Shaken Not Burned

Highlighting changemakers and solutions

Glossary - Biodiversity

Biodiversity refers to the variety of species found within a defined area. In today’s changing world, it has become an increasingly important term when looking at corporate and economic performance. This is because biodiversity serves as a key indicator of healthy ecosystems, on which much of the global economy depends - despite its historic exclusion from operational and financial reporting. Ecosystem services, such as pollination, soil health or the natural cycling of water and air, are provided to businesses without being paid for. As the role of these externalities becomes more apparent, businesses must consider how their operations are both impacting and being impacted by changes in biodiversity.

Busting a myth “ESG investments provide lower returns”

One of the biggest criticisms of ESG investment is that it sacrifices financial return for performance against environmental, social and governance metrics, but this is rarely the case. The key consideration when analysing an investment’s performance is to understand the methodology and the time-frame over which its returns are expected. According to research by McKinsey, companies that are focused on ESG have not only seen higher returns over time but also stronger growth in earnings and dividends.

Furthermore, ESG investing is not as simple as excluding industries deemed to be harmful. Every sector has its own pros and cons, all of which must be taken into account and considered separately for each individual asset or company. Specific metrics must be applied, with performance measured against set criteria. This means that even an oil and gas major could be considered an ‘ESG investment’ if it shows signs of progressive change or leadership among its peers. If a company has demonstrably integrated ESG and sustainability into its growth and profitability strategies, then it is likely to improve its long-term performance.

What we’ve been reading this week

• Global investment community increasingly focused on sustainability

  While the debate about ESG continues to rage, the majority of professional investors are well aware of the need to minimise their exposure to sustainability-related risks. According to research from Deloitte and the Fletcher School, investors are also considering the opportunities provided by sustainable investment strategies. Indeed, estimates suggest that the global economy could grow by around $43 trillion from 2021 – 2070, but if it achieves net zero emissions. The research found that 83% of surveyed investors are already incorporating sustainability data into their most fundamental analyses and 79% of respondents have sustainability policies in place, compared to 20% five years ago.
  

• Shell appeal opens in the Netherlands

  The legal issues between the Dutch District Court and Shell are set to frame conversations about the responsibility of the fossil fuel industry. The Dutch arm of Friends of the Earth, Milieudefensie, won a landmark ruling in 2021 to say that Shell had a ‘duty of care’ to the public and that the company must reduce its emissions by 45% by 2030 from 2019 levels. This decision was largely based on evidence of Shell’s prior knowledge of the negative impact of its operations. As yet, Shell has refused to comply with the ruling and has instead launched an appeal to the court. Its outcome will be an important moment in the evolution of climate litigation.
  

• Industry remains misaligned with climate goals

  As Shell mounts its appeal against enforced climate action, the fossil fuel industry as a whole is failing to address climate risk. Research by Carbon Tracker has highlighted three major risk areas, which are described as ‘chronic and mounting’, warning that the sector is pursuing short-term that threaten to compromise climate goals while simultaneously threatening investors’ returns. The three areas are the misalignment between corporate goals and the Paris Agreement, overreliance on unproven technologies such as CCS and the continued attachment of executive compensation to increased production rather than product management.

• Swiss Re warns environmental losses could double in the next ten years

  Global reinsurance giant Swiss Re has published its annual report on the impact of natural catastrophes, warning that impacts could double over the next decade. Globally, insured losses from natural catastrophes exceeded $100 billion in 2023 for the fourth consecutive year, confirming the 5–7% annual growth trend in global insured natural catastrophe losses since 1994.

  Interestingly, the report suggests that individual disasters are not necessarily getting worse, but the areas we’ve built in are at elevated risk. As such, the threat must be addressed through a combination of mitigation and adaptation.

  “This reconfirms the 30-year loss trend that's been driven by the accumulation of assets in regions vulnerable to natural catastrophes,” said Jérôme Jean Haegeli, Swiss Re's Group Chief Economist. “In the future, however, we must consider something more: climate-related hazard intensification. Fiercer storms and bigger floods fuelled by a warming planet are due to contribute more to losses. This demonstrates how urgent the need for action is, especially when taking into account structurally higher inflation that has caused post-disaster costs to soar.”

• Global rethink on debt to push emerging markets investment in adaptation

  The World Bank has released a set of credit data, focusing on sovereign default and private debt recovery, which gives new insight into nearly four decades worth of corporate default rates. Given the sensitivity of debt to the risks of environmental destruction, the information could not be more relevant in today’s world.

  The new data shows that emerging markets are not as risky as typically feared, with lenders generally recovering around 90% of debt following the collapse of the borrower. This is certainly welcome news given the amount of investment required for the transition to a sustainable future. It also showed that sovereign defaults are rare, and that the IFC’s private sector portfolio had a low default rate of 4.1%. For those investments rated as "weak" by IFC's internal rating system, the default rate was only 2.6% during the period between 2017 and 2023, indicating that even investments considered higher risk can perform better than would normally be expected. Hopefully, this will lead to increased appetite for further investments towards transition, mitigation and adaptation.