Réjean Nguyen, Director, Impact Investing and ESG Integration
Biodiversity is now among the top three areas of interest for Canadian institutional investors, along with climate change and diversity, equity, and inclusion issues. According to a December 2022 survey (1) of 27 asset owners and managers, 48% consider it a priority, up from 18% two years earlier.
While this recent rise in investor interest in biodiversity may surprise some, for many others it is an expected development, given that companies across the world rely so heavily on access to natural capital. Unprecedented impacts to natural systems and biodiversity—for example, global wildlife populations have plunged 69% between 1970 and 2018 (2) — make more urgent than ever for investors to understand these issues.
A Global Agreement That Sets the Tone
The Kunming-Montréal Global Biodiversity Framework, adopted by 195 states at the 15th United Nations Conference of the Parties, is undeniably one of the highlights of recent years. The head of the UN Convention on Biological Diversity, Elizabeth Mrema, and Canada’s Environment Minister, Steven Guilbeault, each called the conference a “Paris moment for biodiversity,” in reference to the historic 2015 agreement on climate action.
The agreement is certainly a step in the right direction for saving nature, as we said in December. However, the work has only just begun. As a reminder, here is what the Framework calls for:
- protection of 30% of the world’s land, water and marine areas by 2030 (only 17% of land and 10% of marine areas are currently protected);
- funding commitments of US$200 billion to achieve these goals;
- annual payments to poor countries of US$20 billion by 2025, and US$30 billion by 2030;
- phasing out or reforming subsidies, which could amount to an additional US$500 billion for nature; and
- strategies to reduce the impact of chemical pollutants and invasive species.
Most observers agree that, in practice, much more effort will be required from all stakeholders, governments, investors, businesses and civil society to preserve critical ecosystems and protect remaining abundant species. That said, not only does the agreement provide a goal, but its conclusion during an international summit marked by broad consensus carries significant weight going forward.
The next UN Conference on Biodiversity will be held in 2024 in Turkey.
New Frameworks for Analysis and Assessment
About half of the world’s gross domestic product is moderately or heavily dependent on nature and its resources (3). However, for investors to make informed decisions, they will require relevant information about how companies manage their operations and their impacts.
To address this need, the Task Force on Nature-related Financial Disclosures (TNFD) is developing a framework for organizations to “report and act on nature-related opportunities and risks.” Originating in the private sector, the TNFD was created in 2021 with support from the United Nations, the World Wildlife Fund, and Global Canopy.
The current version of the TNFD framework proposes that companies describe nature-related risks and opportunities based on four categories:
- Risk and impact management
- Measurement tools and objectives
For example, one of the recommendations under “governance” would be to describe the oversight of a company’s board of “nature-related dependencies, impacts, risks, and opportunities.” This approach echoes recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), which more and more companies are using to produce an annual report on their approach to climate change risks and opportunities.
If all goes according to plan, the TNFD will publish its full recommendations in September 2023. The organization hopes that its work will contribute to that of the International Sustainability Reporting Standards Board (ISSB), which is developing a global baseline for sustainability reporting.
For their part, UNEP and S&P Global recently unveiled the “Nature Risk Profile,” a methodology for measuring companies’ exposure to natural-related risks. It covers, among other things, risks associated with biodiversity impact, resource dependencies and proximity to natural environments. The methodology is aligned with
the TNFD, UNEP and S&P pointed out in the announcement (4).
Pressure and Disclosure
Nature Action 100
Unveiled in conjunction with COP15, this global investor initiative aims to raise awareness of biodiversity by identifying a list of 100 companies for engagement. Participating investors will focus on companies in “key sectors that are deemed systemically important to the goal of reversing nature and biodiversity loss by 2030.”
The founding signatories of Nature Action 100 include: AXA Investment Managers, Columbia Threadneedle, BNP Paribas, Church Commissioners for England, Domini Impact, Federated Hermes, Karner Blue Capital, Robeco, Storebrand Asset Management, Christian Brothers Investment Services and Vancity. The Secretariat will be coordinated by Ceres and the Institutional Investors Group on Climate Change.
The name and approach of Nature Action 100 are reminiscent of Climate Action 100+, a similar initiative that engages companies on climate issues (and which has a Canadian incarnation, Climate Engagement Canada).
Finance for Biodiversity Pledge
This initiative, launched in late 2020, aims to engage financial institutions in protecting biodiversity. Signatories must commit to the following:
- Collaboration and knowledge sharing
- Dialogue with companies
- Impact assessment
- Target setting
- Disclosure of information on the above by 2025
As of July 4, 2023, the initiative included 140 signatories from 23 countries representing €19.7 trillion (CAD$28.8 trillion) in assets under management. On the issue of target setting, the organization is collaborating with the United Nations Environment Programme Finance Initiative (UNEP FI) and the Science Based Targets Network.
Stopping the loss of species and ecosystems is a huge collective challenge, especially since time is running out. Integrating this imperative into investment practices requires a major paradigm shift for the financial sector. In addition to continued analysis of how ESG factors impact companies, investors will need to broaden their approach to better understand the impact of companies themselves on the environment.
(1) Semi-Annual ESG Sentiment Study of Canadian Institutional Investors
(2) Global Wildlife Populations Plummeted by an Average of 69% in the Past 50 Years
(3) Half of World's GDP Moderately or Highly Dependent on Nature, Says New Report
(4) UNEP and S&P Global Sustainable1 launch new nature risk profile methodology