Asset managers must give equal weight to biodiversity alongside climate-related engagement to address both crises, says Chris Iggo, CIO, Core Investments at AXA IM.
Our biodiversity system is deteriorating at an alarming rate and its loss is causing damage not only to the natural world but to the wider planet, society, and the global economy.
The World Economic Forum estimates that more than half of global GDP – around US$44 trillion – depends on high-functioning biodiversity. As such, biodiversity loss is now increasingly recognised as a systemic risk.
For investors, understanding how biodiversity risks might impact long-term portfolio returns and how best to manage them is just a part of the equation. We believe investors should also consider how to contribute positively to good social and environmental outcomes.
Asset managers cannot address the environmental crisis alone, but they do have a role to play in protecting lives and livelihoods through the way they engage with companies or issuers and direct clients’ capital.
Taken together, we believe there are four critical elements required for asset managers to meet the biodiversity challenge.
Make biodiversity a priority alongside climate change
We already know the destruction of habitats and our food systems causes about 25% of climate emissions. In turn, climate change is becoming an increasingly significant driver of biodiversity loss – land and marine ecosystems absorb more than half of man-made carbon emissions.
This interdependence and interconnectedness mean climate change and biodiversity loss must be tackled together.
However, whereas climate change focuses on a single metric – carbon emissions – biodiversity is multifaceted. Damaging a complex system like the natural world has innumerable economic consequences.
For instance, intensively farming land with pesticides and fertilisers limits its ability to continue producing food by reducing crop yields – and agricultural expansion has reached the point where over a third of terrestrial land surface is being used for crops and livestock.
Polluting water supplies has terrible consequences for those affected, but it also puts the company responsible at risk of reputational and regulatory backlash, which could result in fines and/or higher taxes. Consumers may also boycott their products.
These are economic risks that asset managers cannot afford to ignore. As such, biodiversity must have equal billing with climate change when asset managers consider and make long-term investment decisions for their clients.
Implement specific engagement strategies around biodiversity
It is only in recent years that biodiversity has become a mainstream concern for investment managers. As a result, a comprehensive risk and disclosure framework – akin to the landmark Task Force on Climate-related Financial Disclosures (TCFD) – has hitherto been lacking.
A major step forward will be made in September with the launch of TCFD’s sister framework, the Taskforce for Nature-related Financial Disclosures (TNFD).
With higher-quality reporting from companies on their environmental footprints, asset managers will be better equipped to identify those businesses most exposed and how they individually impact the environment.
This will be crucial to navigating a world lacking a single point of focus – and will also facilitate more detailed engagement around those companies’ long-term plans to improve their business models and behaviours.
Nevertheless, asset managers need to implement their own specific biodiversity engagement strategies or risk squandering this opportunity to drive consequential environmental change.
Use the data
Given preserving biodiversity and ecosystems are now urgent priorities, it is crucial that we have the metrics and tools to measure the impact of investments on the environment. Collecting, analysing, and reporting environmental data is accordingly key.
Today, companies like Iceberg Data Lab offer assessment tools and data solutions that demonstrate the environmental impact of issuers and assets throughout their value chain.
Moreover, advances in ‘big data’ mean it is now much easier to monitor factors such as water quality and soil erosion, with satellite imagery and other technologies providing a reliable picture of exactly how and where the environment is changing.
This should enable investors to make detailed assessments of biodiversity-related risks and opportunities – and therefore make more informed investment decisions.
However, having the right tools does not automatically mean that asset managers will use them. This will require a genuine commitment to tackling biodiversity loss, which is not yet wholly evident across the sector.
Develop strategies backing biodiversity solutions
As with carbon emissions, the investment approach to biodiversity is twofold. We can seek to mitigate risks by allocating capital to companies reducing their biodiversity footprints. But we can also allocate to biodiversity-friendly solutions. The latter, we believe, will most excite investors seeking to have a real impact on the environment.
Companies in the solutions space develop products and services which can have a positive benefit on biodiversity preservation beyond their own footprints. Key areas here include agriculture and aquaculture, water treatment, and sustainable materials.
There is already a myriad of investment opportunities and innovations in these areas which will improve the way we farm, breed fish for food, package food and drink, and much more beyond. The more investment strategies there are to back the companies developing these solutions, the better.
Policy in this space will ultimately be key. Government interventions such as banning plastic packaging for food, which will eventually occur, will be gamechangers for providers on the right side of future legislation. But to help these companies scale and innovate, we need dedicated biodiversity strategies able to channel capital to them.
Around US$133 billion is invested annually in nature-based solutions – including US$18 billion from private sector finance – but this needs to at least triple by 2030 if the world is to meet its climate targets. To support a sustainable global economy, we need increasing numbers of single-focus strategies to help meet the risk that biodiversity loss poses to us all.