Economic and political policy key to mitigating future financial risk: Allspring

Biodiversity increases the world’s resilience to natural shocks, according to Allspring Global Investments, with nutritious food, clean water and the regulation of disease and climate all key to functioning economies. Preserving biodiverse ecologies and promoting natural reserves that embrace biodiversity is one of the clearest and most effective ways to mitigate future environmental risk.

“Even so, these natural assets are often undercounted or omitted from economic and political policy,” Allspring stated in its 2024 Sustainable Investing Outlook. “This has led to a lack of investment in programs that manage and protect these important assets.”

More than half of global GDP is at risk from biodiversity loss, affecting more than 75 per cent of global food crop types. The EU’s Deforestation Regulation requires firms to prove that their products don’t contribute to deforestation, which Allspring expects will lead to higher reporting and monitoring costs for companies. Commodity prices could also increase, and companies will try to pass through higher costs to consumers to protect margins.

Companies lagging in biodiversity risk management could see their valuation discounted as investors become more attuned to biodiversity. The recently launched Taskforce on Nature-related Financial Disclosures is driving companies to improve information disclosed, which can help investors better understand biodiversity dependencies and impacts.

Allspring says the opportunities lie in areas like water-reduction technology, regenerative agriculture and sustainable materials, as well as plant-based proteins and habitat conservation.

“Biodiversity innovators could benefit from valuation premiums, and they may also be better prepared for future regulations. Allspring engages with firms on issues directly related to natural capital and biodiversity that are material to their business performance. We believe managing natural capital can contribute to resilient investments as well as a prosperous shared future.”

Meanwhile, water-related financial risk has “steadily increased for decades”, with declining fresh water impacting an increasing portion of world’s geography and population in 2023 and increasing global temperatures leading to more frequent and extreme weather events.

“Water-related risks cost billions of dollars each year, curb economic growth, accelerate transmission of diseases, add social unrest, and intensify geopolitical pressure,” the report says. “Physical risks stress existing resources, typically requiring added insurance and often new infrastructure.

“Continued water risks from extreme weather, population growth, and urbanization are likely to strain budgets of governments, municipalities, and companies. We expect operational losses to increase along with regulations.”

In energy, Allspring is keeping an eye on the Inflation Reduction Act as well as high-emitting firms it believes could be tomorrow’s “decarbonisation outperformers” – those with climate-aware competitive strategies and ample financial flexibility to act on them.  But geopolitical shocks complicate matters.

“Russia’s invasion of Ukraine demonstrated how even traditional fossil fuel and natural gas supplies are vulnerable to shocks and that these shocks are often unpredictable. Geopolitical risk has increased throughout the world in recent years.

“The Middle East and Africa, in particular, are at risk of further migration and displacement crises, which can be triggered or worsened by energy shocks. Geopolitical risk can also dampen the outlook for clean energy by diverting attention and resources to seemingly more urgent problems.”

Staff Writer