Kate Brett, Head of Sustainable Investment for UK & Europe at Mercer, looks at how asset owners can protect natural capital.
Investors are increasingly turning their attention to consider biodiversity loss, natural capital and the use of natural carbon sinks in achieving commitments to be net zero and keeping global temperature rises within the aims of the Paris Agreement.
For many investors, consideration of biodiversity loss is a natural extension of the work they have been doing on climate change. Investors are starting to apply the same lens that has been applied to climate change risk over the past decade to biodiversity – there are many parallels in terms of the challenge for investors, with investors asking:
- How do I understand the scale of the issue of biodiversity loss?
- How do I translate the science and policy direction into investment risk and opportunity?
- How do I ensure investment decisions taking biodiversity into account are based on robust data?
- Which areas of my portfolio may be most at risk?
- How can I access opportunities promoting solutions to biodiversity loss?
- How do I measure the impact my portfolio is having from a biodiversity and natural capital perspective?
The economics of biodiversity loss raises fundamental questions about the capacity for long-term economic growth, with the World Economic Forum’s 2021 Global Risks Report finding biodiversity loss to be within the top 5 risks over the coming decade by both likelihood and impact while the Business for Nature coalition estimates that over half of the world’s GDP, US$44 trillion of economic value, is at moderate or severe risk due to nature loss.
There are many headlines covering the upcoming COP26 on climate change yet there has been less coverage of the upcoming COP15 on biodiversity, due to be held in October this year in Kunming, China. The international community is in the process of agreeing the ‘Post-2020 Global Biodiversity Framework’, which aims to ensure that work being undertaken to preserve biodiversity contributes to “the nutrition, food security, and livelihoods of people, especially for the most vulnerable.”
Complex policy landscape
The policy landscape on biodiversity is complex. There are a number of international bodies with remits to preserve and protect biodiversity, including a number housed under the UN (e.g. UNEP, CITES and CBD). There are also a large number of international agreements on biodiversity (e.g. conservation agreements, controlling the use of biodiversity for economic purposes, thematic agreements, and waste-related agreements). It will be important for investors to follow developments from COP15 and engage with policy-makers, regulators and companies on actions being taken, including potential additional regulatory frameworks, to protect against further biodiversity loss and reverse the current course.
Understanding the policy direction has been critical for investors to assess the potential impacts of climate change. The recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) have been widely-recognised as a game-changer in terms of making climate data more transparent, accessible, and comparable across the investment chain and while this continues to be an evolving area, investors are intending to adopt a similar approach to considering biodiversity and natural capital. Earlier this year saw the launch of the Task Force on Nature-related Financial Disclosures (TNFD).
Bringing together asset owners, investment managers and wider stakeholders, the TNFD aims to increase transparency and reporting of nature-related financial information in order that investors can better assess and address the risks posed by biodiversity loss. The TNFD is currently developing its framework, which will be tested over 2022, with the final framework scheduled for release in 2023. Asset owners can support TNFD directly or by encouraging their investment managers and advisors to support this collaboration. Collective engagement remains a powerful tool for investors, and tackling biodiversity loss will rely on collective action in the same way we have seen many investor collaborations on climate change.
There are several ways that asset owners can integrate biodiversity into their portfolio approach. Firstly, through extending their ESG integration expectations, to proactively questioning managers on their approach to biodiversity. Investors should also be considering current levels of exposure to industries and sectors of the portfolio most impacted or having the most adverse impact, either directly or via their supply chains, such as agriculture, food producers, forestry, oil and gas and mining.
We are also seeing innovations by asset managers, offering opportunities to invest in solutions designed to prevent further biodiversity loss and reverse the current course. These investment opportunities cover a range of themes including circular economy as well as opportunities focused on land or ocean conservation. Impact measurement and monitoring will be key to the success of managing biodiversity risks.
While the coming decade has been coined the ‘decade of delivery’ on climate change, it also needs to be the decade of action on biodiversity.