Liquidity Lowdown: Can we really afford to ignore biodiversity loss?

When investors think about risks to the economy, biodiversity loss rarely makes the list. We spend countless hours debating inflation, growth, fiscal policy and geopolitics. We understand how a recession affects corporate earnings. We know why rising government debt can put pressure on bond yields. We can model the impact of tariffs on trade. But how many investors spend time thinking about pollinators, water scarcity or soil quality?

Perhaps the reason is that biodiversity loss feels gradual, distant and difficult to quantify. Unlike a central bank decision or a company profit warning, it doesn't arrive on a specific date with an immediate market reaction. Yet that may be precisely why it deserves more attention.

It is estimated that more than half of global GDP is at least moderately dependent on nature and the ecosystem services it provides.

It is estimated that more than half of global GDP is at least moderately dependent on nature and the ecosystem services it provides. Nature is often treated as an environmental issue, but in reality, it is a form of capital. Just as factories, infrastructure and financial assets help generate economic value, so too do healthy ecosystems. The difference is that we rarely assign them a price until they start to disappear.

A simple example is pollination. Bees and other pollinators play a critical role in agricultural production, helping plants reproduce and increasing crop yields. Many commercially important crops, from apples to berries and avocados, depend on insect pollination to varying degrees. The economic value created by this activity is enormous, yet it is largely provided free of charge by nature.

But what happens if that service begins to fail? If pollinator populations decline significantly due to climate change, disease or habitat loss, crop yields could fall, and food prices could rise. Supply chains could become less reliable. Consumers would face higher costs and businesses would face margin pressure. Suddenly what appeared to be an environmental concern starts looking remarkably similar to an inflation shock.

And agriculture is just one example. What happens if water becomes scarcer in key industrial regions? What happens if fisheries decline? What happens if forests that regulate rainfall patterns are lost? How many business models rely on natural resources that are assumed to be permanent but are, in reality, deteriorating?

The challenge for investors is that nature-related risks rarely sit neatly within a single sector. Companies may appear far removed from biodiversity loss but can still be exposed through their supply chains. Food producers, utilities, manufacturers and retailers all depend, directly or indirectly, on functioning ecosystems. The risks are often hidden until costs begin to rise or production becomes constrained.

If agricultural businesses, food manufacturers, water-intensive industries or forestry operations become riskier borrowers, bank balance sheets are eventually exposed.

The financial sector is not immune either. Banks might assume biodiversity loss is somebody else's problem, but is it really? Banks lend against real economic activity. If agricultural businesses, food manufacturers, water-intensive industries or forestry operations become riskier borrowers, bank balance sheets are eventually exposed. Credit risk does not disappear simply because its origin is environmental.

This raises an interesting question for investors. Could biodiversity loss eventually become a credit story rather than simply a sustainability story? If natural capital deteriorates, some industries will face higher operating costs, lower profitability and potentially greater earnings volatility. Over time, that could influence lending standards, borrowing costs and ultimately credit spreads. Investors spend considerable effort assessing the sustainability of fiscal deficits and corporate balance sheets. Should they be paying equal attention to the sustainability of the natural systems that support those economic activities?

The implications may extend further still. Central banks and economists spend a great deal of time assessing productive capacity within the economy. Labour, capital and productivity are all scrutinised closely. But what if biodiversity loss gradually reduces the productive capacity of economies in ways that traditional models struggle to capture? Could future inflation prove stickier because natural resources become scarcer? Could growth be weaker because ecosystems no longer provide the same level of support to economic activity?

These may sound like distant concerns, but many investment risks look distant until markets are forced to price them. None of this means biodiversity loss is about to trigger the next financial crisis. But it does highlight a broader issue. Investors are generally good at analysing risks that have already appeared in historical data. We are often less comfortable assessing risks that emerge slowly, build over decades and sit outside traditional economic models.

The question is not whether biodiversity loss matters. The reality is that much of the global economy ultimately depends upon nature in one form or another. The real question is whether markets are paying enough attention to it today — or whether, like many risks before it, it will only be fully appreciated once the economic consequences become impossible to ignore.

For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.