More ambitious and integrated investment strategies are needed to tackle climate change and biodiversity loss in tandem.
While investors are becoming more “sophisticated” in their response to the twin crises of climate change and biodiversity loss, the approach of many asset managers to biodiversity “lags far behind”, according to Katie Leach, Senior Programme Development Manager for Biodiversity at non-profit organisation ShareAction. The crises call for financial institutions – whether asset managers, asset owners or banks – to implement ambitious and integrated strategies “at speed”, she adds.
The relationship between climate change and biodiversity is increasingly recognised by policy makers and investors. Speaking at a COP26 event organised by the Secretariat of the UN-convened Convention on Biological Diversity, CBD Executive Secretary Elizabeth Maruma Mrema flagged the “interconnected challenges” of climate change, biodiversity loss and desertification.
The conservation and protection of biodiversity “holds the key to solving every global challenge we face, from climate change mitigation and adaption through to human health, economic development and poverty eradication”, she said.
Its paramount importance is recognised in the Global Biodiversity Framework, the final version of which will be presented for ratification at the second part of the UN Biodiversity Conference, COP15, in Kunming, China, during May 2022.
Speaking in Glasgow, Huang Runqiu, Minister of Ecology and Environment for China and President of COP15, said it was critical that resources should be mobilised to address climate change and biodiversity loss. Multilateralism should be upheld, he added, to achieve common solutions to implement the goals of the Paris Agreement and the Biodiversity Framework.
A focus on forests
A multilateral approach was evidenced in the Glasgow Leaders’ Declaration on Forests and Land Use, endorsed by 141 countries covering just over 90% of the world’s forests. Signatories committed to recognise “the critical and interdependent roles of forests of all types, biodiversity and sustainable land use in enabling the world to meet its sustainable development goals”. They also declared they would help achieve a balance between anthropogenic greenhouse gas emissions and removal by sinks; to adapt to climate change; and to maintain other ecosystem services.
Flora Gaber, ESG Specialist at Swedish government-owned pension fund AP7, says it is “clearly encouraging” that world leaders have committed to end deforestation by 2030. “We haven’t seen anything similar before. Of course, the commitment now has to turn into action, otherwise it’s not worth a lot, but still it’s a reason to be optimistic.”
The importance of forests in supporting biodiversity was also recognised by private sector participants at COP26. More than 30 financial institutions, collectively with over US$8.7 trillion in assets under management, committed to using “best efforts” to eliminate commodity-driven deforestation from portfolios by 2025. The firms included Aviva, Storebrand Asset Management, Impax Asset Management and the Church Commissioners for England.
Participating investors plan to use active ownership and ongoing stewardship to catalyse actions to eliminate deforestation across supply chains from cattle products, palm oil, soy, and pulp and paper production.
However, ShareAction analysis has highlighted that while commitments to fight deforestation are increasing across the finance sector, these are often “weak and high-level”, says Leach. “Many financial institutions treat biodiversity loss and climate change as isolated issues. This risks underestimating the true scale of their impacts and dependencies, inhibiting the development of effective mitigation strategies.”
Efforts to instigate a combined approach to climate change and biodiversity include the Taskforce for Nature-related Financial Disclosures (TNFD). Built upon the structure and foundation of the Taskforce on Climate-Related Financial Disclosures, the goal is for the two frameworks to comprehensively cover reporting and reduction of climate and nature-related financial risks.
“While such combined frameworks develop, asset owners have a key role to play in driving up standards across the asset management industry,” says Leach. “They should be encouraging asset managers to embed climate considerations in biodiversity policies, elevate biodiversity loss considerations as part of climate engagement, and prioritise engagement with sectors and companies having a disproportionate impact on biodiversity and climate change.”
Imperfect information
For the majority of investors, biodiversity is “a relatively new topic, but important”, says Danielle Fugere, President of US-based shareholder advocacy organisation As You Sow. “When we talk to issuers, some of the largest companies, particularly food companies, are cognisant of the need for biodiversity preservation. It is likely there will be increased focus on climate change and its impact on biodiversity and mass extinctions.”
Fugere points to actions of the shareholder advocacy arm of Green Century Capital Management as the beginning of this trend. In April, the organisation withdrew a shareholder proposal for JP Morgan’s annual shareholder meeting after the bank agreed to expand its policies on deforestation. A year earlier, a Green Century resolution, calling on Proctor & Gamble to eliminate deforestation and forest degradation in its supply chain, gained 67% of votes at the company’s annual shareholder meeting. Those voting in support of the resolution included asset manager BlackRock.
In being a relatively fledgling topic, Fugere says the impact of biodiversity loss on portfolios is not well understood, identifying a need for more and better investor education and resources. “All areas of ESG need solid tools to help investors understand impact. While there are some good sources of information on biodiversity, there is not a single index or measurement system that investors can turn to.”
Understanding biodiversity risks and impacts often requires location-specific data, says AP7’s Gaber. “It is harder to quantify than, for instance, climate change, which can largely be tracked through a single-use metric such as greenhouse gas (GHG) emissions. While there is data available to assess biodiversity, it needs to be standardised and aggregated in such a way that is becomes relevant and accessible for investors.”
Joint threats, common solutions
While the impact of biodiversity loss on portfolios may not be well understood, the link between climate change and biodiversity is, says Leach.
“In June this year the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) and Intergovernmental Panel on Climate Change (IPCC) launched a great joint report illustrating the underpinning science. Climate change is the third largest direct driver of biodiversity loss, after land/sea use and direct exploitation, and is set to become increasingly important as a direct driver in future. In turn, biodiversity loss and declines in ecosystem services reduce the potential of ecosystems to limit climate change and mitigate its negative impacts.”
Together climate change and biodiversity loss represent severe environmental threats to the planet, but there are many common solutions for both, such as the protection of forests, wetlands and coastal ecosystems, she says. “Given the interconnected and systemic nature of the threats posed by climate change and biodiversity loss, it is essential that financial institutions respond appropriately.”
Gaber says AP7’s investment strategy recognises that climate stability and biodiversity must be addressed in combination. “In our view, investments aimed at addressing climate change should be assessed for their potential to impact biodiversity as demonstrated by the joint IPBES and IPCC report.”
During COP15, Jean-Jacques Barbéris, Director of the Institutional and Corporate Clients division & ESG at Amundi, who was speaking on behalf of the Finance for Biodiversity Foundation, said the finance sector “cannot forget biodiversity in the race to net zero”. Land use change, he added, is one of the biggest drivers of biodiversity loss, accounting for about 30% of loss, and is the second highest source of GHG emissions.
“Addressing biodiversity loss, in part through nature, will play a key role in achieving net zero, but clear guidelines are needed from the international community,” he said.
The next draft of the Global Biodiversity Framework should “more accurately reflect the sense of urgency and the level of ambition required to protect and restore biodiversity”, said Barbéris. “It is essential that the post-2020 Global Biodiversity Framework highlights the role that financial institutions and the private sector can and should play in delivering the 2030 milestones and the 2050 goals.”
Driving up standards
Chris Dodwell, Head of Policy and Advocacy at Impax Asset Management, said while the final details of the revised Global Biodiversity Framework remain to be seen, the current draft offers encouragement.
“We hope that it raises awareness and galvanises action to address biodiversity loss amongst national governments. We hope to see an overarching goal to halt and reverse biodiversity/nature loss by 2030 included in the updated draft, as we believe this will be most effective in helping to mobilise the private sector.”
Dodwell said it was positive to see a number of financing commitments from governments during the first part of COP15, such as the US$240 million Kunming Biodiversity Fund announced by the Chinese government, as well as the EU’s commitment to double overseas funding for biodiversity-related initiatives by the end of the decade.
“However, these still fall short of the targets of the current draft Global Biodiversity Framework, which highlights a financing gap up to at least US$700 billion per year by 2030,” he adds.
Asset owners are “important catalysts and providers of incentives to drive up standards in the industry around biodiversity” says Leach, citing ShareAction’s ‘Point of No Returns Biodiversity’ report.
To fulfil this role, they need to incorporate biodiversity into all aspects of their investment operations. For example, ShareAction recommends that asset owners strengthen due diligence in asset manager selection by reviewing performance in the areas of biodiversity related voting and engagement, policy commitments and accounting for the impact of investments.
“Equally, asset owners should firmly embed clear and specific expectations on the integration and reporting on biodiversity-related issues, as well as investment objectives regarding negative biodiversity impacts, into investment management agreements,” says Leach.
“Asset owners which are also shareholders in asset management companies can additionally exercise their influence via voting or engagement to address poor performance on biodiversity.”
