Director of Climate Research Chris Goolgasian and Dr. Zach Zobel of Woodwell Climate Research Center return to WellSaid to share their latest insights on the biodiversity research and investing landscape.
Director of Climate Research Chris Goolgasian and Dr. Zach Zobel of Woodwell Climate Research Center return to WellSaid to share their latest insights on the biodiversity research and investing landscape.
1: 50 Economic reliance on ecosystem biodiversity
3:35 Connections between climate change and biodiversity
6:55 Working with Woodwell Climate Research Center
8:27 Defining biodiversity in financial terms
10:27 Economic impacts of species diversity loss
12:20 Critical importance of keystone species
18:45 Corporate and policy responses to biodiversity
21:10 Final thoughts
CHRIS GOOLGASIAN: I think that as ecosystem services deteriorate, companies will experience supply and production losses if the don’t adapt their practices. One industry that has a lot of dependencies is obviously agriculture, dependencies on biodiversity, but there are others in staples, beverages, energy sectors, as well. So production and supply are gonna be a key part of evaluating biodiversity loss.
THOMAS MUCHA: According to a 2020 report from the World Economic Forum, 50 percent of global GDP -- that’s up to US$44 trillion -- is moderately or highly dependent on nature, but despite this tremendous value, data shows that biodiversity loss and ecosystem degradation are accelerating. Now, like climate change, the world has been slow to address this problem. There is some momentum now from policymakers and market participants, but probably not enough. So here to talk about biodiversity loss, the parallels with climate change, and Wellington’s ongoing initiative with Woodwell Climate Research Center are Chris Goolgasian, Director of Climate Research and PM here at Wellington, and Zach Zobel, a climate scientist at Woodwell. Chris, Zach, thanks for joining me today on WellSaid.
CHRIS GOOLGASIAN: Great to be here, my friend.
ZACH ZOBEL: Happy to be here.
THOMAS MUCHA: So, Zach, 44 trillion: that’s a massive amount of economic value. So, from your perspective, what are the benefits of healthy ecosystems, and why is diversity so important?
ZACH ZOBEL: Thanks Thomas. Forty four trillion is a number that you often see. Reports have tried to quantify biodiversity, but in reality the price of biodiversity is all of it. It’s all capital. Everything depends on strong biodiversity. Biodiversity plays a key role in almost every aspect of our lives, whether it’s our health, our food, even the stability of our atmosphere. It’s like having a diversified portfolio in finance. The more diverse it is, the less risk you have of that ecosystem falling apart.
THOMAS MUCHA: So, Chris, as Zach just pointed out, biodiversity, super important. Affects a lot of things. So from your investment perspective, what do you see as the main causes of biodiversity loss? I mean, how do you think about this from a PM perspective?
CHRIS GOOLGASIAN: Yeah, the science is pretty clear, and Woodwell has educated us on this, but the history and the future are gonna be much different. So the history is that about 50 percent of biodiversity loss comes from land use, so if you had a pie chart of the loss, half of that pie is land use, historically.
THOMAS MUCHA: ’Cause we were changing the way we use land?
CHRIS GOOLGASIAN: Exactly. If you think about farming, and housing, and commercial, and industrial practice, on and on and on. But the future estimates from the science world are that by about 2050 climate change is gonna overtake land use as the biggest impact on biodiversity loss. So this is an area where the future’s gonna be different than the past, and climate change is actually gonna be the biggest problem going forward.
THOMAS MUCHA: So this is gonna get worse, not better?
CHRIS GOOLGASIAN: Yes.
THOMAS MUCHA: All right, well, let’s dig into that, those connections between climate change and biodiversity. It strikes me that the momentum to address the former may inform action on the latter, so let’s dig in. Zach, from your perspective, how are climate and biodiversity related from a scientific perspective?
ZACH ZOBEL: In some sense climate, not just climate change, the climate of the localized area, determines what type of biodiversity or what type of ecosystem can be present there. And it’s hard to recover biodiversity, without understanding the native species of that climate. In terms of climate change, biodiversity-rich areas tend to absorb a lot more carbon. They tend to take a lot more carbon out of the atmosphere. So even strong biodiversity can help us mitigate and even adapt to climate change, but it’s particularly important on the mitigation side.
THOMAS MUCHA: So there’s a causal relation between biodiversity loss and climate change.
ZACH ZOBEL: Yeah, so, it’s a feedback loop almost. As biodiversity loss continues to accelerate, as it continues to grow, that is taking one of our important carbon buffers away, or it’s diminishing it at least, and that’s further feedbacking on making climate change worse.
THOMAS MUCHA: Chris, now, from your perspective, what parallels do you see between climate change and biodiversity loss?
CHRIS GOOLGASIAN: Yeah, I think there’s a pretty good playbook from how far climate change has come into the private markets, and where biodiversity probably goes. The playbook has roughly three steps, so the first one is you have to have a framework that’s credible that people basically agree with, and then can be deployed in both disclosure and operations. So for climate, that framework is the TCFD, the Task Force for Climate-Related Financial Disclosures. For biodiversity, that framework is the TNFD, the Task Force on Nature-Related Financial Disclosures.
THOMAS MUCHA: We need to keep the alphabet soups straight there.
CHRIS GOOLGASIAN: We do, lotta letters in there. And the TNFD will be basically formalized by the end of 2023. And so that’s the step one of the playbook. Step two in the playbook is that you will need tools and software for asset managers and asset owners to analyze and evaluate biodiversity risks at the security and portfolio level, essentially to then comply with step one. And then step three in the playbook is you’ll see regulatory action that basically adopts some of the framework. So that’s where we are in the climate world today. Throughout the world, there are a lot of regulations and rules in place that basically replicate and look like what the TCFD recommended. I think somewhere down the road you will see a similar parallel for TNFD, where regulations start to adopt what TNFD said.
THOMAS MUCHA: So I’ve noticed in my discussions with clients, with investors, that there’s a growing awareness of climate change and what’s important. Are you sensing that in biodiversity, as well?
CHRIS GOOLGASIAN: Yes. I think biodiversity is probably the hottest topic within a very hot topic; excuse the pun on “hot” and “climate.” But biodiversity in our firm, and with our clients, has probably been one of the top requested content meetings this year and back half of last year. We recognize the importance of it. With Woodwell, we actually have our annual 2023 research agenda on the science side is filled with biodiversity topics. We also tackled a handful of topics last year. So, it is of high interest on the client and asset owner side.
THOMAS MUCHA: Well, Zach Chris just name-dropped you there. So the start of this chain is science, so how does Woodwell specifically advance awareness and action on biodiversity?
ZACH ZOBEL: Woodwell is a climate change think tank, and we work in a lot of different ecosystems, environments, but fundamentally almost everything we do centers around biodiversity. I’ve already talked about how climate change and biodiversity are naturally intertwined, and I really think working with Wellington has probably been our best example of how we advance the understanding of biodiversity. We’ve been working with Wellington for five years now, through our partnership I think we’ve developed a common vocabulary that oftentimes is lacking in a lot of the scientific research that you may see published online. We actually understand better how asset managers or decision makers think about biodiversity. And I don’t wanna put words in Chris’ mouth, but I think they understand biodiversity a lot more than when we started working with them five years ago. It’s developing that common vocabulary, and that’s how we, in particular, have pushed the science through.
CHRIS GOOLGASIAN: And just to add to what Zach said, the word we use is translation, right? We’re each tryin’ to translate what the other means, so that’s the constant back-and-forth that really brings out the magic.
THOMAS MUCHA: Yeah, and I’ll just say, from my own perspective, my national security, my geopolitical research is informed every day by particularly the climate science that’s coming out of Woodwell. It’s really integrated into my research process, and it’s been very impactful in getting me to understand these issues more clearly.Now, Chris, you mentioned the importance of having a process in incorporating biodiversity issues here. What are some of the main hurdles that you’re seeing to integrating these biodiversity insights into that process, and how do you try to get over those hurdles?
CHRIS GOOLGASIAN: I think one of the key hurdles is pretty clear today, which is the lack of a common measure for biodiversity. Investors live in metrics: PE ratio, tracking risk, beta, etc. And even in climate we now have measures. We have a net-zero framework. Companies can be measured on their net-zero goals. We don’t have anything similar in biodiversity in economic or financial terms.
THOMAS MUCHA: Yet.
CHRIS GOOLGASIAN: Yet. I think we will. The challenge today is that the leader in the clubhouse is a scientific term -- and Zach is far more educated on this than I am -- called Mean Species Abundance, which attempts to measure the diversity of species in an area of land, and I just don’t think that it’s gonna translate well into financial terms. It is in a number of vendor tools already, it’s starting to get attention, but I’m not sure it’s the one that’s really gonna take off. And so I have theorized of a concept, and I’m happy to put it out in the ether today if any energetic listener wants to take it on, and that concept is called Cost of Nature Sold, CONS. That would be the equivalent of what investors are used to, which is Cost of Goods Sold on the income statement. And the idea is that we could have a cost associated with products sourced from nature to produce a good, and then that cost would be both the direct use of natural assets and the disrupted natural assets from that production. In this way, companies could then have a target which might be they wanna get their Cost of Nature Sold down to zero, in the same way that with net-zero you wanna get your emissions down. So that’s a concept, but it is very far off from happening.
THOMAS MUCHA: And it has the added benefit of a clever acronym, CONS, so it’s memorable. What do you think are some of the biggest downstream aspects here, Chris, from this focus on biodiversity? I mean, is it company valuations? Is it the future value of land, other sort of economic metrics?
CHRIS GOOLGASIAN: Sure, I’ll give you two. I’ll give you a micro and a macro one. So the micro one is more around production. I think that as ecosystem services deteriorate, companies will experience supply and production losses if the don’t adapt their practices. One industry that has a lot of dependencies is obviously agriculture, dependencies on biodiversity, but there are others in staples, beverages, energy sectors, as well. So production and supply are gonna be a key part of evaluating biodiversity loss. That’s the micro example. The macro example I think is land. And so if the various 30 for ’30 pledges globally come to fruition, and the 30 for ’30 pledges are basically saying the world needs to protect 30 percent of the land and water by 2030, and maybe we’re at half of that today, per our scientific evaluations, then real estate and land are gonna have a lot more value in the future. Like, if we have to double what we protect, then, this is a finite supply, right? So if we take some off the market, the rest has more value. This is especially true because, as Woodwell as educated us, the goal of this is not to just circle forests that are being unused and say, hey, done, we’re now protecting stuff that we already weren’t touching. The goal is to go region by region, find biodiversity key dependencies, and then protect them. So if you think about -- just take the U.S. -- that would mean going through all 50 states, finding the biodiverse areas, and saying, “These are now protected.” It doesn’t mean just going to the big forests and protecting those. Well, that means in all of those areas, the surrounding property values and land have to be worth more. So at a macro level, I think there could be major land implications.
THOMAS MUCHA: So, Zach, two, two things, from your perspective. Chris mentioned the Mean Species Abundance concept. I’m curious for your scientific perspective on that. And then again, from your scientific perspective, what industries or geographies are most relevant?
ZACH ZOBEL: Yeah, so I’ll start with the Mean Species Abundance. In some sense, I think Chris mentioned, that it doesn’t always work, and I think the reason why it doesn’t always work is because not all species are created equal in an ecosystem. There’s what’s known as a keystone species, and what a keystone species is is the most important species in that food web or that ecosystem, and without that, many other parts of the ecosystem fall apart, and you almost get a situation where there’s only one species that survives, or only one or two in that whole ecosystem once the keystone species is removed from the web.
THOMAS MUCHA: What’s an example of a keystone species?
ZACH ZOBEL: one of ’em’s actually, uh, in the United States, and oOne of ’em’s actually a good success story. I know we’re talking about a lot of bleak things here, so I’ll start with the success story.
THOMAS MUCHA: Good.
ZACH ZOBEL: Several decades ago, the North American wolf was hunted and removed from the ecosystem in Yellowstone National Park, and because of that coyotes and deer no longer had a predator, so they began to become overpopulated. And the reason why the wolf was originally hunted is because it was obviously dangerous to that area, but as we realized that it was the keystone species, it became a protected species, and, sure enough, we re-released several wolves back into the wild, and now they’re flourishing; the ecosystem is back under control. It is a much greater carbon sink. Even waterways are starting to change path to the original place. So like I said, not all species are created equal, and you gotta take into effect the native species, more importantly. We can’t just take species from one ecosystem and move ’em to a different one. You have to understand the science behind the native species. Another really popular example takes place in the Pacific Northwest where we had large swaths of kelp forest that just disappeared one day, and it was actually a mystery for several years until a scientist actually figured out the keystone species in that ecosystem were the otters. The otters were the natural predator to sea urchins. Without the otter in the ecosystem, sea urchins thrived and completely ate all of the kelp forest. The reason why otters disappeared from the ecosystem actually goes back to post-World War II, and the whaling that took place in the Pacific Ocean. Removing the whale from that ecosystem caused the orcas to find a new predator, and they moved on to seal, and after the seal population declined they then moved on to the next best thing, which was otters. To go to your second question, I mentioned at the beginning, but from an industry perspective -- and Chris also touched on this -- everything depends on biodiversity. So, we could go industry by industry, and pick out hey, how does biodiversity impact this industry, but you could almost do that down the line. So a couple of the locations in the world that Woodwell, and scientists in general, are particularly concerned about is our world’s coral reefs would be a big one. Coral reefs, even though they only occupy less than one percent of the ocean, actually contain 25 percent of ocean biodiversity. And even just the Great Barrier Reef alone, which isn’t the only one, 500 million people depend on that for food and livelihoods, such as tourism and fishing. And so coral reefs are dying quite rapidly as the oceans warm. They bleach, and only about 30 percent of the coral survive year to year after a bleaching event, or after a warm ocean year. So it’s expected that by 2050, if we continue on the trajectory we on with global warming, the oceans will become warm enough that as much as 90 percent of coral reefs could be gone, and that’s a huge biodiversity hit, especially in our ocean ecosystems. On land, it’s very obviously the Amazon Forest. We’ve been deforesting the Amazon for decades, if not a century or more, and as we do that, we actually negatively impact the local climate, and there’s a tipping point that we’re rapidly approaching, uh, cod the -- cod the -- called the Amazon dieback, whereas once we cross this threshold it’s almost impossible to reverse it. And it’s where we deforest enough of the Amazon that the local climate has changed so much that the Amazon starts to, essentially, die on its own, even without us deforesting. And so, that number sits at about 25 percent. There’s some uncertainty around that, but if we hit 25 percent of the original forest deforested, somewhere between 25 and 40 percent is where that number sits in the science world., so [there could?] --
THOMAS MUCHA: Where are we right now?
ZACH ZOBEL: We just hit 20 percent last year, and we’re still deforesting about 0.2 to 0.4 percent of the Amazon every year. So you play that forward, if it does happen to be on the low end of that threshold, we could be looking at a Amazon dieback situation in as little as 30 years. But it’s most likely a little bit higher, but that assumes no increased deforesta-- deforestation. And the Amazon is by far the highest biodiversity holder in the world. It’s also by far the greatest on-land carbon sink in the world. And not only that is it keeps the tropics cooler than they would have been without it. So if you think about how warm it is already at the Equator, as climate change continues to make it warmer and warmer, you take away the Amazon and you increase the temperature around the Equator about three or four degrees Celsius more. And so, that would push some locations past inhabitable for humans just because it already is so hot. Those are a couple of the geographic locations that I think scientists are most focused on in the near term, but really every -- you can go continent by continent and find at-risk areas of major biodiversity loss in the twenty-first century.
CHRIS GOOLGASIAN: And just to add, Thomas, there’s an interesting intersection with finance on the coral reef side, which is censors. So, you know, we’ve been very bullish on censors across climate change. Censors are gonna be key. So they can put censors now to monitor the bleaching in the coral reefs, and then you have insurance policies created on the reefs, because the tourism industry relies on the reefs. So this is telling you how severe the problem is that governments are worried about the reef because of tourism, so are taking insurance on the bleaching level at the reef. Like, this is what it’s become.
THOMAS MUCHA: So, Chris, Zach just outlined a number of important scientific principles here, from keystone species to these geographic locations. So, you know, bringing it down to the company level, what examples are you seeing of companies, beyond censors, playing here in , in this this increased focus on biodiversity?
CHRIS GOOLGASIAN: Sure. I think one of the key concepts at the company level is gonna be this concept of a social license. So, I’ll give you an example. Today, companies are primarily working to minimize biodiversity loss through pollution changes, addressing overexploitation, regenerative ag, responsible sourcing, waste management, recycling. Why have they addressed these first? Likely because their connection to climate change, and the company’s interest in maintaining that social license, if you will, with the local community, right? So these are the most visible, easy to see and track things, and the community’s concerned about them so the companies go after them. So as an example, companies that put water and biodiversity considerations upfront can support their social license with those communities that have water shortages, right, and need access to water as a resource. And so beverage companies, you know, pretty obvious example, but they are starting to disclose when they invest in designated areas to improve the watershed health and the residents’ access to water. So those type of collaborations are gonna be key. The more biodiversity risk you have, the more the companies are gonna have to show what they’re doing to the local community in order to maintain that. And then I’ll take this in one other direction, which is where governments and policy may go. There’s a very interesting read on this from Ecuador. So Ecuador is about 10 percent of the world’s biodiversity, and was the first country to recognize the rights of nature. So in 2008 they actually put this in their constitution, and it provides a framework that attempts to balance the needs of nature with the needs of society. And so this could be a blueprint -- if you think back to that 30 for ’30, the blueprints across the globe could also include some type of government constitution or declaration around how do we give biodiversity a, quote, “right” that’s balanced with what the industry and society needs, as well.
THOMAS MUCHA: That’s interesting that Ecuador -- Equator --
CHRIS GOOLGASIAN: Yes.
THOMAS MUCHA: -- is playing a leading role here, given the fact that it’s sitting on the, the most exposed part of the planet in terms of climate change going forward. Zach, you know, since science is driving this whole discussion, we’re gonna give you the last word here. So, from your perspective, what’s the number one thing you wish more people understood about biodiversity?
ZACH ZOBEL: Biodiversity isn’t just about planting trees. For decades it’s been, “Let’s plant a billion trees.” It’s about understanding, one, the native species that are supposed to be in that ecosystem; and two, it’s about getting nature to work together. Just planting trees won’t fix the loss of biodiversity that we’ve already seen. It’s not as simple as that. It takes a knowledgeable science approach, an understanding what should be in this ecosystem, and also understanding what are the important features of this ecosystem, what can allow the ecosystem to work with us to recover the biodiversity that we’ve lost over the past many decades. And that means it’s double important to understand the connection between the finance world and science or biodiversity world because they’re all interconnected.
THOMAS MUCHA: You know, let me just say thank you for the science here. It’s really helping us at Wellington understand this process, really from the most important variable, so thank you for that. So Zach Zobel from Woodwell Climate Research Center, and Chris Goolgasian, thanks, as ever, for doing what you do at Wellington on this topic of biodiversity and climate change in general, and thanks, both, for bein’ here.
CHRIS GOOLGASIAN: Thank you, Thomas. Always a pleasure.
ZACH ZOBEL: Thanks for havin’ me.
-------
Views expressed are those of the speaker(s) and are subject to change. Other teams may hold different views and make different investment decisions. For professional/institutional investors only. Your capital may be at risk. Podcast produced July 2023.
Wellington Management Company LLP (WMC) is an independently owned investment adviser registered with the US Securities and Exchange Commission (SEC). WMC is also registered with the US Commodity Futures Trading Commission (CFTC) as a commodity trading advisor (CTA) and serves as a CTA to certain clients including commodity pools operated by registered commodity pool operators. WMC provides commodity trading advice to all other clients in reliance on exemptions from CTA registration. WMC, along with its affiliates (collectively, Wellington Management), provides investment management and investment advisory services to institutions around the world. Located in Boston, Massachusetts, Wellington Management also has offices in Chicago, Illinois; Radnor, Pennsylvania; San Francisco, California; Frankfurt; Hong Kong; London; Luxembourg; Milan; Shanghai; Singapore; Sydney; Tokyo; Toronto; and Zurich. This material is prepared for, and authorized for internal use by, designated institutional and professional investors and their consultants or for such other use as may be authorized by Wellington Management. This material and/or its contents are current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management. This material is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase shares or other securities. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. In Canada, this material is provided by Wellington Management Canada ULC, a British Columbia unlimited liability company registered in the provinces of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Quebec, and Saskatchewan in the categories of Portfolio Manager and Exempt Market Dealer.
In Europe (excluding the United Kingdom and Switzerland), this material is provided by Wellington Management Europe GmbH (WME) which is authorized and regulated by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin). This material may only be used in countries where WME is duly authorized to operate and is only directed at eligible counterparties or professional clients as defined under the German Securities Trading Act. This material does not constitute investment advice, a solicitation to invest in financial instruments or information recommending or suggesting an investment strategy within the meaning of Section 85 of the German Securities Trading Act (Wertpapierhandelsgesetz). In the United Kingdom, this material is provided by Wellington Management International Limited (WMIL), a firm authorized and regulated by the Financial Conduct Authority (FCA) in the UK (Reference number: 208573). This material is directed only at eligible counterparties or professional clients as defined under the rules of the FCA. In Switzerland, this material is provided by Wellington Management Switzerland GmbH, a firm registered at the commercial register of the canton of Zurich with number CH-020.4.050.857-7. This material is directed only at Qualified Investors as defined in the Swiss Collective Investment Schemes Act and its implementing ordinance. In Hong Kong, this material is provided to you by Wellington Management Hong Kong Limited (WM Hong Kong), a corporation licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities), and Type 9 (asset management) regulated activities, on the basis that you are a Professional Investor as defined in the Securities and Futures Ordinance. By accepting this material you acknowledge and agree that this material is provided for your use only and that you will not distribute or otherwise make this material available to any person. Wellington Investment Management (Shanghai) Limited is a wholly-owned entity and subsidiary of WM Hong Kong.
In Singapore, this material is provided for your use only by Wellington Management Singapore Pte Ltd (WM Singapore) (Registration Number 201415544E). WM Singapore is regulated by the Monetary Authority of Singapore under a Capital Markets Services Licence to conduct fund management activities and is an exempt financial adviser. By accepting this material you represent that you are a non-retail investor and that you will not copy, distribute or otherwise make this material available to any person. In Australia, Wellington Management Australia Pty Ltd (WM Australia) (ABN 19 167 091 090) has authorized the issue of this material for use solely by wholesale clients (as defined in the Corporations Act 2001). By accepting this material, you acknowledge and agree that this material is provided for your use only and that you will not distribute or otherwise make this material available to any person. Wellington Management Company LLP is exempt from the requirement to hold an Australian financial services licence (AFSL) under the Corporations Act 2001 in respect of financial services provided to wholesale clients in Australia, subject to certain conditions. Financial services provided by Wellington Management Company LLP are regulated by the SEC under the laws and regulatory requirements of the United States, which are different from the laws applying in Australia. In Japan, Wellington Management Japan Pte Ltd (WM Japan) (Registration Number 199504987R) has been registered as a Financial Instruments Firm with registered number: Director General of Kanto Local Finance Bureau (Kin-Sho) Number 428. WM Japan is a member of the Japan Investment Advisers Association (JIAA), the Investment Trusts Association, Japan (ITA) and the Type II Financial Instruments Firms Association (T2FIFA). WMIL, WM Hong Kong, WM Japan, and WM Singapore are also registered as investment advisers with the SEC; however, they will comply with the substantive provisions of the US Investment Advisers Act only with respect to their US clients.
©2023 Wellington Management Company LLP. All rights reserved.