Biodiversity: The Roots of Our Economy
Biodiversity loss directly threatens sustainable corporate profitability and global economic growth.
Key Takeaways
Deeply intertwined with climate change and water scarcity, biodiversity loss impacts investors by affecting economic growth and innovation.
Biodiversity’s rapid decline stresses the natural systems we rely on to provide food and water and remove toxins from the air and oceans.
Key sectors (e.g., energy, tourism) and countries (e.g., Australia, China) heavily contribute to and face risks from biodiversity loss.
Biodiversity Drives Economic Growth and Sustains Life Itself
Over half (55%) of the world’s gross domestic product (GDP), estimated at roughly $58 trillion, depends on healthy biodiversity and thriving ecosystem services. Of the nearly 14,000 companies in the S&P Global Broad Market Index (S&P Global BMI), 68% depend significantly on nature.1 (Encompassing both developed and emerging markets stocks, including the U.S., the S&P Global BMI includes publicly listed companies with capitalizations larger than $100 million and annual trade values exceeding $50 million.) In other words, the global economy’s long-term health is rooted in biodiversity.
The 15th Conference of the Parties (COP15) meeting in December 2022 focused on biodiversity risks and opportunities for governments and companies. COP15 resulted in a landmark agreement, the Global Biodiversity Framework (GBF), addressing biodiversity loss and restoring ecosystems. Among other goals, the GBF aims to halt the human-induced extinction of threatened species and reduce the extinction rate of all species tenfold by 2050.2
At American Century Investments, most of our strategies involve investing in companies, industries and countries that depend on and impact biodiversity. This article discusses why biodiversity has such far-reaching and profound implications for investors. It also describes the framework for analyzing how our investing impacts and is affected by the damaging loss of biodiversity the world now faces.
What Is Biodiversity?
As the word suggests, “biodiversity” refers to the range of all forms of life on earth. It encompasses humans and other animals, plants and their ecosystems. Biodiversity and ecosystems evolved to be mutually supportive — when biodiversity declines, these ecosystems are threatened and vice versa.
Biodiversity is essential for meeting our basic needs, such as food, fuel and shelter. It is also a crucial source of medicine. It can potentially lead to new health care and pharmaceutical industry developments and inspire new products and services. Biodiversity has cultural value because it involves animals and plants with spiritual or religious significance, leisure activities such as fishing and bird-watching, and various foods that are meaningful to certain groups.
To understand its all-encompassing effects, we think it helps to separate the overall concept into biodiversity and the ecosystem services and natural capital it entails.
Biodiversity
Biodiversity refers to the wide range of all living things, from single-celled amoebas and tree moss to every plant, insect, fish, amphibian, reptile and mammal. The concept applies to entire ecosystems, referring to diversity within oceans, rivers, forests and deserts, species variation (the number of species and size of a species’ population) and the genetic diversity needed for an individual species’ resilience and survival.
Ecosystem Services
Ecosystem services refer to all of nature's benefits to humans. These benefits include the food, fuels and medicines we consume directly, as well as essential services such as filtering water, pollinating crops, sequestering carbon dioxide (CO2), and helping to protect coastlines from floods.
Natural Capital
Natural capital refers to the natural assets that provide ecosystem services, including the mangrove trees that purify water, bees that pollinate crops and forests that naturally capture CO2. Biodiversity loss can reduce the quantity, quality and resilience of natural assets and the essential ecosystem services they support.
It’s all linked together. Preserving biodiversity protects the natural capital needed to provide the ecosystem services we rely on every day.
Figure 1 | Trees – A Biodiversity Perspective
Biodiversity | Encompasses 73,300 species of trees worldwide.3 |
Ecosystem Services | Regulate temperature, provide shade, filter air pollutants, sequester CO2, manage and filter rainwater, stabilize soil and maintain soil health, provide food and shelter for numerous species, and help improve our mental and physical well-being. |
Natural Capital | Includes rainforests, old-growth forests, woodlands, mangrove swamps, and city trees. |
Source: American Century Investments.
The Biodiversity Crisis Is Real
We are experiencing a human-caused mass extinction — often referred to as the Holocene extinction or sixth great extinction — that may be irreparable.4 Ecologically speaking, humans have become super predators who continuously prey on apex predators and other animals and plants, with global effects on food webs and ecosystems.5
Over the last 50 years, vertebrate species populations have declined by roughly 70%.6 Some 30% of coral reefs have died off, and 75% of those that remain are at risk of bleaching. Wetlands and natural forests are disappearing at an unprecedented pace. While some extinctions have occurred naturally throughout history, the current extinction rate is 100 to 1,000 times greater than the average rate over the past 10 million years.7
Moreover, as every ecosystem consists of mutually dependent components, extinctions and collapsing biospheres lead to even more extinctions and collapses at an increasing rate. If we continue down this path, we will lose flora, animal species and entire ecosystems that will never recover.
Human Activity and Biodiversity Loss
Human activity is the primary cause of this loss in biodiversity. That includes agricultural processes that deplete nutrients in the soil, overharvesting (fishing and logging), urban development, fossil fuel production, pollution and climate change.8
Biodiversity loss, climate change and water scarcity are deeply intertwined. Clearing land (deforestation) for other uses kills plant and animal populations while removing the trees that absorb CO2. That worsens climate change, which increases droughts and intensifies water scarcity. Warming oceans and dried-up riverbeds drive out aquatic plant and animal life, reducing biodiversity.
In just one example of how biodiversity loss can affect human health, the World Health Organization notes that if biodiversity loss continues, wildlife-borne viruses such as COVID-19 will arise more often as the buffer zones that protect us from them break down.9
In short, we believe quick and conscious action is needed to reduce biodiversity loss to help ensure the health and continuity of human society and the global economy.
Yes, because nothing exists in isolation. For example, if a plant-eating insect becomes extinct, the plant that the insect used to eat could grow unchecked and choke off other plants.
Deprived of a key food source, birds that used to feed on this insect could then start eating other things, upsetting the natural balance of “supply and demand” for each species in the ecosystem before the extinction.
This result could impact numerous other species by having a domino effect on the entire system.
Why Should Investors Care About Biodiversity?
Biodiversity demands attention because industries like agriculture, food and beverage, apparel makers and tourism depend on it. Our food, health and economic well-being rely on stable and thriving ecosystems. Natural capital is a critical way of meeting basic needs, and companies rely on nature to make products that sustain and improve the quality of life.
In its Global Risks Report 2024, the World Economic Forum (WEF) ranks biodiversity loss and ecosystem collapse as the third most severe threat humanity will face in the next 10 years.10 China, the EU and the U.S. have the highest economic exposure to nature-dependent industries. Construction, agriculture, and food and beverage production are the largest highly nature-dependent industries.
Biodiversity loss directly threatens sustainable corporate profitability and overall economic growth.
European Union Deforestation Regulation
Expanding the amount of land used to produce commodities such as cattle, cocoa, wood, soy, palm oil, coffee and rubber, along with the products made from them (e.g., leather, furniture, tires, and various food products) is linked to deforestation and forest degradation. This, in turn, adds to greenhouse gas emissions and biodiversity loss.
The EU’s regulation on deforestation-free products, which came into force in 2023, seeks to promote the consumption of “deforestation-free” products and reduce the EU’s impact on global deforestation and forest degradation. Under this regulation, any operator or trader who sells or exports these commodities must be able to prove the products don’t originate from recently deforested land and haven’t contributed to forest degradation.
Industries Depend on and Impact Biodiversity
In many sectors of the economy, the ability to supply enough of a given product to meet demand while delivering profits to shareholders depends on healthy biodiversity. According to the WEF, half of the world’s GDP is moderately or highly dependent on nature and its services, and ecosystems in 20% of countries worldwide are at risk of collapsing due to declining biodiversity and the loss of ecosystem services that decline is causing.11
Figure 2 | Biodiversity and the Apparel Industry
How the apparel industry impacts and depends on biodiversity and nature
Dependence on Biodiversity | Roughly 25% of textile fibers and more than 50% of apparel are cotton-based.12 Degraded ecosystem services will increase the cost of growing cotton, pushing up prices. This will affect industry profits and hurt consumers. |
Negative Impacts on Biodiversity | Supply chains serving the apparel industry can degrade soil and pollute waterways. Dyeing textiles may contaminate freshwater sources through chemical run-off and non-biodegradable waste. |
What Can the Industry Do? | While organic cotton farming is feasible, it is not likely to be scalable or affordable in the near term. Innovators have created fibers from cellulose, wood pulp and agricultural waste as alternatives. Biodegradable polyesters and biopolyesters have also been developed. More investment and innovation are needed to make these approaches scalable. |
Source: Anna Granskog, Franck Laizet, Miriam Lobis, et al., “Biodiversity: The Next Frontier in Sustainable Fashion,” McKinsey & Co., July 23, 2020.
Our Areas of Focus and Framework for Analyzing Biodiversity Risk
While biodiversity affects investment risk and outcomes in almost every industry and region of the world, we focus on two aspects of the investable universe:
Sectors most affected by and contributing the most to biodiversity loss.
Key biodiversity themes in six countries/regions widely deemed as biodiversity hotspots.
In this section, we describe our framework for identifying and analyzing how investing affects and is affected by biodiversity using six critical examples. Examining the investable world with this framework allows us to target and engage in areas where biodiversity issues present the most pressing risks and compelling opportunities.
6 Sectors Most Connected to Biodiversity
Food
Food-related supply chains put immense pressure on ecosystem services globally. Approximately one-third of the earth’s land surface and 75% of freshwater resources are now used to produce crops or raise livestock. Activities in this sector, such as deforestation, overfishing and generating plastic waste, are extreme threats to protecting and preserving biodiversity.13
Infrastructure
Urban areas have more than doubled since 1992, and building urban infrastructures converts land from its natural state, removing trees and other plant life and destroying animal populations that live there. Sourcing materials for infrastructure development also requires significant land, which creates pollution and further disrupts plant and animal life. Housing, public buildings, utilities, vehicles and transportation infrastructure are responsible for about 25% of the pressure humans place on biodiversity.14
Energy
Extracting oil, gas, and coal directly affects biodiversity. Most of this sector’s impact comes from burning these fossil fuels, polluting the air and water and generating greenhouse gas emissions. Climate change affects ecosystems through warming oceans, severe heat waves and drought, torrential rains and destructive floods.
Metals and Mining
Like energy, most of the mining sector’s effects on biodiversity are indirect. For example, while mining itself represents less than 1% of total land use, mining activities destroy habitats and generate pollution and toxic emissions that harm the surrounding flora and fauna and may threaten various species and the overall ecosystem.
Apparel
A significant percentage of clothing is made from materials that grow in nature. Roughly 25% of textile fibers and more than 50% of all clothes are cotton-based.15 The primary effects of apparel on ecosystems are through land use and conversion, as well as raw material extraction and waste, including dyes used in making fabric.
Tourism
Tourism can harm biodiversity by destroying natural habitats, creating pollution, and overstressing limited natural resources. Heavy visitor traffic disrupts sensitive ecosystems. Tourists and suppliers can overconsume local natural resources and unwittingly introduce diseases and invasive plant and animal species not native to the local environment. This can severely disrupt and even destroy ecosystems.
On a positive note, supporting biodiversity can generate revenue for the tourism industry. The global ecotourism market generated $216.5 billion in 2023 and is expected to grow to $759.9 billion by 2032.16
Key Themes in 6 Biodiversity Hotspots
Biodiversity, threats to biodiversity loss and conservation efforts aren’t uniform globally. Here, we focus on six biodiversity-rich countries and regions where we typically invest and the industries in these areas that we deem critical in terms of biodiversity challenges and opportunities.
Our analyses incorporate how government regulations and corporate pledges will help these countries better preserve biodiversity, strengthening their economies and populations and supporting business opportunities.
Cattle Farming in Brazil
Brazil has the second-largest number of cattle globally — 22.2% of the world's total, according to the U.S. Department of Agriculture’s Economic Research Service — behind only India, which doesn’t raise cows for consumption. Cattle farming is a massive source of methane and contributes to deforestation in the Amazon.
Infrastructure in India
With almost 18% of the global population crammed into just 2.4% of the earth’s landmass, India’s challenge is to sustainably allocate land and resources to support over 1.4 billion people. The Indian government allocated $134 billion for infrastructure projects in its 2024/2025 budget.17 However, infrastructure projects in India often don’t manage environmental impacts upfront and may call for deforestation in areas with endangered species. This results in delays and cost overruns, which increases risks to investors by hurting a project’s cash flows and profitability.18
Fast Fashion in China
More than 26 million tons of clothes are thrown away in China annually, and as the world’s largest producer of fast fashion, China is responsible for almost 22% of the 92 million tons of textile waste generated worldwide each year.19 The apparel industry harms biodiversity by converting land to farm use to grow cotton, deforestation to raise cattle to produce leather, and water pollution from chemical dumping, which all cause habitat loss for the species that need land and water.
Agriculture in the U.S.
Maintaining the U.S. food supply will require significant changes to conserve water and protect biodiversity. For example, California is the country’s largest producer of agricultural products (crops and livestock), accounting for almost 11% of the nation’s total. The state has some of the richest biodiversity in the U.S. thanks to its long, diverse coastline, forests, mountains and desert.20 But it also suffers from constant water stress, and wildfires and droughts have become routine.
Tourism in Australia
In Australia, climate change is raising sea levels and fueling marine heatwaves, longer fire seasons and extreme heat patterns. The Great Barrier Reef has experienced eight mass bleaching events since 1979, with over 50% of its coral bleached. This biodiversity loss could have a substantial economic impact because the Great Barrier Reef Marine Park and related commercial activities provide about 64,000 full-time jobs and generate more than AU$6.4 billion annually for the national economy.21
Palm Oil Production in Southeast Asia
Southeast Asia is home to an estimated 15% of the earth’s tropical forests. The region also supplies most of the palm oil in many food products. Producing palm oil is a major cause of deforestation, destroying the habitat of endangered species such as the orangutan, pygmy elephant and Sumatran rhino. Converting carbon-rich peatlands into soil palm plantations releases millions of tons of greenhouse gases into the atmosphere.22
Our Framework for Evaluating Biodiversity Risk
Given biodiversity’s widespread implications for investors, our sustainability-related research and engagement protocols systematically analyze how biodiversity affects and is affected by our investee companies. We evaluate the risks and opportunities a company faces regarding the transition to a sustainable, low-emissions economy using three concepts: adaptation, mitigation and innovation. Figure 3 shows how these concepts apply to food and beverage companies.
Figure 3 | Climate Transition Framework for Biodiversity in Food Companies
Adaptation | Is the company using crops grown with regenerative agriculture techniques? Is it seeking drought-resistant crops and finding other ways to reduce its water use in water-scarce regions? |
Mitigation | Is the company minimizing land use in its operations? Is it reducing plastic packaging, which often ends up in oceans and creates microplastics that harm humans and other animals? |
Innovation | Is the company developing new organic or plant-based products that appeal to a growing segment of the population? |
Source: American Century Investments.
We leverage two important resources to analyze the extent to which a specific company is exposed to and working to mitigate biodiversity risk.
ENCORE
ENCORE (Exploring Natural Capital Opportunities, Risks and Exposure) is a U.N. tool that links environmental changes to economic consequences. We use ENCORE to identify natural capital dependencies within our six key sectors and geographies.
Nature-Related Risk & Opportunity Management and Disclosure Framework
In June 2024, the Taskforce on Nature-Related Financial Disclosures (TNFD) released its final recommendations covering nature-related disclosure requirements based on the four pillars of governance, corporate strategy, risk management and metrics and targets. We leverage the TNFD’s developing framework to assess company-specific biodiversity risk and mitigation efforts.
Using a four-stage process combining bottom-up research with active ownership activities, we leverage these resources to evaluate exposures independently on a company-by-company basis.
Snapshot of Our Process
Stage 1: Uncover
Uncover natural capital dependencies in six sectors and six geographies using ENCORE.
Stage 2: Evaluate
Evaluate company biodiversity mitigation using the TNFD framework and disclosures.
Stage 3: Identify and Engage
Identify and engage with companies that show high-risk biodiversity exposures.
Stage 4: Reevaluate and Reengage
Reevaluate and reengage with these companies to track changes and progress.
Figure 4 illustrates how we apply our framework to evaluate an individual real estate company’s exposure to biodiversity risks and identify metrics and targets to discuss when we engage with company management.
Figure 4 | Real Estate Company Example
Uncover Industry Risks and Remediation Efforts | Evaluate the Company Using the TNFD Framework | Engage with the Company on Key Issues | Reengage with the Company for Updates |
|---|---|---|---|
Real estate activities affect: • Groundwater Bioremediation efforts include: • Filtration | The company has strong disclosures regarding its water and nature-related risks but hasn’t provided sufficient information as defined under “Metrics and Targets.” | Discuss best practices concerning missing metrics and targets with company management. | The company has set biodiversity targets and reduced its water intensity per its targets. |
Sources: ENCORE and American Century Investments.
We apply a supply chain-oriented perspective to analyze the six biodiversity hotspots described earlier. With this approach, we engage with companies to encourage them to develop more biodiversity-friendly supply chains.
Figure 5 shows categories we may use when engaging with company management on biodiversity and the types of questions we might ask in each category.
Figure 5 | Engagement With a Hypothetical Food Supplier
Sources of Palm Oil from Indonesia
Sustainable Opportunities | Remediation Efforts | Government Policies | Theme-Specific Best Practices | Risk Mitigation |
|---|---|---|---|---|
R&D to develop products without palm oil or that use sustainable palm oil? | Reforestation efforts? | Impact of a change in political leadership on Indonesia’s policy to withhold permits for new palm oil plantations? | Roundtable on Sustainable Palm Oil (RSPO) certification? | Regular supplier audits? |
Source: American Century Investments.
We also engage with third parties, including nonprofit organizations, to supplement our research and support proxy measures about biodiversity where possible.
Preserving the ecosystems that support economies everywhere will require changes in production processes and consumption habits. It will also involve ambitious goals and collaboration across governments, industries, nonprofit organizations and investors who can supply the capital needed to bring about meaningful change.
At American Century Investments, we champion helping our clients to Prosper With Purpose®. We believe that to be the best possible stewards of our clients’ capital, we must understand how this capital is exposed to risks related to biodiversity loss.
Using a framework that includes research and engagement, we seek to understand biodiversity risks and the opportunities that companies have to change how they operate to help preserve nature-related capital in all its forms while also continuing to drive shareholder value.
We are committed to helping our investee companies and clients understand how preserving biodiversity supports economic development and an improved quality of life for everyone.
Authors
Senior Sustainable Research Analyst
Sustainability: It’s in Our Genes®
Sustainability isn't just something we practice; it is part of who we are as a company and as global citizens.
S&P Global, “How the World’s Largest Companies Depend on Nature and Biodiversity,” May 10, 2023.
United Nations Environment Program, “COP15 ends with landmark biodiversity agreement,” December 20, 2022.
Will Dunham, “Scientists count the world’s tree species (spoiler: It’s a bunch),” World Economic Forum and Reuters, February 8, 2022.
William J. Ripple, Christopher Wolf, Thomas M. Newsome, et al., “World Scientists’ Warning to Humanity: A Second Notice,” BioScience 67, no. 12 (2017): 1026-1028.
Chris T. Darmont, Caroline H. Fox, Heather M. Bryan, et al., “The unique ecology of human predators,” Science 349, no. 6250 (2015): 858-860.
World Wildlife Fund, “68% Average Decline in Species Population Sizes Since 1970, Says New WWF Report,” Press Release, September 9, 2020.
Hannah Ritchie and Max Roser, “Extinctions,” Our World in Data.org, accessed July 9, 2024.
Intergovernmental Panel on Climate Change, “Special Report on Climate Change and Land: Chapter 4, Land Degradation,” August 2019.
World Health Organization, “WHO-Convened Global Study of Origins of SARS-CoV-2: China Part,” April 6, 2021.
Simon Torkington, “50% of the Global Economy Is Under Threat from Biodiversity Loss,” World Economic Forum, February 7, 2023.
World Economic Forum, “Half of World’s GDP Moderately or Highly Dependent on Nature, Says New Report,” News Release, January 19, 2020; Swiss Re Group, “A fifth of countries worldwide at risk from ecosystem collapse as biodiversity declines, reveals pioneering Swiss Re Index,” Press Release, September 23, 2020.
Torsten Kurth, Gerd Wübbels, and Adrien Portafaix, et al., “The Biodiversity Crisis Is a Business Crisis,” Boston Consulting Group, March 2, 2021.
Kurth, Wübbels, Portafaix, et al., “The Biodiversity Crisis Is a Business Crisis.”
Kurth, Wübbels, Portafaix, et al., “The Biodiversity Crisis Is a Business Crisis.”
Ibid.
Fortune Business Insights, “Ecotourism Market Size, Share & Industry Analysis, by Type (Nature & Wildlife Tourism, Agro-tourism, and Others), by Traveler Type (Solo and Group), by Booking Mode (Travel Agents and Direct), by Age Group (Generation X, Millennials, and Generation Z), and Regional Forecast, 2024-2032,” July 22, 2024.
Rajiv Khanna and Aara Tomar, “When It Comes to Infrastructure Building, Is India the Next Land of Opportunity?” Norton Rose Fulbright, March 2024.
Shashank Singh, “Integration of Environmental Risks in Infrastructure Investments in India: A Business Case for Financial Institutions,” WWF-India, 2021.
Tian Macleod Ji, “26 Million Tons of Clothing End Up in China’s Landfills Each Year, Propelled by Fast Fashion,” Associated Press, July 10, 2024; Arabella Ruiz, “17 Most Worrying Textile Waste Statistics & Facts,” TheRoundUp.org, March 18, 2024.
U.S. Department of Agriculture Economic Research Service, “Agricultural Production and Prices,” accessed July 12, 2024.
Australian Government, Great Barrier Reef Marine Park Authority, “Fascinating Facts About the Great Barrier Reef,” May 28, 2024.
WWF-UK, “8 Things to Know About Palm Oil,” accessed July 10. 2024.
Many of American Century's investment strategies incorporate sustainability factors, using environmental, social, and/or governance (ESG) data, into their investment processes in addition to traditional financial analysis. However, when doing so, the portfolio managers may not consider sustainability-related factors with respect to every investment decision and, even when such factors are considered, they may conclude that other attributes of an investment outweigh sustainability factors when making decisions for the portfolio. The incorporation of sustainability factors may limit the investment opportunities available to a portfolio, and the portfolio may or may not outperform those investment strategies that do not incorporate sustainability factors. ESG data used by the portfolio managers often lacks standardization, consistency, and transparency, and for certain companies such data may not be available, complete, or accurate.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
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