Investors face a catastrophic risk from the loss of the world’s natural resources spanning soil to flora, fauna and minerals that underpin the global economy and provide the world’s food, medicines and built environment.
Nature loss will impact economies and the financial system, yet nothing is being done at a global level to mitigate the losses because in many ways the issues remain invisible, said Ingrid Kukuljan, head of impact and sustainable investment at Federated Hermes Limited speaking during the Fiduciary Investors Symposium at Oxford University.
“Plants alone are responsible for around 40 per cent of the medicine in the western world,” she said.
Kukuljan pointed to recent research from Hungary’s central bank, MNB, conducted to help it and other central banks evaluate the impact of biodiversity loss. It revealed a profound impact on the economy, an increase natural disasters and hit to GDP from biodiversity loss.
Despite the fact the issues are frequently unseen, Kukuljan argued they are increasingly apparent. Like inflation in commodity prices in goods like cocoa, coffee and olive oil which she directly attributed to issues in the supply chain as a consequence of natural disasters.
She said fiduciary capital is not flowing into strategies to stem its loss.
“Biodiversity is much bigger than climate, but there is a lack of understanding,” she said.
The world needs to change how we live and eat, and she pointed to sector specific opportunities for investors in food production and manufacturing.
Moreover, the market is beginning to price in biodiversity gains. For example, before the “Trump trade” Federated Hermes’ nature-focused equity investment fund of biodiversity champions with no tech exposure has provided strong risk adjusted returns, only trailing MSCI World “by 100 bps.”
Kukuljan said the fund has done well because the businesses in the portfolio are exposed to huge secular growth factors.
“You can make money by investing in solutions,” she said. She also sounded the alarm on not putting capital to work to protect biodiversity.
“If you don’t start investing now there won’t be any returns in ten years because the degradation will be so high. Take it seriously from a fiduciary duty point of view.”
Oxford endowment focuses on natural capital
Integrating nature at the £6 billion Oxford Endowment Fund is in its early stages. Eighty per cent of the portfolio is invested in an externally managed equity allocation and a small allocation to rural land in the mixed property portfolio is long-term tenanted to farmers. However, in a recent push to meaningfully integrate nature in a larger allocation, the investor acquired a 7,000- acre estate in Scotland in 2020 where it is developing a long-term multi-faceted strategy encompassing financial, environmental and societal returns spanning peatland restoration, woodland creation and sustainable tourism.
“Our focus is on maximising the natural capital,” said Antonia Coad, head of sustainability, Oxford University Endowment Management.
The endowment has already seen returns from its natural capital investment. For example carbon credits from the peatland restoration project have been generated to boost value creation for the estate.
The endowment is also involved in a more niche nature investment in its venture portfolio, including an opportunity to help mitigate the impact of micro plastics. But Coad said it is difficult finding talented venture capital funds that are backing interesting innovation with a biodiversity impact.
In public equity, the endowment has backed sustainable investor Osmosis Investment Management, investing both in the company and its fund.
Like the Oxford endowment, most investors begin integrating nature in real assets first.
Yet Kukuljan said publicly listed multinational corporations are the “biggest culprits” when it comes to destroying biodiversity and nature. She urged fixed income rating agencies to start taking biodiversity loss into consideration at a sovereign and corporate level.
She also stressed the strong connection between the ‘S’ of ESG and nature investment.
“If you want to invest in social issues you have to invest in biodiversity.”
TNFD reporting
The Oxford Endowment Fund has not begun integrating TNFD into its reporting. Instead the team is watching others to learn lessons and best practice from early adopters. Coad noted that it is helpful that it is not “an entirely new framework” but shares similarities and alignment with the TCFD. She added that it will be a helpful tool for engagement.
Federated Hermes has been working with the Natural History Museum to gather better data on biodiversity loss, looking at the key stress factors contributing to loss around waste, water, emissions and land use.
“The data is there but it is sparse,” she said.
Kukuljan called the TNFD a user friendly framework, and predicted that it will ultimately merge with the TCFD. Similarly, she suggested that the biodiversity and climate COPs will merge. “I hope they unite the COPs; there is no need for two, or to silo biodiversity and climate.”
“Climate is one of the drivers of biodiversity loss and we shouldn’t separate the two. Forty per cent of all climate mitigation has to come from nature based solutions. If you don’t invest in nature, how are you going to reach climate targets?”
Recently in Cali, Colombia for the COP16 Biodiversity Summit she noted a heightened present of private market participants and finance ministers, representing a greater fiscal lever. Other encouraging signs of progress include the Global Biodiversity Framework, launched in 2022 and viewed as the Paris Agreement for Nature.
Although stewardship is an important element of investing in nature panellists reflected that capital allocation is a much greater lever than stewardship in creating change and Kukuljan also urged governments to reform lobbying laws. Positively, federal and state laws in the US help protect biodiversity and Japan has become a global leader in stemming biodiversity loss.
