Author: Cameron Turner
Can asset owners save the world from a biodiversity crisis? The answer is complicated. Pensions for Purpose’s recent report, ‘Natural capital and biodiversity – where are UK pension funds on their journey?’, commissioned by Gresham House, revealed that 38% of UK asset owners have already invested in natural capital solutions to address biodiversity loss. However, of those approached for interview, nearly 40% refused to participate as a consequence of having done little work on their nature-related risks, dependencies and impacts. So, when considering the inherent sample bias involved in those asset owners who agreed to talk about nature, the percentage invested in natural capital would be even smaller, probably in single figures. It is clear asset owners are still at a nascent stage of thinking about nature. Why should they prioritise this issue?
We are running out of time
Over half of global GDP is dependent on nature, which is in decline at a rate unprecedented in human history. For example, the Living Planet Report, produced by the World Wildlife Fund in conjunction with the Zoological Society of London, revealed that species populations have dropped on average by 69% since 1970.
If this does not raise alarm bells, we can zoom in and focus on the 35-54% of assets held by financial institutions which, according to the Sustainable Policy Institute, are highly or very highly dependent on ecosystem services supported by biodiversity and nature.
Nature and biodiversity loss is an emergency, not only presenting a systemic risk to human life but also to the economy. So, how can asset owners minimise this risk?
Engage and invest
The goal of Pensions for Purpose’s research was to show how invested asset owners are in natural capital and biodiversity; also to highlight the opportunities, and encourage impact investment in natural capital.
Impact investment offers a central tool to reduce systemic risk. Through pursuing nature-positive investments, asset owners take advantage of reduced risk (which will benefit their portfolios in the long run) and also structural shifts in the economy. For example, one of the investment consultants interviewed for the research estimated that, from a starting point of 5-10% of their clients, who have invested in natural capital, 50-60% are likely to remain invested as the transition moves on, because almost everybody is setting net-zero targets. If this prediction comes true, the investors who move early are likely to have a financial advantage.
While most asset owners are unlikely to have worked much on biodiversity and nature loss, over half of the pension funds interviewed were focused on stewardship and engagement to reduce it. While engagement is an important tool for asset owners to improve their impact on nature, because biodiversity loss is a systemic risk, they should start by engaging beyond their own investee companies. When all actors within the system begin to align their priorities to halt nature loss, outcomes will improve.
For asset owners, this means not only engaging with companies, but also lobbying other industry players and governments to push for improved standardisation and transparency on nature-related metrics, as well as better policies to prevent nature loss. If engagement with investee companies fails, asset owners should share with the press why they chose to divest as a last resort. This will help keep companies accountable. The Church of England’s decision to divest from oil and gas stocks because they felt these companies were stalling on net-zero plans is a good recent example.
So, if keeping companies accountable is crucial, what is the best way to do that?
Assigning monetary value to nature
Although efforts to value nature are flawed and may be seen to ‘commodify’ it, without a monetary value the natural world is open to exploitation. Biodiversity is part of the public good, which private companies are degrading. As the environmental economist Pavan Sukhdev wrote: “We use nature because it’s valuable, but we lose it because it’s free.” To transition to a nature-positive economy, we must focus on valuing the costs of the exploiting nature. Would investors be incentivised to support the protection and restoration of nature if a monetary value was attributed to positive impacts? To some extent, we are already seeing climate mitigation in the carbon credits market.
While impact investment seeks to protect and restore nature through the creation of natural capital, the Impact-Weighted Accounts Project at Harvard Business School can help to increase companies’ accountability. Large blue-chip firms such as Nestlé and Philip Morris International have begun to monetise their impacts. If impact-weighted accounts are adopted at scale (and asset owners can push for this), then their fiduciary duties would align with improvements in their impact on nature, and the monetary value of nature would help to solve nature loss.
Asset owners, along with many economic actors, tend to work in silos. However, this century is bringing about seismic challenges which cannot be ignored; nature loss is just one of them. If they continue to act in their medium to long term interests, then accounting for and taking action to reduce systemic risks is essential.
The goal of Pensions for Purpose’s report was to see what point asset owners have reached in incorporating biodiversity and natural capital into their investment decision-making. In reality they are right at the beginning, but we are running out of time. We need to raise awareness of the available opportunities to address biodiversity loss, the investment solutions and why these align with the need to generate long-term sustainable returns.
Cameron Turner is a Research Analyst at Pensions for Purpose