Features

New Paths for Investors on Biodiversity

Soon-to-be-launched TNFD and other frameworks offer investors and corporates much-needed direction on measuring nature-related risks.

It’s one thing to measure and compare greenhouse gas (GHG) emissions from individual corporates, countries or regions, but it’s quite another to accurately track and limit diverse human impacts on soil quality, pollinator levels, water scarcity and loss of species––to name but a few of the risk categories under the biodiversity umbrella.

Biodiversity is the next emergent priority for many investors looking to build sustainability into their portfolios. The exploitation of the natural world is the source of a plethora of potential environmental and social crises, according to a 2020 report by the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), a body founded by the UN Environment Programme to fill a similar role to the Intergovernmental Panel on Climate Change.

For example, an estimated four billion people currently rely primarily on natural medicines, with some 70% of cancer drugs sourced or derived from nature, IPBES noted.

The value of agricultural crop production has increased threefold since 1970 to keep pace with demographics. But with 75% of the land surface “significantly altered”, 66% of the ocean area experiencing “cumulative impacts”, over 85% of wetlands now lost and 32 million hectares of primary or recovering forest destroyed (between 2010 and 2015 alone), the burden on natural resources is recognised as unsustainable.

But knowing what to measure and how to measure it is no easy task, says Bill Baue, Senior Director of r3.0 a non-profit platform focused on redesign, resilience and regeneration.

“Climate risk is an incredibly complex issue, but it’s only a subset of biodiversity risk which is even more complicated,” he tells ESG Investor.

“Investors are having to ask themselves: To what extent are corporate impacts associated with biodiversity loss? Directly attributing the loss of a species to one company, for example, is currently an impossible task.”

But corporates are already producing data on issues such as water scarcity and soil quality, which can provide a strong basis for broader biodiversity-related reporting and therefore more decision-useful information for investors, Baue notes.

Ready for take-off? 

Following in the wake of the widely adopted Task Force on Climate-related Financial Disclosures (TCFD) framework, a Task Force on Nature-related Financial Disclosures (TNFD) will be officially launched in mid-June 2021, backed by Global Canopy, the United Nations Development Programme, the UNEP Financial Initiative (UNEP FI) and the World Wide Fund for Nature (WWF). This means that wider industry will be able to support and collaborate with the working group on their findings so far, helping to shape its voluntary reporting framework over the next two years.

Since its inception eight months ago, the TNFD working group has been attempting to identify which biodiversity risks should be measured, how they can be measured and what further guidance investors and corporates will need in order to ensure that biodiversity is comprehensively accounted for in future investment decisions and engagements.

Challenges surrounding the identification and measurement of biodiversity-related risks won’t be easy to overcome. It will require a dramatic uptick in involvement from corporates, policymakers and investors alike, experts warn.

“We’re at the take-off moment, so we need to be thinking carefully about our approach,” said Simon Zadek, Co-Director of the UNEP Inquiry into the design of a Sustainable Financial System, speaking at the recent ‘Establishing metrics for biodiversity and ecological transition’ webinar hosted by think tank Official Monetary and Financial Institutions Forum (OMFIF).

Identifying material risk 

The development of reporting frameworks and capabilities requires agreement on which biodiversity risks are most material to investors, experts say. It also requires agreement on how the risks are measured, with an eye on how the metrics are incorporated into investment processes.

“The breadth of nature-related issues across different sectors is vast,” said Dr. Rhian-Mari Thomas, Chief Executive of the Green Finance Institute (GFI), speaking at S&P Global’s inaugural Sustainable1 event in May.

“What investors do decide to measure needs to be localised, temporal and geographic, creating a feedback loop where this information is accessible to all parties and remains useful and relevant,” said fellow panellist Mark Gough, CEO of global multi-stakeholder collaborative group Capitals Coalition.

“Biodiversity risks will need to include the contexts of local reactions and local value, because we can’t just put a conversion factor on it like we do with carbon,” Gough said.

Once the risks that should be measured have been identified, the question remains how to ensure that metrics used are accurate, easily applicable and allow for comparability, Thomas added, pointing also to the challenge of integrating nature-related risk metrics into credit analysis.

In response to the Dasgupta Review, published in February 2021, the GFI consulted with over 40 representatives from banks, asset managers, asset owners, standard setters and conservation finance specialists before launching the nature-positive Pathway for Action, setting 12 over-arching recommendations for managing biodiversity-related risks.

These include identifying key industry sectors and geographies to be prioritised in reporting and reaching a common consensus on these across frameworks, in order to best manage nature-related risks on a global scale. As well as this, the Pathway for Action encourages the development and implementation of innovative measurement tools where possible, such as geospatial data.

Further initiatives include Exploring Natural Capital Opportunities, Risks and Exposure (ENCORE), developed by the UNEP World Conservation Monitoring Centre (WCMC), UNEP FI and Global Canopy. ENCORE aims to better identify the natural capital assets underpinning each ecosystem, accounting for environmental changes that may materially affect business performance. This deeper understanding will help financial institutions more closely align their portfolios with biodiversity targets.

Baue also points to the context-based Biodiversity Performance Index (BPI), developed by the Center for Sustainable Organizations (CSO) and Manomet, with r3.0 supporting the pilot project for companies and investors. The BPI identified a composite of 10 biodiversity-related indicators that can be used to weigh organisation-level performance. These include harvesting/predation, habitat loss and non-native species introduction.

“Context-based metrics can be applied externally, meaning investors don’t need to solely rely on the numerical data provided by the corporates themselves,” Baue explains. This ensures an element of accountability, as investors will be able to validate or question the underlying information corporates are providing, he says.

Investors in mining and metals, food and energy corporates should be especially aware of how these companies are mitigating nature-related risks, as they are more likely to commit biodiversity-related controversies, a recent Moody’s controversy risk assessment noted.

Over half (53%) of assessed controversies between 2016-2021 related to extraction activities in “sensitive ecosystems”, illegal land clearance and marine pollution, or damaged local ecosystems due to oil spills and oil and gas leaks.

“We would expect the response of companies to such controversies to improve as biodiversity exposure and risk management moves up the investor and regulatory agenda,” Moody’s noted.

Measuring risk

Despite the greater complexity of nature-related risks and disclosures, the TNFD framework will align with the TCFD framework where possible through use of the same four reporting pillars: governance, strategy, risk management, and metrics and targets.

This will help to provide a “landing spot” for other disclosure and regulatory projects around biodiversity, according to Thomas. However, the framework will be more flexible in order to incorporate the different metrics that will be needed to measure the quality of soil or the decline of pollinators.

“This is an engagement exercise to bring the best of existing frameworks together to harmonise them all,” she said. “To complement [the TNFD], I would like to see national biodiversity targets and sectoral roadmaps, such as we are seeing with climate-related risks.”

Baue notes that the TCFD framework is “far from perfect”, as it doesn’t explicitly call for science-based targets in firms’ emissions reduction targets. “I hope TNFD more closely aligns with science-based recommendations,” he says.

Today, without a mandatory standardised biodiversity-specific disclosure framework, corporates are inconsistently disclosing to investors their exposure to biodiversity-related risks.

When their management of biodiversity-related risks cannot be easily compared, evidence suggests incentives to improve are lacking. The average biodiversity protection score for 1,200 assessed global companies was just 32 out of 100, according to a recent report by credit rating company Moody’s.

Furthermore, within a subsample of 67 heavy construction companies, Moody’s noted that, while 61% of companies have disclosed commitments to addressing biodiversity issues, nearly half of disclosures were “weak” when outlining the implementation of these commitments.

“This shows a clear disconnect between most companies’ commitments and tangible measures disclosed to reduce their impact on biodiversity,” the report said.

Public sector role

A common issue cited by investors and corporates alike is that the data needed to supplement biodiversity-related disclosures isn’t available. This simply isn’t the case, experts argue, and therefore shouldn’t be hindering progress in providing biodiversity-related disclosures.

“There’s a lot of data that companies are already collecting when it comes to nature-based risk that can be used by investors. In particular, there’s innovative spatial and satellite data that we can now gather and use when assessing portfolio exposure to nature-related risks,” Thomas said.

Governments could provide additional support by setting national baselines and targets which would not only help to streamline data flows but also hone investor priorities and direct capital.

“Governments should work with investors to better understand where public finance needs to play a role and where private finance is needed to bolster biodiversity solutions,” Thomas added. “Policymakers should be building on the wealth of data already out there, putting data into a policy context that will make nature-related solutions more investable and accessible to the private sector.”

Public and private sector actors hope to make progress toward a global biodiversity reporting framework at the COP15 UN Convention on Biological Diversity (CBD) in Kunming, China, later this year.

Furthermore, the European Union’s Environment Committee has agreed that a EU Biodiversity Law is needed to support the formation of Europe-specific biodiversity reporting rules. A Plenary session of the European Parliament is scheduled to vote on this resolution at its next session on June 7-10, 2021. MEPs further called for a ‘Paris Agreement’ for biodiversity should be agreed on at the UN CBD in October 2021.

Nonetheless, there’s a lot of progress investors can make ahead of policy and regulatory developments, Baue says.

“Universal and global investors are best-placed to put pressure on companies to provide nature-related data in the first place,” Baue emphasises. “Investors need to make sure they’re asking for it.”

The cost of nature-related risks

The Dasgupta Review made it very clear that corporates and investors alike need to radically adopt a new way of thinking in order to quantify and manage biodiversity risks. Accounting for nature will be disruptive. But it is necessary, in order to direct capital sustainably and to avoid irreversible damage.

As well as the need to identify which biodiversity risks most need to be measured and given a financial value, there’s also a demand for investments into nature-based solutions.

A total global investment of US$8.1 trillion in nature is also required over the next three decades (US$536 billion a year), according to the ‘State of Finance for Nature’ report published by the World Economic Forum, UN Environment Programme (UNEP) and the Economics of Land Degradation (ELD) Initiative.

This means annual investments into nature-based solutions will have to triple by 2030 from current investments of US$133 billion, the report said.

“Biodiversity loss is already costing the global economy 10% of its output each year. If we do not sufficiently finance nature-based solutions, we will impact the capacities of countries to make progress on other vital areas such as education, health and employment. If we do not save nature now, we will not be able to achieve sustainable development,” said Inger Andersen, Executive Director at UNEP.

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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