Lessons learned by investors from climate risk management can be applied to nature where “urgency is paramount”.
Investors are prioritising location-specific data as they seek to use the recommendations of the Taskforce for Nature-related Financial Disclosures (TNFD) framework to “conceptualise” their nature risks, impacts and dependencies.
Speaking at ESG Investor’s Nature Data for Institutional Investors event on 2 November, Miriam Benarey, Associate Director, Sustainability & Stewardship at Impax Asset Management (AM), said the TNFD framework is key to the firm assessing the impact of its investments on nature, which involves evaluating its exposure to companies “active in sensitive geographic areas”.
The TNFD framework also provides detailed guidance on the four phases of the LEAP approach designed to be used by an assessment team in an organisation: Locate, Evaluate, Assess and Prepare.“The location-specific element, [identifying] where operations and value chain activities take place near biodiversity-sensitive areas, is crucial to conceptualising our approach to nature,” said Benarey.
“This leads to the importance of corporate geolocation disclosure, which we greatly appreciate being included in the TNFD recommendations, extending what we’ve seen in the Task Force on Climate-related Financial Disclosures’ (TCFD) framework.”
The TNFD’s final recommendations, which were released in September, included 14 recommended disclosures across four categories: governance; strategy; risk and impact management; and metrics and targets.
One of the TNFD’s four strategy disclosures requires reporting on “the locations of assets and/or activities in the organisation’s direct operations and, where possible, upstream and downstream value chain(s) that meet the criteria for priority locations.
Benarey told onlookers that Impax AM had focused a lot of attention on assessing the physical climate risks of its investments, which, like nature-related impacts, are “highly location-specific”.
The firm, therefore, has learned “valuable lessons” from its focus on physical climate risks that are applicable to assessing its nature-related risks, impacts and dependencies, she said.
“Initially, our climate-related company engagements didn’t yield the desired outcomes,” she said, noting that to address this Impax AM developed a proprietary, geolocation-based scenario analysis tool using data obtained through its engagements.
“Geolocation disclosure is key to addressing both physical climate risk and nature impact,” she said, noting that investors require precise physical location data from companies to make sound, long-term financial decisions.
According to Benarey, the second lesson Impax AM learned from its experiences with climate risk was the need for “systematic engagement to shape the landscape”.
“We combined our physical climate risk engagements with companies and advocacy with policymakers,” she said, adding that this approach became a “powerful nexus”, leading the firm to submit a petition to the US Securities and Exchange Commission (SEC) to require companies to report on the location of their assets, including disclosure of “where their most vulnerable assets were by GPS co-ordinates”.
Impax AM also partnered with the New York State Common Retirement Fund (NYSCRF) to request S&P 500 companies to report geolocation data points.
The SEC subsequently proposed its climate disclosure rule, including attention to physical climate risk and geolocation data, which expected to be released in 2024.
“These lessons underscore how much we’ve learned from addressing climate issues,” said Benarey.
“With nature, we lack the luxury of time, as urgency is paramount and, therefore, we are actively working through various channels to encourage location-specific disclosure by companies, enabling better assessment and long-term financial decision-making.”
Shortcuts for nature
Also speaking at the event, Maria Nazarova-Doyle, Head of Sustainable Investment at IFM Investors, said that policymakers’ and investors’ experience on climate can offer “shortcuts” to better nature integration.
The groundwork carried out by asset owners and managers on climate has improved the data architecture available to investors overall, according to Nazarova-Doyle.
“ESG-related data is being piped in from data and analytics providers – all that is missing is a source for nature data,” she said, noting that TNFD will drive the necessary proliferation of nature-related data.
Nazarova-Doyle also noted that work on climate has driven a transformation of asset owners’ and managers’ sustainable investment teams in terms of relevant skills and competencies needed for assessing nature-related risks, impacts and dependencies.
“A few years ago, financial services firms only had a couple of people in the corporate social responsibility area, but now they have sustainable investment teams that are fully staffed and working full time,” she said.
“Nature might not be quite yet on the agenda, but the foundational work has been done.”
She also noted how stewardship approaches have evolved, noting how in recent years responsible investors have come together and started to engage with companies and push for dialogue.
“Conversations and engagement of investors with governments in terms of support and policy development have happened a lot in climate, though not yet enough in nature, but the channels of communication exist,” said Nazarova-Doyle, previously Head of Responsible Investments and Stewardship at Scottish Widows.
“We are in a better position now than when we started with climate, as we already have the groundwork in place. We just need to get together and execute more rapidly.”
Nazarova-Doyle did, however, acknowledge key differences between climate and nature-related risks, including the non-fungibility of biodiversity impacts versus carbon emissions.
These differences create an “intellectual challenge” which may require further upskilling by existing sustainability teams in financial services firms, she said.
“They either need intense training or additional resources to understand nature-related impacts on biodiversity issues,” she said, adding that the work done on understanding different sectors’ exposure to climate change will need to be replicated for a variety of nature-related risks and dependencies, such as pollination.