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A fair COP: adherence to global biodiversity targets requires innovative, sustainable companies

  • 06 March 2023 (5 min read)

Key points: 

  • COP 15 produced a non-binding global agreement between 188 governments1
  • These quantifiable, time sensitive commitments are already becoming enshrined in local regulations
  • The obligation to meet these targets is likely to accelerate growth in companies providing innovative, sustainable and efficient solutions

The latest UN Biodiversity conference, COP 15, took place in December 2022. Significantly, the outcome included an agreement between 188 member countries to adopt the Kunming-Montreal Biodiversity Framework (“Global Biodiversity Framework”; GBF), and work towards specific targets to reduce and mitigate biodiversity loss by 2030 and goals for 2050. The ability to assess the impact of a company and its operations in a meaningful and material way is crucial to driving real progress; in our view, the adoption of the GBF is a positive step towards helping companies reduce their negative impact on biodiversity. While some initial headlines viewed the non-binding nature of the agreement as lacking teeth and falling short in comparison to the 2015 Paris Agreement, on reflection there are numerous reasons why the outcome of COP 15 is likely to be significant. One such reason is the greater inclusion of the private sector, which is expected to aid transparency and alignment between corporates and governments on a larger scale.2 Another key realisation is that parts of the GBF are already becoming enforceable by local governments and regulators – such as the EU, which is leading the way by adopting comparable targets in a bottom-up approach to enforcement, and may take stakeholders by surprise with just how soon this is likely to become law across significant swathes of the developed market.3

Which GBF areas do we consider most impactful?

One of the more high-level targets set out is the so-called ‘30 by 30’ requirement for the protection of 30% of land and seas by 2030. Whilst seemingly broad, it actually represents an intricate recognition of the need to implement this target across multiple industries which have had a historically significant biodiversity footprint, such as deforestation, primarily driven by the food industry. Improvements in such industries have already been set in motion by existing requirements, such as the Natura 2000, which outlines many areas recognised within the EU and the UK as stores of biodiversity which must be protected.4

While this is a welcome development for the future of the planet, forward thinking investors may also consider the future risks that start to materialise for companies with less visibility over the role of land use throughout their supply chain. Assets that may be considered lower risk and profitable under existing regulation might be increasingly at risk of becoming stranded. Growing recognition of the importance of biodiversity has already driven adoption of frameworks of a comparable scope, and we are seeing promising opportunities within responsibly minded companies as a result. Stora Enso5  and UPM6 are two such examples; these Finnish paper, packaging and wood product companies both source raw materials from their own forestry assets which not only boosts their sustainability credentials, but also provides them with supply chain visibility, benefitting them somewhat versus companies which outsource land use to other biodiverse regions, often developing ones.

Another significant target from COP 15 is the commitment to a 50% reduction in pesticide use globally by 2030. This is of significance to investors as pesticide manufacturers could potentially see a fall in demand for their traditional product set in a tighter regulatory scenario. The way in which these companies respond to changing sentiment and invest in innovation developing less harmful products is likely to have an effect on how much of this risk they can mitigate, and means that careful research must be carried out on a case-by-case basis. For example, Corteva is a leader in the development of seed and crop chemicals, the latter of which provides almost half of total sales. Whilst the company has some positive impact potential in terms of helping to achieve global food production targets, we cannot ignore the significant revenue derived from highly hazardous pesticides (HHPs), which excludes the stock for the Biodiversity strategy.7

Perhaps a more nuanced risk is also highlighted by the target to achieve a 50% reduction in nutrient loss caused by fertilisers, which can be caused by a multitude of factors such as water pollution, run-off of excess chemicals and responsible land use. A helpful case study of how a risk can become an opportunity thanks to innovation can be seen in the case of John Deere, an agricultural equipment provider which has already seen huge demand for its precision agriculture equipment driven by the rising cost of fertilisers, accelerated by the Russia Ukraine war and the effect upon the raw materials supply chain such as potash for which Russia is a major producer. It’s not hard to see how this more efficient use of materials, resulting in less pollution of the environment, can also be significantly beneficial in the fight against biodiversity loss.8

Finally, the GBF requires a 50% reduction in food waste per capita by 2030. While food waste as a global and local issue has already attracted significant discourse and changing consumer patterns over recent years, it has largely focused on the consumer and the individual. This target will increase pressure on the individual and the consumer but also shift more onus onto the governmental (and by extension, corporate) level. It’s clear that efficiencies in food consumption will be needed to achieve this level of savings, at both the retailer and consumer levels, and some parallels can be drawn here with the ongoing energy crisis, another global problem auxiliary to the terrible humanitarian cost of ongoing geopolitical instability. Rising bills and constricted supplies created a huge global emergency efficiency drive to save energy, and the achievements made over the winter of 2022 thanks to rapid adaptability from companies and governments have, in some areas, been surprisingly effective.9 This can help us to be optimistic about the ability to achieve such an ambitious target when it comes to food production.

Companies which can help here include TOMRA, a Norwegian recycling company specialising in sensor-based technology. It operates a dual-pronged approach at both the corporate and consumer level; food producers, wholesalers and retailers can help to avoid waste by implementing more sophisticated screening of food from waste – TOMRA has already installed 13,000 such capabilities globally.10 Consumers can also do their part by using its ‘reverse vending’ machines within supermarkets which allow the return of recyclable food packaging in return for rebates.

Everything must grow

While these targets are a good starting point, it’s important for all of us as investors, consumers, governments, and policy makers not to rest on our laurels and to continue to critically examine these targets, their progress and how to measure them. Monitoring plans for these targets remain in draft status, and with COP 16 approaching in 2024 it will be crucial to make sure these are in place and effective enough to allow meaningful progress towards the 2030 targets which, at that point, will only be six years away. New and existing top-down frameworks such as the Task Force on Climate-Related Financial Disclosures (TCFD) and Nature-related Financial Disclosures (TNFD) provide reasons for optimism, but momentum must be kept up at all levels to hit increasingly urgent goals.

More clarity is also needed between the contentious ‘common but different’ (CBDR) responsibilities and the resolution of differences of opinion between member states against a delicate geopolitical backdrop, and whether this should be enshrined within the framework or confined to climate policy.11

Another source of potential concern is the amount of investment pledged by countries to fight biodiversity loss. It is estimated that the funding needed to protect biodiversity falls between $598-824bn per annum by 2030; so far, pledges are falling significantly short of that number. Whether the pledges can be increased, or if efficiencies can be achieved resulting in the top-down estimate to be overstated remains to be seen.

On a more optimistic note, it’s key to remember that environmental awareness has come a long way since 2015, and while the Paris Agreement needed to be binding upon its signatories, it’s not as crucial thanks to the pressure created by growing evidence, awareness and worst-case predictions impacting the future of our planet, global societies and economy. Land use and its implications are a recurring motif throughout the major COP 15 targets. The trend for increased regulation is a major source of both risks and opportunities for companies – and those which look to adapt, innovate and improve now whilst appreciating the growing awareness of the intrinsic value of natural capital are the companies which are likely to be most successful in the long-term.

Companies shown are for illustrative purposes only as of 03/03/2023. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalised recommendation to buy or sell securities.

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Biodiversity

The urgent need to prevent and mitigate biodiversity loss can create responsible investment opportunities driven by increasingly stringent and tangible global regulations, long-term targets and corporate reporting commitments

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    This market communication is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

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