Industry

Managers Laying Groundwork on Biodiversity

Engagement policies will be further refined once Global Biodiversity Framework, TNFD are finalised, according to Morningstar. 

Asset managers are beginning to incorporate biodiversity into their sustainability-focused engagement and voting strategies, but political leadership is needed to accelerate and reinforce change.  

“One of the key things that came out of COP27 was the understanding that we’re not going to limit global warming to 1.5°C unless we address nature degradation and biodiversity loss,” Lindsey Stewart, Director of Investment Stewardship Research and data provider Morningstar, told ESG Investor. 

“However, it’s hard to expect all asset managers to pull in the same direction until there’s a mandated framework establishing a clear path of action.” 

Stewart recently authored a Morningstar paper which assessed the current engagement and voting policies of 25 asset managers across the EU and US, outlining how and to what extent they are incorporating biodiversity considerations into their strategies, as well as how this may change in the future.  

He found that 13 of these asset managers are currently providing sufficient detail on their biodiversity-related active ownership policies, including AXA Investment Managers, BNP Paribas Asset Management and Schroders.  

Of the top five assessed asset managers by fund assets, only BlackRock and Capital Group “made significant specific comments about their approach to investment stewardship on biodiversity”.  

Capital Group said the firm’s monitoring process identifies entities “that have been implicated in environmental degradation”, including involvement in deforestation either directly or in their supply chains. It will then engage with those involved to ensure “they are taking appropriate remedial action”. 

Common themes emerged across assessed biodiversity engagement and voting policies: acknowledgement of the materiality of biodiversity impacts and dependencies, recognition of the link between climate change and biodiversity-related risks, and expectations of investee companies to improve their reporting and transparency on biodiversity-related risks and impacts. 

Globalised frameworks 

Stewart said that policy developments will provide asset managers with the certainty they need to add more depth to their current engagement and voting policies. 

“We will soon see if [current progress] will actually translate into defined voting policies post-COP15,” he said. 

Government negotiations to discuss and finalise the text of the post-2020 Global Biodiversity Framework (GBF) – the so-called ‘Paris for plants’ – are officially underway in Montreal. Comprising of 21 targets and ten milestones to be achieved by 2030, the draft text includes pledges to preserve and restore at least 30% of land areas and sea areas globally and ensuring at least 20% of degraded freshwater, marine and terrestrial ecosystems are under restoration. 

Over time, it’s expected that the GBF will trigger changes to laws and regulations globally to prevent further nature degradation and mobilise increase public and private investment towards solutions. 

“If we do end up with a new post-2020 GBF, then asset managers will start responding in the same way as we’ve seen with climate, issuing a lot more specific requirements for investee companies and ensuring their engagement and voting requirements really address nature loss and biodiversity,” said Stewart.  

It’s unlikely that the impact of the GBF will be truly felt as soon as the 2023 proxy season, he added. 

The framework being developed by the Taskforce on Nature-related Financial Disclosure (TNFD) was also referenced by asset managers in their engagement and voting policies, according to the Morningstar report.  

Its work on nature-related disclosures is linked to the GBF through target 15, which will require companies to assess, report on and mitigate their dependencies and negative impacts on biodiversity locally and globally.  

TNFD’s latest iteration of disclosure recommendations was published last month 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.  

Several managers said they expect TNFD to become a “valuable resource” and “default framework”, the Morningstar report noted.  

Legal and General Investment Management’s (LGIM) ‘Global Corporate Governance and Responsible Investment Principles’, published in April, said that the firm will be engaging with investee companies to ensure “greater disclosure” in line with the TNFD framework. 

“Managers are increasingly asking for biodiversity-related information from companies that they need to make informed decisions. They are not necessarily taking voting action unless they think there has been some serious lack of oversight,” said Stewart. 

Working together on biodiversity 

Collaborative engagement initiatives focused on biodiversity will help to both align and empower engagement and voting policies, the report noted.  

Some of the assessed asset managers, such as AXA IM and BNPP AM, are members of the Finance for Biodiversity Pledge, which was established in September 2020, with members committing to collaborating and sharing knowledge on biodiversity-related risks and opportunities. Signatories are also expected to engage with investee companies on biodiversity, assessing impacts, setting targets and reporting publicly on their engagement progress before 2025.  

The pledge currently has 111 signatories representing over US$16 trillion in assets.  

The launch of Nature Action 100 (NA100) “will likely prompt significant changes in the way asset managers approach biodiversity issues from an active ownership perspective”, the Morningstar report said.  

Following in the footsteps of Climate Action 100+ and planning a soft launch at COP15, NA100 will serve as a collaborative investor initiative focused on engaging with major corporates on their nature-related impacts. 

Meaningful progress on mitigating biodiversity and nature-related risks depends on active engagement, said Stewart, noting that “stewardship is where the rubber really hits the road”. 

“It’s a case of ensuring that companies have determined the materiality of biodiversity to their business, both the financial materiality and how it impacts on communities and stakeholders. For those who have determined this materiality, how are they then reporting that information so that investors can make informed decisions on where they want to direct money,” he said.   

“That can be difficult in the absence of a defined reporting framework, but asset managers are starting to ask for that information. Asset managers are also indicating that they are likely to support shareholder resolutions asking for this information.” 

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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