The numerous challenges facing investors when it comes to addressing biodiversity risk were explored at the PLSA’s investment conference in February, with asset owners and investors discussing their experiences.
Faith Ward, chief responsible investment officer at Brunel Pension Partnership, warned that the investment industry does not yet fully understand the issue of biodiversity. “I don’t think anybody has got a total grip of all the complexities that need to go on when dealing with biodiversity and nature. The impact matters, on the where, the when and the what. So there is a lot of complexity,” she said.
Ward also highlighted how biodiversity was made a responsible investment priority by Brunel back in 2022. “That is not to say we weren’t doing anything on it before, we had been looking at deforestation and supply-chain risks, but we felt looking at the evidence and the enormous impact it has and the potential risks on our portfolio brought it through as a risk in its own right,” she said.
It was then that Brunel applied it in the same way as other risks, which led to several questions being asked, Ward said. Such as: how does Brunel integrate this into its decision making? How does Brunel collaborate with others? Which is the best way of bringing about change? And how can Brunel be transparent in tackling that change? As well as: what are the expectations of Brunel’s asset managers? And what are the expectations on companies and the assets Brunel invests in?
Picking one topic out of those, Ward addressed the issue of expectations on asset managers. “It is about the risk. So identifying where those risks might be, as well the opportunity in terms of capital deployment in those opportunities.”
But, she added, not just in terms of managing the risks and opportunities in more overt assets that tackle nature loss. “But actually the everyday, the natural assets we have, and this is particularly pertinent in the real asset space and where we are directly investing and how we can maximise the opportunities within those. So it is not necessarily an asset allocation thing, it could be just how you go about your day-to-day investment risk opportunity analysis.”
Bigger than climate
Offering another warning, David Russell, chair of the Transition Pathway Initiative, said the biodiversity challenge facing asset owners and investors is bigger than the challenges addressing climate change.
“Nature and biodiversity are much more complex to deal with than climate change. And climate change itself isn’t easy,” he said. “We have been looking at climate change for 20 years and thinking in more detail about it in the last five, six and seven years post the Paris agreement.”
Russell then revealed another challenge. “We have a track record of looking at the [climate] issue. We can collect climate data, we can do carbon footprints, we can do scenarios because there is something you can anchor that on.
“You can measure emissions and the reductions in emissions for climate change. With biodiversity there are so many different measures, that it is going to be highly complex for the pension fund community, and active managers, to deal with.”
When addressing the issue of what nature is and why investors should care, Josephine Quint, finance sector advocacy manager at WWF UK, gave a compelling account of the situation.
“Nature is all the systems on earth, including land, water and biodiversity, which provide us with food, clean air and fresh water and so much more. Unfortunately nature is in freefall,” she said.
Two sides
Globally we have lost 59% of our nature since 1970, Quint added. That matters to the finance and investment sector for a few reasons. “One is that climate and nature are two sides of the same coin. So for financial institutions that have targets it won’t be able to meet those without looking at nature,” she said.
“The other reason why it is important to the financial sector is that nature underpins our economy and by extension the finance sector.” Quint added that 55% of global GDP is dependent on nature.
“So translating that into financial risk, the loss of those services nature provides us with will translate into losses for the economy and the finance sector,” she said.
Another type of risk comes from the transition of the economy, regulation and consumer behavior in the face of nature loss, Quint said. “Which means those businesses and financial institutions that do not integrate nature alongside in their financial and business decisions will be left behind,” she said.
Maria Nazarova-Doyle, who leads the global sustainable investment team at IFM Investors, also said there is a necessity in addressing biodiversity from an investor perspective. “Biodiversity is not just a new shiny thing.
“It is something we have to do. Especially when you think of larger infrastructure projects: they have always had to have a biodiversity assessment, it is part of how we do risk management,” she added.
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