Genetic Diversity Loss: Financial Risks Part I

Ragini gupta, CLB student fellow–LLM in Environmental Law and Policy (’23).

Climate change and habitat destruction may have already led to the loss of 10 percent of the earth’s genetic diversity . In Part I, we discuss the financial risk of loss of biodiversity and genetic diversity. We also examine the implications of corporate liability. Part II will examine the securities law aspect in more detail.


What is genetic variation?

Genetic diversity is the number of alleles or genotypes in a population. It is a level of biodiversity. The other levels are species diversity and eco-system diversity. The combined DNA differences of all individuals within a species is what is meant by ““. Genetic diversity is described as , which underpins other levels of biodiversity.


Why should we care about genetic diversity loss?

The loss of genetic diversity cannot be reversed, because it recovers much slower than the rate at which it was lost. Loss of genetic diversity affects us all. We are used to seeing nature as separate from us. The Food and Agricultural Organization (FAO) has warned of the dangers of the loss of genetic diversity in plants . This is because the world’s food security is dependent on 30 species of crops that supply most of our dietary protein and energy. Genetic diversity is essential for the continued production of these species. Since ancient times, humans have relied on nature to provide them with medicine. This includes both traditional and modern remedies. Aspirin is derived from willow bark, digoxin comes from the flower Digitalis lanata and morphine is derived by opium. Of the 150 most popular prescription drugs in the United States, a minimum of 118 are made from natural sources. According to an estimate, the loss of biodiversity means that we lose at least one important potential drug every 2 years.


Loss of biodiversity as a risk to financial stability

It is easy to imagine the health risks of biodiversity loss, but it also poses a financial threat. biodiversity losses are one of the three biggest global risks by 2022 according to the World Economic Forum. More than half the world’s GDP is dependent on healthy ecosystems. According to the World Economic Forum, long-term damages due to biodiversity loss range from USD 2 to 4.5 trillion each year.


What does HTML0 mean for corporate law ?

A growing body of research argues that Climate Change presents predictable financial and systemic risk, and has implications on the fiduciary duty of directors under corporate law. The same logic can be applied to the risks posed by loss of biodiversity or genetic diversity.

Delaware law imposes two fiduciary obligations on directors: a duty to act with loyalty and a responsibility of care. In the context of climate change, the argument is that a Board may breach its duty to care if it fails to educate itself about the material and foreseeable financial risks that are relevant to the industry or is grossly negligence in evaluating this information. A breach of can occur if directors are “willfully ignorant or consciously ignore climate-related financial risk” as “conscious disregard of one’s responsibilities constitutes bad faith.” Securities law obligations that require disclosure of climate risk are one example. The SEC’s 2010 Interpretative Release on Disclosures Related to Climate Change discusses already some ways that climate change can trigger disclosure requirements. The SEC’s proposed rules that enhance and standardize disclosures related to climate change may further enhance these requirements.

The same arguments can be applied to the financial risks posed by biodiversity loss. As with climate change, risks associated with biodiversity loss are broadly classified as physical risks and/or transition risks. Physical risks are caused by the loss of ecosystem services that a business depends on. In the U.S., for example, the production of crops dependent on Pollinators contributes USD 50 billion per year to the economy. The decline in pollinators can also pose physical risks for industries that depend on these crops. The transition risks are caused by shifts in consumer or policy sentiments resulting from efforts to counter biodiversity losses. At the 15th COP of the UN Convention on Biological Diversity parties, the Kunming Montreal Global Biodiversity framework was adopted. The Framework’s Target 18 calls for parties to identify by 2025, and eliminate, phase-out or reform harmful incentives, including subsidies, that are detrimental to biodiversity, by at least US $500 billion by 2030. Some businesses may face transitional risks if national governments continue to pursue such targets. The losses that can be caused by biodiversity-related risks are significant. The risks are foreseeable, as well. It is highly unlikely that a company or its directors would claim to be unaware of the threats posed by biodiversity loss. In a report from March 2022,, a study group of central bankers and supervisors, as well as researchers, found that biodiversity loss can pose a financial threat and threaten financial stability. This falls under the mandate of central banks and supervisors. Directors may be violating their fiduciary duty if they fail to adequately inform themselves about the financial risks of biodiversity loss to their businesses or if they do not incorporate these risks into their business strategies.

However, there are differences between the risks of climate change and loss of genetic diversity/biodiversity. One of the reasons is that biodiversity is hard to measure. There’s no single metric for tracking biodiversity loss, unlike climate change which uses carbon emissions. While Net Zero pledges rely on companies to offset the carbon emissions they produce, it is argued that a destroyed ecosystem cannot be replaced or “offset”. The efforts to reduce climate risks are primarily focused on reducing emissions, but protecting biodiversity requires a multi-faceted strategy.

So far, climate change lawsuits based on securities laws and fiduciary duty have been mostly unsuccessful. Future litigations on biodiversity risks may face similar challenges. It is still too early to call litigations that intersect climate change with corporate law a failure. In addition, litigation is not the only means of influencing a company. The number of shareholder initiatives related to climate risks is growing. In some cases, investors cite climate change to justify voting against the election of management-backed board members. There may be similar shareholder activism on biodiversity risk, even though institutional investors have been voting against biodiversity proposals. However, this could change as the Task Force on Nature Related Financial Disclosure framework is expected to be finalized by September 2023. The Task Force on Nature Related Financial Disclosure’s framework is expected to be finalized in September 2023.

Part II discusses how disclosure obligations under securities laws may be applicable to biodiversity/genetic loss.

References

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