Investors move biodiversity higher on their priority list

Ecological investing is following a similar path as climate change in gaining institutional interest, but there's a lot of work to be done to reach the same level of awareness and urgency, investors say.

"Compared to the advanced understanding of climate-related risks and opportunities, the discussions on the nature side are behind," said Martin Berg, CIO of the nature-based carbon strategy at Climate Asset Management in London, a money management joint venture of HSBC and Pollination Group, a climate change investment and advisory firm, to address natural capital strategies.

With an estimated 50% of global economic value generation dependent on nature, according to the World Economic Forum, most economic sectors are in danger as biodiversity — the variety of life on the planet, including genes, ecosystems, plants and animals — continues to decline, sometimes rapidly.

Biodiversity "is something that a lot of investors are starting to get their arms around," said Olga Hancock, deputy head of responsible investment in London for Church Commissioners for England. It manages the Church of England's £9.2 billion ($12.5 billion) endowment that has long prioritized land stewardship, and as climate change gets taken seriously, "there is more awareness around the ecological crisis and impacts. Ecological issues are cropping up all over the world," said Ms. Hancock.

For investors, threats to natural capital can particularly impact sectors like agriculture, forestry, pharmaceuticals, mining and hydroelectric power, but biodiversity by definition touches all sectors. In addition to a company's direct uses of natural capital, many other companies — with their own biodiversity issues — are involved in supplying energy, materials, goods and services to them. As a result, "the key issue is supply chains. A lot of investors are looking at that now," Ms. Hancock said.

Asset owners also "are increasingly searching for funds which are attempting to address biodiversity loss," said Robert-Alexandre Poujade, ESG analyst and biodiversity lead with BNP Paribas Asset Management in Paris, with €502 billion ($569 billion) in assets under management.

For APG Asset Management, the in-house manager of the €627 billion Stichting Pensioenfonds ABP, Heerlen, Netherlands, biodiversity "has been on our agenda for a long time," said Willem Hettinga, senior responsible investment specialist. Now, he said, "the entire world is learning about biodiversity."

APG and other clients are revising investment policies to address both climate and biodiversity, he said, and that is keeping APG "busy with risk identification" related to biodiversity loss across all asset classes.

Mr. Hettinga said APG was also the first pension fund investor to join the Partnership for Biodiversity Accounting Financials, an organization working on a standard for assessing and disclosing financial impacts of biodiversity, and to map out biodiversity investments. "We are creating hot spots where we can have the biggest impact," Mr. Hettinga said.

Other collaborations, like one between Robeco and World Wide Fund for Nature Netherlands, are working on frameworks and policy to integrate biodiversity into asset management.

There are also "high expectations" for an effort underway by the Taskforce on Nature-related Financial Disclosures to develop a universal risk management and disclosure framework for companies and investors that would help elevate biodiversity as an investment priority, Mr. Hettinga and others said. As with climate change, where recommendations from the Task Force on Climate-related Financial Disclosures have been widely accepted by companies, investors and regulators, the TNFD process could bring biodiversity center stage, advocates say.

Emerging tools, like the United Nations Environment Programme Finance Initiative's assessment tool, ENCORE — Exploring Natural Capital Opportunities, Risks and Exposure — will also help, they say.

Climate change has sparked numerous collaborations among investors seeking common frameworks, metrics and attention, and similar efforts for biodiversity are now taking shape.

Some, like the Natural Capital Investment Alliance, are focusing on mobilizing investments in nature-based ecoinvestment opportunities. BNP Paribas has partnered with CDP Global in London, a non-profit organization that runs an environmental impact disclosure system, to develop common biodiversity corporate reporting metrics. "For companies, the first step is to recognize that biodiversity is important; the next step is to integrate biodiversity into their strategy," Mr. Poujade said.

Other collaborations address specific biodiversity challenges, like the Investors Policy Dialogue on Deforestation, a group formed by the Church of England and 30 financial institutions with a combined $8.7 trillion in assets under management to tackle agricultural commodity-driven deforestation through engagement with public agencies and industry associations in selected countries.

Biodiversity and its interconnectedness with climate change also got a boost at the United Nations climate change conference last November. "COP26 in Glasgow was the first time biodiversity had been treated as a parallel issue. It is increasingly clear that without reversing the destruction of nature and making massive efforts to restore lost forests, wetlands and peatlands, there is little chance of averting high impact climate change," said Eugenie Mathieu, London-based senior ESG analyst and earth pillar lead at Aviva Investors, with £262 billion in assets.

Investors are now hoping for further progress at the U.N. Biodiversity Conference's 15th meeting, known as COP15 — the biodiversity version of COP26 — to be held in Kunming, China, in late April. Representatives of countries that have ratified a treaty for the conservation of biological diversity, whose governing body is the Conference of the Parties, will meet to review goals and work on adopting a global biodiversity framework to highlight the urgent policy actions needed globally to stabilize biodiversity loss by 2030 and create improvements by 2050.

COP 15 on biodiversity "is the big event that we are all waiting for because we expect it will set some targets," said Mr. Poujade of BNP Paribas. Like COP26 did for climate change, "we still need a comprehensive agreement on a global framework."

Even then, understanding and managing biodiversity from an investment perspective will take a lot of work. Unlike climate change, "there is no single metric available, comparable to greenhouse gas emissions, which provides all the information needed, so it can be difficult to assess a company's impact on the natural environment and make comparisons across multiple companies. It would not be realistic to compare a bank with a beverage company using a similar set of metrics, for example," said Ms. Mathieu with Aviva Investors. Instead, investors need to consider risks on a sector-by-sector basis and collect data from a variety of sources, she said.

Investors are stepping up their engagement with companies that are dependent on nature, such as breweries highly dependent on water, to identify both risks and opportunities.

"The biggest lever we have is through existing companies. I think it's important to stay connected to those players. They are aware of the many risks," including legal and market-entry risks, said Mr. Hettinga of APG. With more investors paying attention, "we are not the only ones asking them."

Risk can be a powerful motivator, said Mr. Berg of Climate Asset Management. "What really moved the needle on carbon was the moment when the risk side got involved. The same is happening on nature in many investment houses around the world."

Regulators are starting to pay closer attention as well, particularly in Europe where biodiversity is part of a sweeping taxonomy framework for determining which economic activities can be considered sustainable. France is leading the regulatory charge, with new rules that require investors to identify how biodiversity impacts investment activities and their plans for addressing biological diversity.

Those moves "will be a game changer in investors' behaviors and approach to biodiversity, making things more concrete and implementable, both in investment decisions and engagement," said Virginie Derue, head of ESG research for AXA Investment Managers in Paris, with $1 trillion under management.