A second wave of performance for BBB bonds?
Forget A, B or C… BBBs are all the rage at the moment in the alphabet soup of fixed income....
In preparation for Good Money Week, I was talking to my husband at dinner about what I wanted to focus on. I listed a range of topics: climate change, human rights, plastic use, our endeavour to eat less meat, saving our oceans and, finally, biodiversity. This last one had him interested. His immediate question was: how are you going to talk about animals going extinct alongside investing? Challenge accepted.
Biodiversity encompasses the 8 million or so species on the planet. Basically, it’s all life on Earth: bacteria to bears, plants to people – the range of life is incredible. But it’s also more than animal extinction and deforestation. It relates to all the different ecosystems that house them: coral reefs to rainforests, grasslands to tundras.
‘The truth is: the natural world is changing. And we are totally dependent on that world. It provides our food, water and air. It is the most previous thing we have, and we need to defend it.’ — Sir David Attenborough
Biodiversity is also one the nine planetary boundaries included in the framework for the Pictet Global Environmental Opportunities fund. It is also one of the two most compromised by human activity, with species extinction currently taking place at a rate 10 to 100 times faster than what is considered sustainable. We are now in what scientists are calling “the sixth mass extinction in geological history”.*
Healthy ecosystems matter for more than idealistic reasons. Despite all that technology has to offer, we’re still dependent on a healthy and vibrant ecosystem, enabling natural pollination of crops, clean air and extreme weather mitigation. A loss of biodiversity impairs these functions, as Jamie Jenkins, co-manager of BMO Responsible Global Equity outlined in his recent podcast, which focused on water scarcity.
Diminishing biodiversity in our oceans is the single greatest threat to the survival of humanity. Among the hundreds of millions of people living in poverty, more than 70%** depend on natural resources to earn their livelihoods, whether through farming, fishing, forestry, or other nature-based activities.
The Seychelles, an archipelagic nation consisting of 115 granite and coral islands, is one of the world’s biodiversity hotspots. According to the World Bank, “marine resources are critical to the country’s economic growth. After tourism, the fisheries sector is the country’s most important industry, contributing significantly to annual GDP and employing 17% of the population. Fish products make up around 95% of the total value of domestic exports.”***
To help support its biodiveristy, the Seychelles launched the world’s first sovereign blue bond. This is a special type of bond that will be used support sustainable marine and fisheries projects and develop the Seychelles’ blue economy. Noelle Cazalis, co-manager of Rathbone Ethical Bond, told us more about the blue bond offering in her recent interview:
Climate change is of course a direct pressure on global biodiversity but there are other factors as well, such as habitat stress (unsustainable use/overexploitation) and pollution. There are also a number of indirect drivers. Eva Cairns, ESG investment analyst told us in this podcast, “we focus a lot on fossil fuels but the impact of agriculture, food production and consumption is huge. About a quarter of emissions come from agriculture, forestry and land use. So countries and regions relying really heavily on agriculture need to rethink how that’s going to look like in the future – what methods they’re going to use and how they can be more efficient…We need to feed a growing population so how is that going to happen?”
Thankfully, investment opportunities in some of the indirect drivers plentiful. In a recent interview Luciano Diana, co-manager of Pictet Global Environmental Opportunities, told us about some in water technology, sustainable agriculture and developments in plant-based foods.
Zoonotic diseases, or zoonoses, are infectious diseases that can be transmitted to humans by other animals. Covid-19 is of course a more topical example. Shifts in urbanisation, land use and biodiversity are altering ecological dynamics and, in some cases, facilitating the human-animal contact that exacerbates the risk of zoonoses. However, biodiversity conservation can play a crucial role. Paul Leadley, a researcher at the University of Paris-Saclay, pointed out that ‘human health is “linked indissociably” with the condition or health of nature, and that about 70% of emerging diseases are a result of human contact with animals, including causes such as deforestation and trade and consumption of wild animals.’^
Healthy ecosystems can also provide an essential source of many drugs used in modern medicine. A 2016 study found, ‘there are over 1300 medicinal plants used in Europe, of which 90% are harvested from wild resources; in the United States, about 118 of the top 150 prescription drugs are based on natural sources. Furthermore, up to 80% of people in developing countries are totally dependent on herbal drugs for their primary healthcare, and over 25% of prescribed medicines in developed countries are derived from wild plant species.’^^
At the beginning of this article I told you about how the rate of species extinction is currently taking place at a rate 10 to 100 times faster than what is considered sustainable. For plant species that rate is between 100 and 1000 times higher than the expected natural extinction rate. That means we lose at least one potential major drug every 2 years^^ caused by over-harvesting, habitat destruction and an increasing human population.
*Beyond Biodiversity Day: why it matters for investors, Pictet Asset Management, 20 May 2020
**Global environment outlook: healthy planet healthy people, UN Environment, 2019]
***Seychelles launches World’s First Sovereign Blue Bond, the World Bank, 29 Oct 2018
^Source: Ensuring biodiversity now will prevent pandemics later, S Sadeque (UN), 26 May 2020
^^Source: CM Journal, Issue 11, Article 37 (2016)