Investors’ Fight to Track Impact on Nature

Investors are increasingly recognising the need for biodiversity and nature-related data, even as still nascent information streams prove difficult to navigate. 

If the agreement on the Global Biodiversity Framework (GBF), the so-called ‘Paris for plants’, in Montreal last year told us anything, it’s that addressing the impacts of climate change must happen in tandem with responding to the biodiversity and nature crises.  

“With the recognition that climate and nature are inseparable, and that nature will play a part in net zero transition planning, data on nature [and biodiversity] is required for this integration,” Gemma James, Head of Biodiversity and Nature at specialist advisory firm Chronos Sustainability, tells ESG Investor. 

Yet, with the spectrum of possible biodiversity and nature-related risks that are financially material so vast, spanning everything from water, forestry, and agriculture, where do investors even start?  

The biodiversity and nature data market being built by third-party providers is growing at a rapid pace, but it’s still in its nascent stages, with investors currently focused on developing their in-house assessment capabilities and supporting different initiatives on a piecemeal basis.  

Given the lack of standardised data sets, investors are still exhibiting some hesitancy in getting started, but it’s imperative that they do start getting more hands-on with the data that’s already out there, according to experts speaking to ESG Investor.  

“For investors with broadly diversified portfolios, externalities from unsustainable use of natural ecosystems can affect long-term performance,” notes Snorre Gjerde, Lead Investment Stewardship Manager at Norges Bank Investment Management (NBIM), and a Taskforce Member of the Task Force on Nature-related Financial Disclosures (TNFD).  

“We need to understand the financial implications of these developments, how our portfolios are exposed to them, and how we can best manage the risks and opportunities that arise,” he says, adding that the sovereign wealth fund needs access to “comparable, accurate and decision-useful data” that is scalable across its portfolio, which consists of over 9,000 companies spanning 70 markets.  

Guide rails will be built with the finalisation of the TNFD framework later this year and the subsequent action from policymakers who agreed to the terms of the GBF.  

“But investors still have a long way to go on this topic,” admits Lauren Muusse, Co-Investor Engagement Lead at the World Benchmarking Alliance (WBA). 

A complicated web 

“All of the issues we’ve seen with climate data are magnified ten-fold when we look at biodiversity and nature data,” says Dr Rory Sullivan, Chronos Sustainability’s CEO. 

The crux of the issue is that biodiversity and nature-related risks and impacts cannot be measured through an aggregate set of metrics that can be easily applied across sectors and asset classes, such as measuring tonnes of CO2 connected to an activity, he says. 

Further, data can be “biased towards certain species or ecosystems”, which can result in the underestimation or overestimation of their importance or abundance, says James d’Ath, Data Lead for the TNFD. The data can be “inconsistent” due to differences in measurement techniques, sampling frequency, and data quality control, he adds.  

“There is also often a lack of long-term data on natural resources and ecosystems, which can make it difficult to assess trends and changes over time. This can make it challenging to develop effective conservation strategies,” d’Ath says. 

Simon Zadek, Chair of think tank NatureFinance, formally known as the Finance for Biodiversity Initiative, argues that a large number of financial institutions are still focused on “how they can relate increasingly available biodiversity data to their performance models”. 

“For many financial institutions, they simply don’t know – even at a conceptual level – if there are nature-related risks,” he says. 

Unlike carbon metrics, nature and biodiversity-related data is location-specific, which also creates challenges.  

“Biodiversity in rural England is clearly not the same as a Brazilian biome, and [companies in each region] have vastly different potential risks and impacts,” notes Aela Cozic, Sustainable Investment Analyst and Portfolio Manager at UK-based investment manager Fidelity International.

Procuring location-specific data becomes resource-intensive and complex for an investor with a portfolio of hundreds, even thousands of companies globally, she explains. For a logging company in the Amazon, for example, there will likely be a heavy focus on deforestation-related data, but that kind of data becomes less relevant for an oil and gas major.  

Keeping track of all the possible biodiversity and nature-related risks and impacts across a large corporate’s supply chain becomes “incredibly complex”, Cozic says.  

NBIM’s Gjerde agrees, adding that visibility of location-specific risks is also an important part of then identifying the most effective “site-specific solutions”. 

Investors need to procure “some qualitative narrative to accompany the quantitative data”, as it can serve as an overlay piecing the data puzzle together, argues James from Chronos Sustainability. However, this still may not result in a “clean narrative”, she warns. 

The complexities surrounding data has meant that asset managers have been reluctant so far to set targets. A recent report by UK-based NGO ShareAction, which ranked 77 asset managers with a combined US$77 trillion in AuM, noted that biodiversity is a “blind spot” in terms of performance. 

But investors choosing the path of inaction while they wait for relevant and comparable data from investee companies may be waiting a while. WBA’s 2022 Nature Benchmark noted that only 5% of the 400 companies it assessed have looked at how, and to what extent, their operations and business models have an impact on nature and biodiversity. 

No matter how sporadic and open to interpretation it may be, there is “plenty of data to get started”, argues TNFD’s d’Ath. 

A narrative has built up that there isn’t enough data – this merely misrepresents the issue,” he says, adding that there is instead a lack of understanding of how to use existing data or indeed how to find it.  

“My message: Do not make perfection the enemy of good.” 

Data innovation “blossoming” 

Investors aren’t starting from ground zero, however.  

Most have set up or are in the process of setting up “firm-wide internal processes and tools to use climate-related data which can all be leveraged as new biodiversity and nature-related data is brought in, which should also accelerate the adoption of this newer data when made available, according to Nikki Gwilliam-Beeharee, Co-Investor Engagement Lead at the WBA. 

Fidelity International’s Cozic says that the asset manager provides training to its investment teams on biodiversity and nature-related data to “continue to raise awareness so that they know our expectations towards companies in these areas”.  

In 2021, Fidelity International conducted 198 engagements (14% of total engagements for the year) related to nature, including biodiversity, waste management and water usage. 

Other investors are working to develop and launch their own data solutions. 

In February, UK-based Brunel Pension Partnership announced it is embarking on a pilot with S&P Trucost to develop a “biodiversity footprint” to enhance the asset owner’s analytics and disclosures across these themes. 

In November 2021, HSBC launched the ESG Biodiversity Screened Index, which excludes companies that pose a threat to biodiversity. 

“We’ve definitely seen a high-level of ambition coming from asset owners and other investors in this space,” says Kate Brett, Global Intellectual Capital Leader for Sustainable Investment at investment consultancy firm Mercer. 

She points to a 2020 call to action by French asset managers AXA Investment Managers, BNP Paribas Asset Management, Sycomore Asset Management, and Mirova, which outlined their interest in working with data providers to develop and implement tools to measure the impact of their investments on biodiversity.  

In March 2021, the Align project was also launched, led by the United Nation’s Environment Programme World Conservation Monitoring Centre (UNEP-WCMC) and funded by the European Commission. Its three-year plan is to work with companies, financial institutions and nature-focused organisations to develop harmonised biodiversity measurement tools and approaches. 

“There will likely be more consolidation in the industry like this over the coming years,” says Brett. 

At COP15, a collaborative investor-led engagement initiative was launched to serve as a counterpart to Climate Action 100+.  

Nature Action 100 (NA100) will target major corporates on their nature-related impacts, developing sector-specific pathways, identifying corporate actions needed to protect and restore nature, and tracking the progress of focus companies against key indicators. 

Alongside the development of its disclosure framework, d’Ath highlights his role co-chairing TNFD’s Data Catalyst, which has over 135 participants representative of entities from right across the nature-related data landscape working on projects to “address the numerous gaps and challenges and enable the broadest adoption of the TNFD framework in the shortest timeframe possible”. 

NatureFinance’s Zadek is ultimately encouraged by the extent of innovation seen in the biodiversity and nature market, noting that it’s “blossoming”.  

“There are hundreds upon hundreds of new start-ups all wanting to offer different types of biodiversity data and different types of analysis associated with it,” he says, adding that the biggest data providers are also beginning to more systematically offer biodiversity data. 

Earlier this year, data provider MSCI announced its plans to distribute biodiversity data and analytical tools from AI and data platform NatureAlpha, which recently launched the Integrated Biodiversity Assessment Tool (IBAT) to help investors understand their portfolio-related risks. 

A clear path forward 

The GBF and TNFD are set to make all the difference, according to experts. 

Consensus was reached on the GBF late last year, with governments agreeing to its 21 targets and ten milestones by 2030. It includes pledges to preserve and restore at least 30% of land and sea areas globally, as well as ensuring at least 20% of degraded freshwater, marine and terrestrial ecosystems are under restoration. These pledges will likely result in changes to laws and regulations globally to ensure the goals are met.  

The “landmark” deal has the potential to “mobilise hundreds of billions for biodiversity”, says Pratima Divgi, Head of Capital Markets at environmental disclosure platform CDP (North America). 

While the word ‘mandatory’ does not appear in the final text of the GBF, the agreement commits governments to encourage and enable disclosure on biodiversity and to ensure large businesses are disclosing from 2030,” she says.  

“This sends a clear message to all large businesses and financial institutions that they must assess and disclose risks, dependencies and impacts on nature, as governments have agreed to require this by 2030 at the latest.” 

One of the most notable aspects of the GBF for investors and companies is target 15, which will require companies to assess, report on and mitigate their dependencies and negative impacts on biodiversity locally and globally. 

This is where the TNFD plays a vital role, as it’s developing a framework that will serve as “the gold standard for nature disclosure”, according to James from Chronos Sustainability.  

TNFD’s V0.3 iteration of disclosure recommendations was published last year and accounts for varying materiality and reporting preferences, building on the four core pillars outlined by the Taskforce on Climate-related Financial Disclosure (TCFD). The final version is expected September 2023.   

Our hope is that the TNFD framework, which we have taken an active role in co-creating, can be an important tool to strengthen and standardise how companies manage and disclose on nature risk,” says NBIM’s Gjerde. 

While the TNFD does not have the capacity to make disclosures mandatory, it’s likely that it will follow the path of the TCFD, which has been adopted into laws globally. 

Another important announcement made at COP15 last year, which will further facilitate a global shift to nature-focused disclosure, was that the International Sustainability Standards Board (ISSB) plans to immediately advance work on its upcoming climate standard, making explicit connections to natural ecosystems and human capital aspects of the net zero transition.   

A question that remains to be answered is whether this increased level of [biodiversity and nature] data available will actually push companies, investors and markets towards being nature-positive,” concludes WBA’s Muusse. 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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