Asset managers must sharpen their focus on biodiversity

LAST December’s historic agreement to halt and reverse global biodiversity loss, signed at the UN Convention on Biodiversity’s COP15 summit in Montreal, has – naturally enough – invoked comparisons with the 2015 Paris Agreement on climate change.

Nearly 200 countries signed up for the Kunming-Montreal Global Biodiversity Framework, committing for the first time to conserve or protect at least 30 per cent of global lands and waters by 2030.

Just as the 2015 climate accord marked the start of a concerted effort to transition the global economy away from carbon, the biodiversity pact makes it clear that global leaders will no longer tolerate the destruction of the natural world.

This multilateral agreement on conservation will also have wide-ranging implications for businesses and investors everywhere – just as the global campaign against climate change has created new risks and opportunities since leaders met in Paris some seven years ago. We can expect new regulation to uproot established business models, heightened risks for companies operating in biodiversity hotspots and a growing focus on transparency and reporting.

But how can investors prepare for this shift in priorities?

Biodiversity is a complex topic. While there is a clear link between emissions and climate change, no such single factor obviously reflects a company’s impact on the natural world. There is no real consensus on even the kind of data that should be monitored and, as a result, very little reporting.

Only 31 per cent of companies worldwide have made a public commitment to and/or endorsed biodiversity-related initiatives, according to a November 2022 report from CDP, a non-profit that helps companies and cities to disclose their environmental impact. In response, other than investing directly in companies that are actively trying to protect and restore biodiversity, asset managers and other capital allocators can take action today in three main ways: monitoring risks, engaging more with corporates, and preparing for regulatory change.

Monitor materiality

When it comes to mitigating biodiversity-related risks, investors should keep in mind “double materiality” – that is, both the impact a company has on biodiversity through its operations and activities (its “biodiversity footprint”), and its exposure to biodiversity-related risks.

Yet, there remains a distinct lack of consensus about which metrics to prioritise when seeking to identify and mitigate nature-related risks.

Any investment strategy looking to incorporate biodiversity considerations should be careful not to oversimplify an incredibly complex topic. For example, caution is required when looking at top-level biodiversity scores. Given that corporate disclosure is so poor in this area, companies may be rewarded with higher scores for simply reporting information on biodiversity, whether good or bad.

Data providers provide granular metrics on specific topics, such as deforestation, and holistic metrics or scores, which seek to quantify an issuer’s biodiversity footprint and dependency. And some corporates have already produced their own metrics: French luxury goods group Kering, for example, has introduced an environmental profit and loss measurement tool, designed to quantify its impact along the entire supply chain.

Investors may find such data useful, but they cannot rely solely on quantitative metrics. For instance, they must also understand how companies interact with their suppliers to assess the likelihood and magnitude of the potential legal and reputational risks they may face in respect of their impact on nature.

Raise awareness

The kind of deep dive that can reveal a comprehensive picture of a company’s biodiversity footprint and the related risks is only possible through engagement. Investors can start by asking whether there is a biodiversity policy in place, but should delve further into company- and sector-specific biodiversity issues.

The formation of collaborative engagement initiatives, such as Nature Action 100+, will also help in driving concerted action in key sectors deemed systemically important in reversing nature and biodiversity loss.

Asset managers can also increase companies’ awareness of their own biodiversity risks and dependencies, which is often lacking. They could, for example, employ the use of geospatial biodiversity datasets to uncover localised supply chain risks and push firms to take action.

Get ready for TNFD

The Taskforce on Nature-Related Financial Disclosures (TNFD), a global reporting initiative, should provide more clarity when it publishes its final recommendations in September.

Investors, however, would do well to start exploring the various metrics and approaches in advance. Again, the experience of the climate transition is a useful comparison: the rapid adoption of recommendations from the Task Force on Climate-Related Financial Disclosures – the precursor to TNFD – offers a guide to the likely trajectory of global regulation around conservation.

Incorporating biodiversity concerns into investment portfolios will be a complex and challenging process. But the COP15 agreement makes it clear that preserving biodiversity will be crucial not only for the planet’s survival, but also for protecting corporate bottom lines.

As the world moves towards improving transparency and holding companies accountable for their destruction of natural capital, investors have an essential role to play in protecting that value.

The writers are from Man Group. Jason Mitchell is head of responsible investment research, and Jessica Henry, senior responsible investment research analyst.