Pension provider highlights nature data challenges for asset owners ahead of industry guide on biodiversity portfolio assessments.
Vendors need to deliver flexible data solutions that can be easily integrated into asset owners’ in-house analysis and investment processes to support rigorous management of nature-related risks and impacts.
Lee Backhouse, Senior Responsible Investment Manager at UK-based life insurance and pension provider Scottish Widows, said the nascent nature data market was not yet providing asset owners with the inputs needed by institutional investors to manage and disclose risks in line with the recommendations of the Taskforce on Nature-related Financial Disclosures (TNFD).
“It’s important for an end-user to be able to manipulate and use data [from third-party vendors] in their own ways – if they can’t do that, then the data is of limited use,” he told attendees at ESG Investor’s inaugural Nature Data for Institutional Investors event.
Having access to the underlying methodology used by data providers is also of significant importance to investors, Backhouse said, to facilitate comparisons between different datasets and ensure any missing information can be clearly identified.
“Being able to understand the selected thresholds for coverage and qualitative categories is incredibly important to us [at Scottish Widows] and is an issue we’ve introduced into our discussions with data providers,” he added.
While the availability of nature-related data has been improving, there remains a number of data gaps across nature-related themes that need to be filled, such as information on the marine environment, according to Backhouse.
“These gaps serve as a big opportunity for data providers to explore and address.”
He added that the global and sectoral averages of nature-related risks and impacts provided by tools like ENCORE has been useful at the initial screening phase of investments.
“But at the point when the investor wants to delve deeper into [the data] and start to address the TNFD LEAP in more detail and get more insight, that’s when investors need to think about spatially explicit and company specific information, which isn’t currently provided by ENCORE,” he said.
“Investors need more geo-specific data from data providers.”
The LEAP framework aims to serve as a nature-based opportunity and risk assessment framework for financial services firms to locate the interfaces with nature, evaluate nature-related dependencies and impacts, assess material risks and opportunities, and prepare to report on those risks and opportunities.
In March, Scottish Widows called on the UK government and regulators to create policy to better support the mobilisation of private sector capital into nature.
The ‘Nature and Biodiversity: The Pensions Imperative’ report also called on the pension fund sector to assess portfolios’ exposure to nature-related risks and to undertake engagement with policymakers on the issue, such as encouraging the government to mandate the TNFD framework.
Following the publication of this report, Scottish Widows is in the process of developing its own methodology and industry guide to assess biodiversity risks across its entire portfolio, according to Backhouse.
“It is being developed in a way that is going to be suitable for portfolios that carry a large investment universe and will really try to drill into the specifics across biodiversity risk,” he said.
The onus is not only on data providers to get comfortable with nature-related data.
Backhouse emphasised the importance of ensuring teams in investment firms develop a working understand of nature-related threats prior to delving into the data.
“At Scottish Widows, it became clear that there was a need to really embed a requisite level of subject matter knowledge on the natural world itself, because data has limited use if you do not sufficiently understand the natural world and the issues impacting it,” he said.
“So, before even thinking about [nature] data – how to acquire it and how to integrate it – investors need to be upskilling on biodiversity and nature.”
To this end, Scottish Widows has partnered with the Zoological Society of London as part of efforts to educate its in-house team. They learned about risks in soft commodity value chains and how stewardship and investment practices can aid progress.
Such training has “transformed” the investment team’s way of thinking, said Backhouse, making the use and integration of nature data “much easier”.
“We don’t yet have regulation across the industry pushing us into biodiversity risk assessments, instead we have an invaluable window of opportunity to take action ourselves.”
Sharing insights and solutions across the industry is the key to accelerating progress toward more sustainable dependence on the natural world, according to Backhouse, echoing the sentiments of Alicia Kedzierski, Head of ESG and D&I at the UK Financial Conduct Authority, during the conference.
“By working together to understand the complexities one might face when conducting a biodiversity assessment, and understanding where investors may face hurdles or where there may be advantages and disadvantages, is key to helping to keep the regulator happy,” Backhouse said.
“We will follow different approaches based on different organisational focus areas, different business applications, different portfolio exposures, but there are many practicalities which apply across the broad sense of biodiversity risk assessment.”