraints are creating growing transition risks by requiring companies to reduce their water withdrawals or discharges into the environment. “For example, in Chile, mining companies had to make investments of several billion dollars to create desalination plants because they could no longer draw from groundwater,” illustrates Elouan Heurard. He also observes that, within the framework of international agreements, protected areas will see their size and level of protection increase. “As a result, some companies must adjust their production methods or make investments to comply with these new standards,” he adds.

Ensuring that Companies Better Address Biodiversity Dependency on biodiversity varies significantly between sectors. However, exiting the most dependent sectors is not the approach adopted by Candriam. “We will remain exposed to these sectors so that the companies involved can better address their biodiversity challenges,” says Alix Chosson, who aims not to repeat the mistakes of some low-carbon strategies on the topic of climate transition, which aimed solely to minimize a portfolio’s carbon footprint. The goal is also to better understand biodiversity risks: “The notion of location is also very important. Biodiversity is a local issue, so depending on where a company’s activity is located — in an already urbanized area, an artificialized one, or, conversely, in a primary ecosystem — its impacts will differ,” analyzes Alix Chosson.

Multiple Evaluation Models Coexist Investors need to quantify biodiversity impacts and dependencies, but the process is complex. “It’s not just a physical flow like CO2, but an impact on a complex network of life, so multiple evaluation models coexist, expressing impacts and dependencies in different units,” notes Elouan Heurard. The question of location, putting an impact or dependency in its ecological context, is therefore crucial. “Saying that we are dependent on water is only part of the story because this dependency will manifest differently depending on the water status of the region, the regulatory context, access to water in that area, the water market, etc.,” he explains.

The approach — integrating the notion of location into biodiversity analysis — is relatively new, and the objective is ambitious: “Unfortunately, the economic world is already behind because, according to international goals, we should have reversed the biodiversity loss curve by 2030, which gives us little time to implement these practices,” regrets Elouan Heurard.

 

Content written by Florent Berthat.