Investors are increasingly focusing on how companies interact with and care for natural ecosystems, and schemes can contribute meaningfully to these efforts, experts say.
While climate change remains the area of most interest and where most environmental, social and governance activity is focused, biodiversity has also come to the fore.
In response, institutional investors in countries such as the Netherlands and Denmark are starting to take the lead on biodiversity investment initiatives, to encourage the businesses in which they invest to take these issues seriously and adapt their operations accordingly.
But are UK pension funds positioned to benefit from this area of the “environmental” strand of ESG investing?
Historically, biodiversity hasn’t been featured as a top ESG priority for pension funds, but I believe this will change
Adam Bennot, RisCura
RisCura head of responsible investment Adam Bennot says: “Historically, biodiversity hasn’t been featured as a top ESG priority for pension funds, but I believe this will change, and we are starting to see evidence of that. Increasingly, investors are recognising the importance of protecting biodiversity from a risk perspective.”
He cites the World Economic Forum’s 2022 Global Risks Report, which ranked biodiversity loss as the third most severe risk facing the world over the next 10 years, after climate action failure and extreme weather.
“Our economic output largely depends on our natural world,” says Bennot.
“Collapsing fish stocks and the threat of extinction of plant and animal species due to overconsumption and deforestation pose a significant risk to our natural ecosystem and its ability to support economic growth.”
A dearth of data
As with many areas of ESG investing, one of the key problems is access to reliable, accurate and consistent data.
“Because of the lack of consistency around how to measure and approach biodiversity, setting targets is challenging for companies,” says Newton Investment Management head of sustainable investment Therese Niklasson.
“Most companies are disclosing high-level commitments as targets, and few are setting more specific targets.”
Bennot agrees: “There is still a lack of robust and standardised metrics and targets for measuring biodiversity impacts. Ultimately, this is challenging as the data isn’t quite there to inform investment decision-making.”
Industry-wide coalitions are now being created to combat this challenge. Last year saw the creation of the Taskforce on Nature-related Financial Disclosures, an international body designed to create reporting guidelines and standards in a similar way to the Task Force on Climate-related Financial Disclosures. It is currently consulting on a draft version of its framework.
Other related initiatives have been set up to improve awareness of biodiversity-related financial issues and collaborate on reporting and transparency.
More than 100 pension funds, asset managers and private banks have signed the Finance for Biodiversity Pledge, a key part of which involves public reporting of positive and negative contributions towards biodiversity from investment portfolios.
In October this year, more than 330 companies and organisations called for world leaders to introduce mandatory corporate reporting on nature impacts, in line with the framework.
The group included Danish pension fund PensionDanmark, Legal & General, abrdn, Aviva Investors and Schroders.
Actions for trustees
The momentum for action is growing – so what can trustee boards do now?
Womble Bond Dickinson UK partner Tracy Walsh says that there are several actions trustees can take to improve their understanding of biodiversity exposures in their investment portfolios.
These include engaging with asset managers and advisers to get help interpreting information and data, and ensuring managers are aligned with the trustee board’s investment strategy and beliefs.
COP27: Implementing regulatory solutions high on trustees’ agenda
COP27 delivered few concrete promises, highlighting trustees’ role in setting the institutional environmental, social and governance agenda.
Walsh adds: “Don’t just use boiler-plate assurances that the asset manager’s policies are consistent with the trustees’ ESG beliefs.
“The voting policy is an excellent tool, even where voting is delegated, and would set out how schemes check their managers’ approach and the steps that will be taken where the managers’ voting choices diverge from the scheme’s voting policy.
“Interrogate which components of environmental responsibility the fund manager is actually focused on, assess whether this is appropriate, understand what limitations the fund manager is dealing with in terms of underlying data, and understand how they are working to overcome those limitations.”
