Sustainability

01 March 2010

Biodiversity - Lessons from nature

By Christoph Butz, Sustainability Expert

2010 is the International Year of Biodiversity. A critical subject, certainly, but hardly one to turn an investor's head, you might imagine. But think again. The topical issue of biodiversity holds important, practical lessons for the way we do business.

According to the Millennium Ecosystem Assessment, biodiversity has been declining more rapidly in the previous 50 years than at any other time in human history. Species loss is estimated to be one hundred to one thousand times higher than the natural background extinction rate, and climate change will drive the downward spiral even faster.

The International Union for Conservation of Nature (IUCN) reports on its most recent Red List that 21 per cent of all known mammals, 30 per cent of all known amphibians, 12 per cent of all known birds, as well as 28 per cent of reptiles, 37 per cent of freshwater fishes, 70 per cent of plants, and 35 per cent of invertebrates so far assessed are under threat.

Shocking as these figures already are, they reflect merely a fraction of the havoc mankind is wreaking on the planet. The true toll of humans’ swathe on Earth can only be guessed at, given that the tally above is based on less than 3 per cent of the two million species that are known to us today, whereas the total number of existing species is not even known to the nearest order of magnitude and could range from 5 to 30 million or much higher. Many more species will therefore become extinct before any of us has had the chance to marvel at them.

While this depressing prospect surely brings tears to the eyes of every naturalist, why should investors or the wider society be concerned about persistent biodiversity loss?

In many respects our globalised and tightly interwoven economy is not so different from an ecosystem. Maintaining a fine balance is crucial. One species thriving excessively at the expense of another often leads to disastrous consequences. When predators get out of control the whole food chain can collapse. The financial crisis has brutally reminded us of what can happen if a few highly relevant companies become extinct (bankrupt) or dysfunctional. The cost of stabilising the system is extremely high, with no assurance of whether the fix is permanent or not.

Ecosystems are highly complex and interactive systems of living organisms and their abiotic environment. Ecosystems provide us with essential services ‘free of charge’, without which life on earth as we know it would be impossible. Most of these services take place literally underground without our even noticing it, but others are more apparent and often of direct economic benefit to us. Just think, for instance, of natural pest control performed by bugs feeding on other bugs that would otherwise feed on our crops, or the invaluable ollination performed reliably by bees and other insects going about their daily business.

In a seminal article published in Nature in 1997, Costanza et al. estimated that the worth of seventeen 'cosystem services’ was in the range of USD16-54 trillion per year, with an average of USD33 trillion. At that time, nominal global gross national product was around USD18 trillion per year. These figures make it immediately obvious why there is no realistic chance that we could ever supplant natural ecosystem services on any meaningful scale with our technological prostheses. A collapse of only some of these vital co-services would almost certainly push the global economy over the edge.

Our own profession can learn much from the study of ecosystems. Each species and component in a given ecosystem has its specific niche and role to play. The more biodiverse an ecosystem, the more resilient it generally is to external shocks. The adage that the whole is more than the sum of its parts is nowhere more true than it is here.

Likewise, spreading risks by diversifying portfolios has become a cornerstone of modern investment theory. In a sense, biodiversity is nature’s own version of Markowitz’s modern portfolio theory, even if the nature anticipated Markowitz with more than three billion years of organic evolution.

Investors should take inspiration from natural ecosystems and take a long-term view in their investment decisions. They should favour diversity of business models and allocate more capital to those economic actors most likely to guarantee the stability and sustainability of our economic system in the future. Undue emphasis on shortterm profits can undermine business ethics and ultimately weed out the very companies that might prove the most resilient to withstand the next future shock.

If we are to live sustainably on this planet, we should heed the lessons that nature and biodiversity have to teach us.

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