On July 11, France Invest published a Biodiversity Guide under the supervision of Noëlla de Bermingham, President of the France Invest Sustainability Commission, and in collaboration with BL Evolution and other member contributors.

The purpose of this guide is to serve as an educational and referential point for biodiversity related integration at the management company level.

While this may seem extremely intriguing, conceptualizing the link between biodiversity and PE industry is not straightforward.

So, let’s break it down…

What is Biodiversity?

The guide defines biodiversity as being, “the source of many goods and services used by humans and their daily activities”¹. The Center of Biodiversity and Conservation goes further and includes human cultural diversity as a part of biodiversity, indicating that the social and biological dimensions are interconnected².

Thus naturally, humans have a dependency on ecosystem services – a term that refers to the way in which different organisms interact in nature.

Drivers of loss

However, as we enter the 6^th mass extinction, wherein human actions are responsible for the loss in biodiversity and ecosystem services, the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) identified 5 drivers that account for the decline in ecosystem services – changes in land and sea use, exploitation of natural resources, pollution, climate change, and invasive alien species.

The planet is already starting to observe this change. Just last month, for example, France, Spain, and Portugal witnessed wildfires where temperatures reached 42.2°C³. This was followed by torrential storms in France, Italy, that killed atleast 5 in Corsica last week⁴. This emphasizes the effects of climate change and the prominent nature related risks they pose.

Economic and Financial Impact

These nature related risks also evoke economic and financial risks. Shortages in raw materials, for example, can disrupt supply chains and fluctuate asset and commodity prices affecting demand, supply, costs, and thus cash flows and balance sheets.

A study carried out by Banque de France states that the 42% of financial institutions portfolios carry securities that are highly or very highly dependent on one or more ecosystem service. This delineates that the biodiversity footprint of businesses is significant and in France it corresponds to an impact on “130,000km2 of pristine nature, or 24 per cent of the area of metropolitan France” ⁵.

Therefore, curbing the nature, economic, financial risks brought by the loss of biodiversity, should no longer be a choice, but something that is regulated and supervised by the government. France and Europe have been the forerunners in legislation and have already laid out various regulatory frameworks for businesses to increase their vigilance on the subject and be cautious of their impacts on biodiversity.

There are 4 main biodiversity-related regulations that impact Private Equity–

1. Regulation (EU) 2020:852 – “The EU Taxonomy for Sustainable Activities”
2. Regulation (EU) 2019/2088 – “Sustainable Finance Disclosure Regulation”
3. Proposal for a Directive 2021:10104 (COD) – “Corporate Sustainability Reporting Disclosure
4. Article 29 of the Energy Climate Law (FR)

As these regulations evolve and become more specific, the guide suggests best practices related to biodiversity that should be adopted by management companies into their investment cycle.

Find below a synthesized version of the recommendations given by the guide.  

Conclusion

As the regulatory frameworks continue to evolve in relation to biodiversity, PE management companies will have to take the next step to integrate biodiversity, as they have done so with ESG, into their vision and strategy.

As an industry that can create so much value, with a European deal activity of €721.3 B in 2021⁶, it is important for its actors to be proactive by evolving and adopting new strategies that bring a positive impact on the planet.

References

^{1. https://www.franceinvest.eu/guides-biodiversite/}

^{2. https://www.amnh.org/research/center-for-biodiversity-conservation#:~:text=The%20Center%20for%20Biodiversity%20and%20Conservation%20(CBC)%20transforms%20knowledge%E2%80%94,local%20knowledge%E2%80%94into%20conservation%20action}

^{3. https://edition.cnn.com/2022/07/18/weather/europe-uk-heatwave-wildfires-france-spain-intl/index.html}

^{4. https://www.france24.com/en/europe/20220818-at-least-three-killed-as-hurricane-force-winds-batter-corsica}

^{5. https://publications.banque-france.fr/en/silent-spring-financial-system-exploring-biodiversity-related-financial-risks-france}

^{6. https://pitchbook.com/news/reports/q2-2022-european-pe-breakdown}