Harry Thomas

Globe WorldWatch

COP15 Part 1, COP26 and the Role of Biodiversity in Financial Markets


With COP15 Part 1 and COP26 now over, the conferences have arguably achieved more than expected but less than hoped. To make sense of the potential impact of these events for the planet and investors, Harry Thomas, Co-Portfolio Manager of the TT Environmental Solutions Strategy, recently held a webinar discussion with leading ecology expert Dr Joseph Bull.  

Dr Bull is a Senior Lecturer in Conservation Science at the prestigious Durrell Institute of Conservation and Ecology. Following his time as a private sector environmental consultant focusing on ecology and climate change, he gained a PhD at Imperial College London. He also completed a postdoctoral fellowship at the University of Copenhagen, and remains a visiting researcher at the University of Oxford. Dr Bull is also a member of the TT Environmental Solutions Strategy Research Advisory Board. Given Dr Bull’s background in conservation and ecology, throughout the discussion there was an attempt to shine a light on how investors can comprehend and mitigate the existential threat of biodiversity loss, which can often be overshadowed by the better-understood issue of climate change. A summary of the discussion can be found below, while the full webinar can be viewed here on our website. 

COP15 and Biodiversity

Harry Thomas: COP15 sets the framework for the biodiversity policy landscape over the next 10 years. It will be fleshed out in more detail in the second part of the conference next year. Can you give us some insight into what changes are likely?

Dr Bull: We’ve had an ongoing biodiversity crisis for many years, with nature in decline all over the planet. Until now much of the global policy effort has been focused on attempts to halt such losses and prevent further destruction. I think one of the big shifts in policy tone that we will see in the second part of COP15 next year will be a focus on restoration and reversing those losses. In fact, there is already talk of having net restorative targets for nature, aiming for more wild habitats and pristine ecosystems than we’ve had in the past. Similarly, there are discussions about bringing many endangered species back from the brink of extinction. Such policy goals are likely to be closely aligned with the UN Decade on Ecosystem Restoration programme.

Harry Thomas: Such an optimistic goal is clearly welcome. If policy does move towards reversing losses rather than simply preventing them, what could be some of the more contentious issues?

Dr Bull: One of the big contentious issues will be deciding the best way to reverse losses. One approach could be to focus on net outcomes. That is to say, we could accept losses in some places if they’re overshadowed by gains elsewhere for an overall net gain in nature. Another approach could be to focus intensely on preventing losses in the first place and then aim to achieve much smaller gains, but everywhere. This may appear to be a subtle difference, but the practical outcomes are quite different. Another contentious point of discussion will be finance. It will be vitally important to decide where the billions of dollars that we need to prevent losses and restore nature across the planet will come from.

Harry Thomas: There will clearly be a pivotal role for corporations and governments here, and on that note it was encouraging to see many large multinational companies commit to being “nature positive” at COP26. This is a term that is starting to gain significant traction, but is still slightly unclear to many. Perhaps you could give us your impression on what “nature positive” means?

Dr Bull: It has been gaining a lot of attention recently and has become a buzz phrase in global biodiversity policy circles. Unsurprisingly, the idea behind “nature positive” is to achieve positive results for nature and a net increase in biodiversity. It aims to go further than existing concepts, contending that it is not enough to simply mitigate the impacts of economic activities. Instead these activities should be genuinely restorative for nature at a very large scale to the extent that they are aligned with increasingly ambitious global policy goals.

Harry Thomas: Hopefully we can create ways in which companies are economically incentivised to do that because that would be the easiest method to get them on board with restoring nature and biodiversity. While this question is perhaps less closely aligned with the concept of “nature positive”, could you give us an idea of the things that companies can stop doing now in order to avoid harm to nature? Could you also give us a sense of some of the opportunities for companies to restore nature?

Dr Bull: In actual fact if the aim is to achieve a “nature positive” state, you have to start by avoiding impacts wherever possible, because if you focus too heavily on restoration and compensation for impacts then it becomes incredibly expensive and difficult to work out where you actually do that restoration work on the planet. One of the best ways that companies can reduce their impact is to minimise their activities in certain geographies such as the Tropics where biodiversity is relatively intact and therefore damage would be far more profound than elsewhere. In terms of opportunities for substantial ecosystem restoration, some of the best exist within agriculture. On idea gaining traction is to restore abandoned or marginal farmland that people are no longer able to make a decent profit on from farming. There are also many opportunities in the forestry industry, which is moving towards a new paradigm of recognising forests not only as production landscapes, but also as important hosts for increasing biodiversity. One of the biggest underappreciated areas of opportunity is freshwater terrestrial aquatic systems such as rivers, lakes and wetlands. They are under huge threat globally, despite their importance for biodiversity and the services they provide to people.

Harry Thomas: Shifting the focus to the investment world, a lot of these potential changes – whether it’s managing forests in a way that improves biodiversity or better protecting freshwater systems – might involve additional regulations and costs for companies. Do you think this is how companies will come to primarily view the challenge of biodiversity conservation – as an additional burden – or do you see many new markets, products and services emerging that will create economic opportunities to entice companies to invest in the space.

Dr Bull: It’s not particularly exciting to say, but I expect some of the biggest gains in biodiversity conservation to come from incrementally improving the efficiency of production systems. Examples include improving the efficiency of agricultural yields so that we use less land for human activities, or improving the efficiency of agricultural chemicals to reduce run-off into aquatic systems. Technologies that accomplish this will not only help to conserve biodiversity at a large scale, but could also represent excellent investment opportunities. There are many such technologies currently being developed, suggesting that companies are seeing opportunities to invest in the space.   

Harry Thomas: It’s an interesting point and one that’s caused me to reflect on the exposures that we have in our strategy that are biodiversity focused. Roughly one-quarter of our positions are held primarily because of their biodiversity conservation credentials rather than their impact on climate change mitigation. Of those names, many are linked to improving land use efficiency, including seed technology and irrigation companies. There are already certain publicly-listed businesses that are improving the efficiency of agriculture, forestry and other land intensive activities, but I suspect that in the next couple of years there will be a lot more coming to market. It will certainly be an area we focus on.

Dr Bull: While the portfolio is still more focused on the transition to a low carbon economy than it is on biodiversity conservation for a variety of reasons, it’s important to remember that the two issues are fundamentally intertwined. Indeed, one of the best tools we have to mitigate climate change is nature-based solutions such as sequestering carbon through habitat restoration, or not releasing it in the first place by avoiding deforestation.

Harry Thomas: Absolutely. As you know we share one-third of our revenue with carefully selected environmental charities and one of the key factors that we considered when we partnered with rewilding charity Heal is that their work is clearly beneficial from both a carbon and biodiversity perspective.

Perhaps now is a good time to turn to what red flags investors should be looking for to show that a company is not adequately taking into account the impact of its activities on biodiversity.

Dr Bull: One red flag would be if a company doesn’t have a sustainability strategy, or fails to mention biodiversity, conservation, ecology, or nature in its strategy. That’s quite a high bar to set as most companies don’t. If they do mention biodiversity as part of their sustainability strategy, what do they say about it? Are there quantifiable commitments to smart targets related to biodiversity. If there are concrete commitments, are they sufficiently comprehensive? For example, a company may say that it has a target to reduce its impacts on biodiversity and measures that in terms of the amount of timber products that it buys which are certified by the Forestry Stewardship Council. Whilst this is a good start, it’s unlikely to be a sufficiently comprehensive strategy. 

Another red flag may be the sector that a company operates in. A lot of extractive sector companies take biodiversity impacts quite seriously and talk about them publicly. If an extractive company failed to talk about biodiversity in any meaningful way then that would be a warning sign as they’d likely be having significant impacts. Similarly, if a consumer products, clothing or food company didn’t acknowledge their biodiversity impacts all the way up the supply chain or downstream in the value chain then that would be a red flag as it is highly likely that the majority of their impacts will lie there. 

Harry Thomas: That’s a very helpful framework. In our strategy we’ve created a biodiversity engagement guide with tailored questions to ask companies on a sector-by-sector basis. It’s important to be asking very different questions to a solar company versus a recycled packaging company, for example, as they are likely to have different types and levels of impact.

Dr Bull: That’s a really good example of the importance of considering the supply chain. There have been some recent interesting academic analyses of renewable energy technologies and where their potential impacts on biodiversity could lie. Running with your example of solar panels, we know that there will be substantial overlap between the world’s biodiversity critical areas and the location of mines used to extract metals for solar panels. If there is a solar panel manufacturer that has no awareness of where their materials are coming from and doesn’t consider the biodiversity impacts in their supply chain then again it would be a red flag as these impacts could be huge.

Harry Thomas: I think you’d be surprised at the range of responses we get when we ask a company about their approach to biodiversity. There are companies that go into quite a bit of detail and have quantifiable targets, while others don’t even pay lip service to it. This is clearly still a nascent area, and at this early stage it feels like asset managers have a big role to play in educating companies about biodiversity and getting them to engage with it, rather than necessarily discerning between companies on the basis of how well they respond to such questions. There’s probably not a large enough population of companies that are responding in detail to questions on biodiversity strategy in order to make a call as to whether one is doing it better than another.

Dr Bull: I agree. We did a study that looked at which Fortune 100 companies were making biodiversity commitments. The variety was quite surprising, even from such a small sample. It’s not just the companies that need the education, I think the messages being delivered by the conservation community could also be dramatically improved. We’ve done a much better job as an environmental science community of explaining the issue of climate change. We’ve provided a metric – tonnes of CO2 equivalent – as a way of measuring a company’s environmental impact, and we’ve developed a protocol for reporting and disclosing that impact. Unfortunately we don’t have anything comparable for biodiversity at this stage. We need to work on delivering a more focused and coherent message about what the biodiversity issue is about, and how biodiversity impacts and gains can be measured.

Harry Thomas: Staying on the topic of biodiversity, it would be interesting to get your perspective on what you would be demanding of us as asset managers if you were an investor watching this webinar.

Dr Bull: Firstly, how are you measuring biodiversity? Are you talking about biodiversity in terms of species, habitats, or even the benefits people get from it? Secondly, how far up the value chain do you go – are you talking about direct biodiversity impacts or more broadly than that? This gives you an idea of the scale of ambition and seriousness with which the issue is being taken. You can only really take biodiversity seriously if you’re looking at impacts all the way up and down the value chain. Thirdly, I’d want to know if are there any sectors, companies, or activities in certain geographies that you’re ruling out because the biodiversity impacts are too great? Exclusion on biodiversity grounds is a big subject of debate in the conservation science field – should there be some ‘no go’ areas to help mitigate biodiversity impacts? Finally, I’d ask about your overall objective. Again this goes back to the very start of this conversation – it’s about trying to assess the scale of your ambition. Are you looking for companies that mitigate their impacts or seek to prevent further impacts from happening? Or are you looking at companies, activities and sectors that are actually restorative?

Harry Thomas: The point you make on exclusions chimes with us particularly because of conversations we’re having as a team at the moment. We have a well-defined list of sectors and sub-sectors such as clean energy and clean transport that we focus on because they provide solutions to environmental problems. We don’t necessarily have an exclusion list; companies that are not providing environmental solutions simply won’t meet our stringent criteria and therefore won’t be held in the portfolio. This includes the vast majority of companies, from old world energy players to the internet giants. But even within the specific environmental thematics that we are exposed to, there are areas and companies that we arguably shouldn’t be investing in because of their impact on carbon emissions and biodiversity. For example, EV producer Rivian recently IPO’d in the US to much fanfare. While many investors might see this company as helping to solve environmental problems, the reality is that it is making pick-up trucks that are large and heavy, with extremely powerful engines. If we analysed the biodiversity impacts that a company such as this has on its supply chains, they are likely to outweigh the impacts of a company that manufactures lower powered, smaller passenger cars with internal combustion engines.


Harry Thomas: Turning to COP26, I’d be very interested to hear how you would appraise the outcomes. From my perspective, given the extreme warning issued by the IPCC that we only have 11 years left before our CO2 emissions will ultimately raise global temperatures by 1.5 degrees, COP26 felt disappointing, particularly the looseness of the language around coal. But perhaps my expectations were misplaced because it’s not until next year that we’ll see the tightening up of national targets and the translation into action. 

Dr Bull: Climate change is clearly a major problem and the IPCC has given a stark warning which is well founded. We certainly need to do everything we can and as quickly as possible to reduce emissions to a level that’s consistent with warming of 1.5 degrees or below. That said, my overall assessment of COP26 is actually one of cautious optimism because I think it’s a step in the right direction. It’s not the giant leap that many people were hoping for, but I don’t think it was ever going to be that because there are so many different national situations and competing priorities that are trying to merge into one global agreement. What I believe we can reasonably hope for in these COPs are incremental steps in the right direction, and that was certainly evident at COP26. While the language on coal was unfortunately watered down at the last minute, the fact that coal was even mentioned in a statement within a UN document such as this is a huge step forward based on where we were before. As projections are updated over time based on pledges made at various COPs, predicted temperature rises by the end of the century are falling, suggesting progress is being made. 

Harry Thomas: That is an interesting perspective on it and there were definitely some pockets of success. One of them was the commitment to end and reverse deforestation by the end of the decade. This is a very ambitious goal – how enforceable do you think it will be in practice? Historically, have we been successful at creating mechanisms to ensure policies such as this are effective and adhered to?

Dr Bull: The success of previous policy mechanisms to prevent and reverse deforestation has been mixed. It is often tied to the political situation in a certain country at a given time. Brazil is a good example of the political backdrop shaping deforestation dynamics from one year to the next. The announcement at COP26 on deforestation and land use was important because it is a high level commitment. This is exactly the kind of top-down policy that we need to come out of the COP events because they demonstrate the direction of travel in the global community in terms of the environment. The announcement was also important because it included other land uses in a range of ecosystems. In the past it has been very common to talk about forests, whilst at the same time ignoring many other equally or even more important habitats, not only from a biodiversity perspective but also from a climate change mitigation point of view. You’re absolutely right to question whether this commitment has the teeth to change deforestation rates across the planet. We will need to see how it is implemented across the different member states before coming to a conclusion. Hopefully it’s something that will act as a signpost to the direction of travel that the planet needs. If we manage to get anywhere near to preventing deforestation by 2030 then that is a huge step forward.

Harry Thomas: Another area that was heralded as a success was the commitment to cut methane emissions by 30% by 2030. However, several of the biggest emitters such as China, Russia and Australia did not sign up to the pledge. How can we exert leverage on those countries to encourage them to engage and, where countries have committed, ensure that this goal is achieved?

Dr Bull: Having methane included in high level policy discussions and commitments is a big step forward. It’s very easy to forget that for a long time people have only really thought about climate change in terms of carbon dioxide, but there’s clearly a long list of other harmful greenhouse gases. A high level pledge on methane reflects a deeper, more nuanced and comprehensive understanding of the climate change issue. In terms of how we bring more countries on board, I’m a big fan of the ‘soft policy’ approach. The fact that so many other countries are joining up to these commitments and that public awareness of these issues is growing rapidly should put pressure on even the biggest emitters to sign up. I think if you want meaningful action to take place as a result of these policy commitments there needs to be a way of bringing these other countries on board that isn’t coercive. Thankfully there are encouraging signs that other parties will eventually join of their own volition as issues such as this gain momentum. For example, there was an unexpected joint announcement from China and the US about cooperating on environmental issues.

Harry Thomas: On that potential cooperation between China and the US, for me one of the most exciting aspects over the past couple of years is that climate change mitigation has gone from being seen as a tax in the form of higher costs that are paid now in order to reap a benefit in 20 or 30 years to a point where people are recognising that we can actually achieve lower energy costs using renewable power than we could using hydrocarbons. Governments and businesses are realising that the world is changing and that they need to be at the forefront of this transition, innovating and capturing leadership in the industries that are going to be the champions of tomorrow. I definitely feel that China has seized the initiative, becoming a global leader in EVs and solar predominately, but also in wind to a lesser degree. While cooperation between countries such as the US and China on environmental issues is clearly good, competition between rival powers and companies could also be a force for good if it accelerates the adoption of green technologies.

Dr Bull: That’s right. Humans have very short-term memories and it’s easy to forget how seismic the shift has been in the last 5-10 years in terms of recognising climate change and biodiversity loss and how much these issues have become mainstream policy for governments and the private sector. The only thing I’d add is that the finance industry needs to come on board as that would be a truly transformational development. This is partly why I enjoy working with TT International and why I’m really pleased with what you’re doing here.

Harry Thomas: Yes I agree absolutely. Bringing the discussion back to investment, one of the reasons I felt slightly deflated after COP26 is that there were few tangible reasons to change the financial models of my investee companies. For example, if there had been a commitment to stop building any more coal fired power plants then I could conceivably predict that the incremental growth would be replaced by renewables and increase the opportunity set for some of the portfolio holdings. Are you able to point to areas where there could be a change in addressable market for a technology as a consequence of COP26, or is it a case of waiting until next year when these high level commitments are fleshed out

Dr Bull: I think you’re right to say that we may need to wait until next year for more clarity. However, there was a lot of discussion around the decarbonisation of energy supplies, as well as land use and agriculture. There were even discussions on agroecology, which has flown under the radar for too long. If I was looking to invest in technologies that reduce the emissions intensity of economic activities then agriculture is certainly one of the big sectors I’d look at. Discussions around forests and other ecosystems being used to mitigate emissions could also spark significant interest from companies and investors in terms of thinking about which ecosystems could be restored around the world in order to sequester greenhouse gas emissions and sell those credits in the international marketplace. 

Harry Thomas: One of the aspects of COP26 that I know you thought was particularly exciting was the notion of linking together carbon markets and internationalising certain markets that are currently stranded. In time, there could hopefully be a standardisation of voluntary carbon credits to the extent that there was significant international trading of them. In addition to carbon credits, I’m also starting to see plastic credits, but as biodiversity becomes more quantifiable in terms of corporate impact, are we at a stage where people are beginning to discuss biodiversity credits – the concept that a company can sell its changing corporate behaviour as something that is tradeable?

Dr Bull: Absolutely, that is one of my core areas of research and in fact there are already regional and national policies that effectively enable markets in biodiversity credits. There are still many creases to iron out, but evidence suggests that they’ve been successful in some cases. Unfortunately one of the big differences between carbon credits and biodiversity credits is that there is a lot more scope for international trade in the former. It is relatively easy to identify a company’s greenhouse gas emissions in one part of the world, and then offset them with credits from another part of the world because the emissions are all being pumped into the same atmosphere, whereas biodiversity credits must be a lot more localised and specific to be reasonable. For example, you can’t exchange the loss of elephants in one country for the gain of eagles in another. But this doesn’t mean that international biodiversity credits cannot exist in some sense. We know that many of the impacts that multinational organisations have on biodiversity will be higher up the supply chain. These businesses could analyse where they are buying their commodity inputs from, assess their impacts at the root of the supply chain, and fund localised biodiversity conservation efforts to offset these impacts. While this concept is slightly different to international carbon credits, international biodiversity compensation is very much possible and is an active area of research.  

Harry Thomas: I hope that investors found that discussion as enjoyable and informative as I did. Clearly there is a product that sits behind this discussion – the TT Environmental Solutions Strategy – which we’re extremely proud of from both an investment and environmental perspective. If you’d like to hear more about the strategy then please contact your appropriate sales representative using the details on the following page. 

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