Capturing material nature-related risks and opportunities is critical to long-term financial performance, says Laina Draegar, Director of Global Equities at Los Angeles Capital Management.
The richness and complexity of our planet’s ecosystems is reflected in the challenges inherent in evaluating nature-related financially-material risks. Nevertheless, they must be overcome by investors seeking to deliver long-term performance.
The landmark Kunming-Montreal Global Biodiversity Framework has distilled five key drivers of biodiversity loss: changes in land and sea use, direct exploitation of organisms, climate change, pollution and invasion of alien species. These drivers are typically realised in an interconnected fashion. The rate of ecosystem loss is also difficult to forecast and non-linear. As the climate changes and warms, both these acute and chronic risks may accelerate and could materialise to degrade ecosystems in a heterogeneous manner.
Acute nature-related risks, via catastrophic weather events or pollution spills, can result in massive ecological change overnight. While chronic risks may result in changes to ecosystems that occur gradually overtime, for ecosystems subject to key thresholds and tipping points where cumulative impacts can reach a point of irreversible change, the risk increases dramatically once those tipping points are crossed.
Deep connections
To make matters more complicated, biodiversity risks are deeply interconnected and often self-reinforcing. Positive feedback loops mean that one crisis, such as deforestation, can accelerate another crisis like climate change, which in turn intensifies extreme weather events and further degrades habitats. Multiple threats – including pollution, climate change, and habitat loss – do not simply add up; they amplify each other’s impacts, resulting in outcomes that are more severe than if each occurred in isolation.
Ecosystems – complex webs of interaction – are particularly vulnerable to cascading effects: the loss of a single keystone species can trigger rapid collapse throughout the food web, reducing resilience and pushing systems toward irreversible tipping points. As biodiversity declines, ecosystems become less able to withstand stress, making them more susceptible to even minor disturbances and accelerating the overall decline in function.
This dynamic means that biodiversity loss and its associated risks – such as reduced food security, increased disease emergence, and economic instability – can escalate rapidly, often in exponential or non-linear ways. The World Economic Forum has identified biodiversity loss as one of the most severe threats facing humanity in the coming decade, largely due to these compounding and interconnected effects.
At least half of global GDP is moderately or highly dependent on nature, and the economy fundamentally relies on critical services including clean water, air, and food. As an example, analysis by the Green Finance Institute shows that 75% of the United Kingdom is affected by at least one hotspot of natural capital depletion, with 25% impacted by two or more.
While agriculture is most at risk in percentage terms, the largest monetary risks are found in the services and manufacturing sectors. Disruption to ecosystem services can reduce agricultural output by up to 15% annually, with simultaneous risks to pollination, soil quality, and invasive species. Across the UK economy, water risks alone could reach 13% of GDP in an extreme event. For the seven largest UK banks, analyses indicate possible adjustments in the value of domestic holdings of up to 4–5% over the coming decade due to physical nature-related risks.
Exposed sectors
The sectors most exposed to biodiversity loss – such as agriculture, food production, forestry, mining, energy, chemicals, and consumer staples – often overlap geographically with regions of high biodiversity value and ecosystem fragility, amplifying the materiality of the risk of nature-dependencies and impacts.
These regions include tropical forests in Latin America (notably Brazil’s Amazon and Cerrado), Southeast Asia (Indonesia, Malaysia, Philippines, Vietnam), and Sub-Saharan Africa (the Congo Basin and East African savannahs). Listed equities in these sectors are particularly vulnerable when their operations, supply chains, or resource extraction activities are concentrated in these biodiversity hotspots. For example, companies in the packaged foods, meats, and agricultural products sub-industries have significant exposure in Latin America and Southeast Asia, where land-use change and deforestation are major drivers of biodiversity loss.
Similarly, mining and energy firms operating in Africa and South America may face heightened risks due to ecosystem degradation and regulatory challenges. The overlap of high-impact sectors and sensitive geographies means that a relatively small number of companies account for a large share of global biodiversity impacts, and their listed equities are exposed to material financial risks from nature loss, regulatory changes, and supply chain disruptions.
Water dependency
Recent research highlights that supply chain water security risks are increasingly material for listed equities, particularly in sectors with high water dependency such as food and beverage, textiles, semiconductors, mining, and energy. Companies with global supply chains often source raw materials and components from regions facing acute water stress, including parts of Latin America, Southeast Asia, and Sub-Saharan Africa.
Disruptions in these regions – whether from drought, flooding, or regulatory changes – can lead to increased costs, operational delays, and reputational risks for publicly traded firms. For example, CDP’s water disclosure data shows that a significant proportion of listed companies have identified water-related risks that could impact their financial performance, yet many still lack robust mitigation strategies. As investor scrutiny and regulatory expectations rise, the ability to assess, disclose, and manage water security risks across supply chains is becoming a key factor in protecting shareholder value and ensuring long-term resilience for listed equities.
Climate change is intensifying both water scarcity and water-related hazards, such as floods and droughts, as rising temperatures disrupt precipitation patterns and the global water cycle. Globally, water stress is increasing and is particularly acute in certain regions. Climate change uniquely impacts the water cycle, which can manifest as extreme flooding, drought, glacial melt, and ocean acidification, each posing distinct threats to water quality and security and challenging the integrity of global supply chains.
In 2024, four out of five of the costliest natural disasters measured by insured losses were water-related. The rapid expansion of artificial intelligence is anticipated to further strain water resources, as data centres require significant freshwater for cooling, and increased demand for critical minerals intensifies water demands posed by the mining industry. Droughts driven by rising temperatures may pose further challenges for operations in water-insecure regions.
A notable example is Mendoza, Argentina, where a growing conflict has emerged between the legacy wine production economy and newer copper mining businesses, both highly water-intensive industries. Mendoza’s renowned Malbec vineyards depend on glacial meltwater for irrigation, while proposed copper mining projects require substantial water for ore processing. As Argentina seeks economic growth through mining, Mendoza has streamlined permits and fast-tracked copper development, attracting companies such as First Quantum Minerals. This has raised concerns among environmentalists and wine producers about long-term water availability and the sustainability of Mendoza’s agricultural identity. Despite efforts to site mines away from critical vineyard and glacier zones, the tension between economic growth and water security remains a central challenge for the region.
Water disclosure has generally lagged behind emissions reporting, which may mean that risks remain unidentified in company balance sheets. As these risks increase synergistically with rising global temperatures and global economic development, they are likely underestimated, resulting in misunderstood threats to portfolios and financial stability.
Intricate challenges
Biodiversity is increasingly recognised as a financially material factor that can influence long-term value creation, portfolio resilience, and risk-adjusted returns. For institutional investors, integrating biodiversity into investment strategies can support fiduciary responsibilities and help identify emerging risks and opportunities tied to nature-related dependencies and impacts.
A financially material approach to biodiversity often requires addressing cross-cutting drivers of nature loss, including deforestation, water stress, pollution, and climate change. Companies in resource-intensive sectors (e.g., agriculture, forestry, food and beverage, apparel, and extractives) face heightened operational and materials cost risks, while high-emitting or polluting industries may be exposed to policy, litigation, and reputational risks.
As global frameworks like the Taskforce on Nature-related Financial Disclosures (TNFD) gain traction, the barriers for evaluating these risks and opportunities are falling. Investors who proactively navigate the intricate challenges of capturing nature-related risks and opportunities may be better positioned to manage long-term financial performance, while recognising that outcomes remain subject to market and environmental uncertainties.
Laina Draegar, Director of Global Equities and Responsible Investing at Los Angeles Capital Management (LACM), is a senior portfolio manager, chairs the firm’s responsible investing solutions committee, and is a member of its investment committee. She oversees LACM’s ESG activities utilising ESG criteria as a tool to improve investment returns, better manage risk and meet clients’ unique investment objectives through customised ESG solutions. Draegar has helped to shape LACM’s responsible investing, active ownership, and climate policies and leads the effort to thoughtfully integrate ESG within the firm’s multi-factor framework.
This article was co-authored by Annie Krut, Sustainable Investment Strategist, Los Angeles Capital Management.
BIODIVERSITY, FOOD SECURITY, FOOD SYSTEMS, INVESTMENT STRATEGY, MINING, NATURE, REGENERATIVE AGRICULTURE, RISK MANAGEMENT, STEWARDSHIP, SUSTAINABLE AGRICULTURE, TNFD, WATER
Capturing material nature-related risks and opportunities is critical to long-term financial performance, says Laina Draegar, Director of Global Equities at Los Angeles Capital Management.
The richness and complexity of our planet’s ecosystems is reflected in the challenges inherent in evaluating nature-related financially-material risks. Nevertheless, they must be overcome by investors seeking to deliver long-term performance.
The landmark Kunming-Montreal Global Biodiversity Framework has distilled five key drivers of biodiversity loss: changes in land and sea use, direct exploitation of organisms, climate change, pollution and invasion of alien species. These drivers are typically realised in an interconnected fashion. The rate of ecosystem loss is also difficult to forecast and non-linear. As the climate changes and warms, both these acute and chronic risks may accelerate and could materialise to degrade ecosystems in a heterogeneous manner.
Acute nature-related risks, via catastrophic weather events or pollution spills, can result in massive ecological change overnight. While chronic risks may result in changes to ecosystems that occur gradually overtime, for ecosystems subject to key thresholds and tipping points where cumulative impacts can reach a point of irreversible change, the risk increases dramatically once those tipping points are crossed.
Deep connections
To make matters more complicated, biodiversity risks are deeply interconnected and often self-reinforcing. Positive feedback loops mean that one crisis, such as deforestation, can accelerate another crisis like climate change, which in turn intensifies extreme weather events and further degrades habitats. Multiple threats – including pollution, climate change, and habitat loss – do not simply add up; they amplify each other’s impacts, resulting in outcomes that are more severe than if each occurred in isolation.
Ecosystems – complex webs of interaction – are particularly vulnerable to cascading effects: the loss of a single keystone species can trigger rapid collapse throughout the food web, reducing resilience and pushing systems toward irreversible tipping points. As biodiversity declines, ecosystems become less able to withstand stress, making them more susceptible to even minor disturbances and accelerating the overall decline in function.
This dynamic means that biodiversity loss and its associated risks – such as reduced food security, increased disease emergence, and economic instability – can escalate rapidly, often in exponential or non-linear ways. The World Economic Forum has identified biodiversity loss as one of the most severe threats facing humanity in the coming decade, largely due to these compounding and interconnected effects.
At least half of global GDP is moderately or highly dependent on nature, and the economy fundamentally relies on critical services including clean water, air, and food. As an example, analysis by the Green Finance Institute shows that 75% of the United Kingdom is affected by at least one hotspot of natural capital depletion, with 25% impacted by two or more.
While agriculture is most at risk in percentage terms, the largest monetary risks are found in the services and manufacturing sectors. Disruption to ecosystem services can reduce agricultural output by up to 15% annually, with simultaneous risks to pollination, soil quality, and invasive species. Across the UK economy, water risks alone could reach 13% of GDP in an extreme event. For the seven largest UK banks, analyses indicate possible adjustments in the value of domestic holdings of up to 4–5% over the coming decade due to physical nature-related risks.
Exposed sectors
The sectors most exposed to biodiversity loss – such as agriculture, food production, forestry, mining, energy, chemicals, and consumer staples – often overlap geographically with regions of high biodiversity value and ecosystem fragility, amplifying the materiality of the risk of nature-dependencies and impacts.
These regions include tropical forests in Latin America (notably Brazil’s Amazon and Cerrado), Southeast Asia (Indonesia, Malaysia, Philippines, Vietnam), and Sub-Saharan Africa (the Congo Basin and East African savannahs). Listed equities in these sectors are particularly vulnerable when their operations, supply chains, or resource extraction activities are concentrated in these biodiversity hotspots. For example, companies in the packaged foods, meats, and agricultural products sub-industries have significant exposure in Latin America and Southeast Asia, where land-use change and deforestation are major drivers of biodiversity loss.
Similarly, mining and energy firms operating in Africa and South America may face heightened risks due to ecosystem degradation and regulatory challenges. The overlap of high-impact sectors and sensitive geographies means that a relatively small number of companies account for a large share of global biodiversity impacts, and their listed equities are exposed to material financial risks from nature loss, regulatory changes, and supply chain disruptions.
Water dependency
Recent research highlights that supply chain water security risks are increasingly material for listed equities, particularly in sectors with high water dependency such as food and beverage, textiles, semiconductors, mining, and energy. Companies with global supply chains often source raw materials and components from regions facing acute water stress, including parts of Latin America, Southeast Asia, and Sub-Saharan Africa.
Disruptions in these regions – whether from drought, flooding, or regulatory changes – can lead to increased costs, operational delays, and reputational risks for publicly traded firms. For example, CDP’s water disclosure data shows that a significant proportion of listed companies have identified water-related risks that could impact their financial performance, yet many still lack robust mitigation strategies. As investor scrutiny and regulatory expectations rise, the ability to assess, disclose, and manage water security risks across supply chains is becoming a key factor in protecting shareholder value and ensuring long-term resilience for listed equities.
Climate change is intensifying both water scarcity and water-related hazards, such as floods and droughts, as rising temperatures disrupt precipitation patterns and the global water cycle. Globally, water stress is increasing and is particularly acute in certain regions. Climate change uniquely impacts the water cycle, which can manifest as extreme flooding, drought, glacial melt, and ocean acidification, each posing distinct threats to water quality and security and challenging the integrity of global supply chains.
In 2024, four out of five of the costliest natural disasters measured by insured losses were water-related. The rapid expansion of artificial intelligence is anticipated to further strain water resources, as data centres require significant freshwater for cooling, and increased demand for critical minerals intensifies water demands posed by the mining industry. Droughts driven by rising temperatures may pose further challenges for operations in water-insecure regions.
A notable example is Mendoza, Argentina, where a growing conflict has emerged between the legacy wine production economy and newer copper mining businesses, both highly water-intensive industries. Mendoza’s renowned Malbec vineyards depend on glacial meltwater for irrigation, while proposed copper mining projects require substantial water for ore processing. As Argentina seeks economic growth through mining, Mendoza has streamlined permits and fast-tracked copper development, attracting companies such as First Quantum Minerals. This has raised concerns among environmentalists and wine producers about long-term water availability and the sustainability of Mendoza’s agricultural identity. Despite efforts to site mines away from critical vineyard and glacier zones, the tension between economic growth and water security remains a central challenge for the region.
Water disclosure has generally lagged behind emissions reporting, which may mean that risks remain unidentified in company balance sheets. As these risks increase synergistically with rising global temperatures and global economic development, they are likely underestimated, resulting in misunderstood threats to portfolios and financial stability.
Intricate challenges
Biodiversity is increasingly recognised as a financially material factor that can influence long-term value creation, portfolio resilience, and risk-adjusted returns. For institutional investors, integrating biodiversity into investment strategies can support fiduciary responsibilities and help identify emerging risks and opportunities tied to nature-related dependencies and impacts.
A financially material approach to biodiversity often requires addressing cross-cutting drivers of nature loss, including deforestation, water stress, pollution, and climate change. Companies in resource-intensive sectors (e.g., agriculture, forestry, food and beverage, apparel, and extractives) face heightened operational and materials cost risks, while high-emitting or polluting industries may be exposed to policy, litigation, and reputational risks.
As global frameworks like the Taskforce on Nature-related Financial Disclosures (TNFD) gain traction, the barriers for evaluating these risks and opportunities are falling. Investors who proactively navigate the intricate challenges of capturing nature-related risks and opportunities may be better positioned to manage long-term financial performance, while recognising that outcomes remain subject to market and environmental uncertainties.
Laina Draegar, Director of Global Equities and Responsible Investing at Los Angeles Capital Management (LACM), is a senior portfolio manager, chairs the firm’s responsible investing solutions committee, and is a member of its investment committee. She oversees LACM’s ESG activities utilising ESG criteria as a tool to improve investment returns, better manage risk and meet clients’ unique investment objectives through customised ESG solutions. Draegar has helped to shape LACM’s responsible investing, active ownership, and climate policies and leads the effort to thoughtfully integrate ESG within the firm’s multi-factor framework.
This article was co-authored by Annie Krut, Sustainable Investment Strategist, Los Angeles Capital Management.
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