Investment Institute

Biodiversity crisis: Species extinction and what it means for investors

  • 01 October 2019 (5 min read)

Biological diversity is the infrastructure which supports all life on earth. It underpins the stock of natural capital and allows ecosystems to thrive. It is the sum of all living species, encompassing fauna, flora and the environments they inhabit.

It is also in crisis. Biodiversity loss is an environmental catastrophe developing at a faster pace than climate change – and according to the United Nations (UN), no less than one million plant and animal species are in danger of extinction because of human actions.1

Loss of biodiversity is not only a tragedy of nature but also a major problem for humanity.

The knock-on effects will harm people around the world who depend on biodiversity for their survival. It threatens food security, livelihoods and the economy. On a planet totally deprived of biodiversity, there is no life.

Assessing the damage

The recently-released draft report by the UN Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) makes for sobering reading. It provides ample evidence that the so-called Holocene extinction (named after the current epoch) is unprecedented and is a result of human activity. In the post-war era, populations have modified ecosystems faster and more profoundly than in any other period of humanity. The IPBES 2018 report found that only a quarter of the land mass on the planet is unaffected by human activities, and this proportion could plummet to 10% in 2050.

Biodiversity in numbers2

  • 60% of anthropogenic carbon emissions are sequestrated into ocean and land-based sinks
  • 70% of cancer drugs are natural or synthetic products inspired by nature
  • 75% of food crops rely on animal pollination
  • A quarter of assessed animal and plant groups are threatened with extinction
  • 1,000 times faster extinction rate than the average of the past 10 million years
  • 60% of mammals, birds, fish and reptiles wiped out by humanity since 1970

Three quarters of all the plant, amphibian, reptile, bird and mammal species have become extinct due to overexploitation beyond the natural recovery rate of ecosystems and the cultivation of agriculture3 . Production of food, fodder, fibre and fuel crops, livestock farming, aquaculture, and the planting of trees represent the main agricultural threats. Urban development, trade-related activities, invasive species, industrial pollution, system perturbations and global warming are additional sources of pressure.

What’s fuelling biodiversity loss?

Drivers of biodiversity loss are multiple and complex. They range from the impact of local traffic, to industrial and agricultural activities – all of which lead to land degradation, pollution and destruction of ecosystems – through to global drivers such as climate change.

Many companies harm biodiversity by operating in industries with damaging practices. At the same time, companies are harmed by the loss of biodiversity. Many companies depend on nature either directly through their operations or indirectly through supply chains. Some firms erode biodiversity and are simultaneously harmed by its loss. In fact, most of the companies harming biodiversity are also the more dependent on nature. Fisheries, forestry, agribusiness and hydropower are sectors depending on nature – and pressured by its degradation. The loss of biodiversity and related ecosystems services put these sectors’ business at risk.

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Business’s impact on nature and the impact of nature on these businesses widely depends on where they are based. For example, the main biodiversity pressures in intertropical areas include illegal hunting and deforestation. Elsewhere, biodiversity loss is driven by intensive agricultural activity and its negative impact on insects and bird stocks through the pollution it generates. In addition, while half of all medicines come from plants and other natural elements, across emerging countries 80% of the population rely on traditional plant-based medicines.4

Biodiversity erosion: Investor impact

For investors, biodiversity loss represents a risk to investment returns. For instance, companies which harm biodiversity through their activities will likely have to take on the punitive costs imposed on them because of their practises which harm the environment.

On top of that, firms which rely on biodiversity for their success will see their options and opportunities diminished. And most businesses depend on biodiversity, either directly or through their supply chains. The value of resources and services provided by nature – including water and clean air, pollination and flood control – is estimated to be US$125trn a year, according to a 2014 study.5  Considering that world GDP – the value of economic activity by humans – is US$80trn a year, the global economy is therefore heavily reliant on nature.

Replacing lost natural services can be impossible or very expensive. For example, the Journal of Ecological Economics estimated that labour and technological costs of artificial pollination would represent €153bn6 . This exceeds any economic viability.

Governments, business and the finance sector are starting to question how global environmental risks such as increasing pressure on agricultural land, soil degradation, water stress and extreme weather events, will affect the macroeconomic performance of countries, sectors and financial markets.

Meriting our utmost attention but not a lost cause

AXA Investment Managers believes the unprecedented destruction of natural ecosystems to be an environmental concern, on a par to global warming. There is also a close link between biodiversity loss and climate change, with the former feared to be accelerating the latter.

However, we believe this not yet a lost cause. Investors can play an important role alongside other stakeholders in finding solutions to the crisis. This can be done through allocating investment capital to companies and projects which can help resolve the biodiversity loss crisis. There is also a role for investors to engage with investee companies, to acknowledge this issue and to provide answers.

Methodologies and tools used to measure investors’ biodiversity footprint are under development. These are more complex than measuring a carbon footprint. There are many difficulties in creating generally accepted approaches to measuring biodiversity performance, including the intricacies of biodiversity itself, and the complexity of the cause-and-effect relationships between the activities of organisations and natural environments. While some tools are emerging to help financial institutions map which sectors are particularly at risk – both on the impact and dependency sides – we believe it will take time to identify how our investments depend on or impact biodiversity.

Engaging companies on biodiversity

It is not too late to make a difference and it is our ambition to contribute to transformative change. As investors this means researching biodiversity to better understand how it impacts companies in different sectors, as well as integrating biodiversity considerations into our investment analysis and portfolio construction. It also means allocating capital to investment opportunities are looking to find solutions to the biodiversity loss challenge and monitor and engage investee companies on their performance.

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    This document 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.

    It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document. Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

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