Biodiversity loss – the next big challenge for investors | Asset owners

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Several recent reports from global agencies have confirmed that investors’ focus on minimizing the effects of climate change has come at the expense of ignoring a possibly even greater risk – loss of diversity. organic.

A report by asset consultant Mercer late last year, for example, said investors spent relatively little time on biodiversity risk, compared to how much attention they paid to change risk. climatic. A PRICE [Principles for Responsible Investment] biodiversity working paper, also warned that few investors have focused on minimizing impacts on biodiversity.

Biodiversity risks have increased globally due to the rapid expansion of infrastructure and the built environment. The problem is most acute in Asia, with the region’s city population expected to grow by more than 550 million over the next decade.

In its 2020 Global Risks Report, the World Economic Forum (WEF) predicted that more than half of the world’s gross domestic product ($44 trillion), such as the supply of food, fiber and fuel, is moderately dependent or strongly of nature.

The loss of biodiversity puts this value at risk. Populations of mammals, birds, fish, reptiles and amphibians, for example, declined by 60% between 1970 and 2014, according to the World Wildlife Fund (WWF).

“This is driven by unsustainable consumption, pollution, climate change and habitat conversion,” WWF said.

Most wildlife is destroyed by clearing land for cattle, soybeans, palm oil, timber and leather. Unsurprisingly, according to Moody’s, biodiversity-related controversies have the most impact on three sectors: mining and metals, food and energy.

A study of the MSCI All-Country World Index, carried out by Pictet Asset Management, found that the world’s largest companies are killing animal and plant species at a rate 22 times the threshold; that is, the level at which the species would not disappear. One million species are threatened with imminent extinction, endangering ecosystems essential to sustaining human life.

Last year’s Dasgupta review of the UK Treasury pointed out that economic and financial decisions have traditionally failed to take into account the value of nature, and defined this as “an institutional failure”.

“Financial services cannot continue to behave as if they are isolated from nature,” said Hanne Thornam, head of sustainability services at EY. “Financial institutions can play a role by strongly including positive outcomes for biodiversity and nature in sustainable finance strategies,” she added.

The PRI reports that some investors are indirectly addressing biodiversity risks by adopting sectoral policies on palm oil and deforestation, but adds that “despite these early actions, investors have limited knowledge and little commitments to biodiversity investment policies. .”

Asia-Pacific asset owners with a well-developed and sophisticated environmental policy, such as GPIF, GIC and NZ Super, base their approach to environmental activities on managing the carbon intensity of their portfolios. However, few major asset owners in Asia mention biodiversity in their public reports.

“I broadly agree with the assessment that biodiversity has been less important than climate, whether we’re talking about investors or companies, particularly in Asia,” said Paul Milon, head of stewardship based in Hong Kong at BNP Paribas Asset Management, at AsianInvestor.

Steve Howard, Temasek

Singaporean public investor Temasek is taking a more vigorous approach than most of its peers on biodiversity issues, working with the WEF and AlphaBeta, a Singapore-based strategic economics consultancy.

It estimates that investing individually or collectively in just 59 nature-positive business opportunities in the region could generate $4.3 trillion and 232 million jobs per year by 2030, equivalent to 14% of the GDP of Asia-Pacific.

“The accelerating rate of nature loss will have an impact unimaginable,” said Steve Howard, director of sustainability at Temasek.

“Loss of nature in the region will deeply damage economic activities that depend on natural capital, with up to 63% ($19 trillion) of Asia-Pacific’s GDP at risk – a higher share than the global average. .”

The Temasek study notes that minimizing impact on forests and farmland, for example, will require subsidies and incentive schemes to promote low-impact energy deployment, as well as mitigation bonds for projects with a higher land impact.

Dharisha Mirando, Head of Investor Engagement at Hong Kong-based China Water Risk, a non-profit initiative that works to highlight and address the business and environmental risks of the water crisis in this country, said Asian investor that investors talk about “chronic long-term risks”, such as biodiversity, “but that we are even less interested in them. These slowly building risks will be devastating if we do not act. The question is how to value them, as it can be quite complex.

The UN says the challenge for the investment industry is to create appropriate investment vehicles to begin closing what it estimates to be a $4 trillion funding gap in engagement, divestment and directing capital towards nature conservation by 2050. Biodiversity bonds are likely to be among the first assets institutions can access to help achieve impact. Listed and unlisted companies are also subject to more scrutiny.

Rating agencies and index providers help investors identify companies that are working to limit biodiversity loss. A 2021 Moody’s study found that 38% of the 5,300 large publicly traded companies they assessed had at least one facility associated with habitat loss.

Biodiversity risk does not receive as much attention, in part because regions, companies and sectors process available data in different ways. However, work in this area is intensifying.

Fund managers including Axa, BNP Paribas and Pictet, all signatories of the Taskforce on Nature-related Financial Disclosures (TNFD) are developing measures on biodiversity. For example, BNP Paribas AM piloted a process to assess the biodiversity impact of a portfolio of 10 listed companies in the food industry.

Milon said that using revenue data by region and sector from Bloomberg and company annual reports, the value of BNP Paribas AM’s investments and the share of each company held, the organization could calculate the portfolio footprint and the five most impactful companies.

Like the Task Force on Climate-Related Financial Disclosures (TCFD), TNFD aims to develop a risk management and disclosure framework for companies and investors to report and act on nature-related risks. Its 250 members include Japanese business federation Keidanren, Norway’s sovereign wealth fund manager, Swedish pension funds AP3 and AP7 and the Singapore Stock Exchange.

TNFD’s goal is to support “a shift in global financial flows towards positive outcomes for nature”; to stem the destruction of the planet’s biodiversity.

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