Loss of biodiversity presents specific and pressing issues for pension funds who, as universal owners, cannot just stock-pick or diversify away from a risk that ultimately affects the financial system in its entirety – all asset classes, all sectors, and all businesses – and humanity broadly.
Asset owners must consider the impact of companies they invest in on the natural environment, and the impact they have on biodiversity.
This can be viewed in the context of a narrow fiduciary duty, but it also just makes good sense for very long-term investors like pension funds that investments should be sustainable.
The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) defines the five drivers of global biodiversity loss as land use change and habitat loss; exploitation and overfishing; climate change; pollution; and invasive species and disease.
Considering the scope of these factors, “every business has an impact and also depends on” ensuring biodiversity loss is halted, and reversed wherever possible, says Pictet Asset Management (Pictet AM) investment manager, thematic equities, Viktoras Kulionis.
All that differs from company to company is “the scale of impact and the magnitude of dependence” on biodiversity, Kulionis says.
He says part of the prevailing mindset on biodiversity loss is – as with climate change – that the problems seem a long way off, even if in reality they’re happening right now.
“Sometimes it might be seen as distant or immaterial” he says.
“But those effects, they sometimes take time to play out, and in some cases they are already beginning to unfold.
“Many companies are evaluating their impacts and dependencies on nature, and the number is likely to grow with increasing awareness of biodiversity-related issues.”
A global effort
In October this year 27 pension funds controlling assets estimated at US$2.5 trillion and led by Swedish pension fund AP7, Australian super fund Hesta, Canada’s CDPQ, and the UK’s Church of England Pensions Board and Universities Superannuation Scheme, formed a coalition to encourage governments around the world to take quicker and more concerted efforts to address biodiversity loss.
The coalition has called on governments to:
- Establish ambitious national targets, nature-related transition plans and commitments to halt and reverse biodiversity loss, with a focus on transformation of key sectors, stopping deforestation, and protecting and restoring critical ecosystems.
- Develop mandatory disclosure regulations for companies with material nature-related impacts or dependencies, as well as nature-related transition plans, with metrics strongly tied to biodiversity outcomes.
- Establish and implement regulation to protect nature and biodiversity for all sectors that contribute to IPBES’ five drivers of biodiversity loss.
- Invest in the development and scaling of financial mechanisms to protect and restore nature and biodiversity.
Head of sustainability at the A$90 billion ($58 billion) Hesta, Kim Farrant, says biodiversity loss is a systemic issue, just like climate change, but in some ways is more complex to measure and address.
“They result in both a risk to the portfolio as well as to broader society,” Farrant says,
“Nature and biodiversity loss is no different, in that it’s both a threat to the environment [and to] communities that depend on it, but also presents material financial risk to companies, to shareholders and to the global economy.”
Clear and present risks
Farrant says Hesta’s definition of biodiversity captures both “biotic and abiotic elements – so, the living and the non-living parts of nature: plants and animals; but also lands, oceans, fresh water, atmosphere”.
“At a system level we can see the clear and present risks,” Farrant says.
“More broadly, we can see it by looking at things like the Planetary Boundaries. These are showing that the systemic elements of nature and biodiversity operating beyond these safe zones, and this is particularly for nature-based elements. They need to be brought back within those safe domains.”
Farrant says that as an asset owner and a fiduciary, Hesta has “an important role in safeguarding [and] helping to address a range of global challenges”.
“We do that both to support the strong long-term performance of our portfolio, and really the retirement savings of our one million members, and so we wouldn’t see really safeguarding the planet’s natural capital and biodiversity loss [as being] materially different than seeking to address climate change as a systemic risk,” she says.
The C$452 billion ($320 billion) CDQP head of sustainability Bertrand Millot says the way the fund looks at biodiversity really comes down to nature loss.
But when it comes to measurement, “we need differentiated metrics, and the goals are differentiated, and they are even differentiated by country or region”, Millot says.
“So it’s very complicated, and the idea of this [pension fund coalition] is to really think systemically. What do we need as long-term investors in order to effect change in the system so as to reduce specific and systemic risks?” he says.
Kulionis says guiding the system in the right direction is necessary to address a prevailing sentiment that biodiversity loss issues seem a long way off, even if in reality they’re happening right now.
Opportunities for engagement
Laura Hillis, director of climate and environment at the £3 billion ($4 billion) Church of England Pension Board says addressing biodiversity loss starts with “trying to understand the risk in the current portfolio, so not changing your strategic asset allocation, but just looking across asset classes and going, Okay, where are we really exposed, and thus, where are my opportunities for engagement?”.
Hills says that when one thinks about how dependent the world is economically on nature, a picture starts to emerge that if current trends continue there will be huge impacts on “lots of different countries around the world, on food, on water, on a whole range of different industries”.
“And then that’s saying nothing for the fact that it will impact communities, people, significantly and also cause kind of further social disruption, which would be expected from things like climate change and biodiversity loss,” she says.
Hillis says that as very long-term investors, pension funds must think about systemic risks both in financial terms – the impact on portfolios and investment returns – but also in terms of the world their beneficiaries will be living in when they begin to live off the fruits of their investments.
“Even if you adjust your investment strategy and say we’re going to avoid certain companies really badly impacted by climate change or nature loss, you can’t really divest away from the risk because all companies, all industries, all society ends up being impacted,” she says.
Hillis says it is “a reasonable argument” that in the long run, biodiversity loss presents significant risks to financial stability.
“People who have that long-term mindset will often go, OK, it’s not sufficient for us to just use this information to adjust our portfolio, because fundamentally we’re kind of just tinkering around the edges,” she says.
“If we do that, we actually have to think about how we address the long-term risks and try to effectively reduce that risk, which is a really difficult thing to do.”
Innovating to address losses
Pictet AM’s Kulionis says there are clear opportunities for investors to engage with companies to reduce biodiversity impact, and to encourage them to restore biodiversity where possible.
“It’s an issue we must address, and we are already seeing action being taken”, he says.
“Companies will have to innovate to address biodiversity loss, much like they have for climate change. While addressing climate change has driven significant technological advancements, biodiversity loss presents an even broader challenge that will require extensive effort and innovation.”
Kulionis says Pictet AM allocates capital to companies that it believes “help to alleviate pressures on biodiversity”, and that the asset manager is one of only a few that builds biodiversity impact models in-house.
“The reason why we do that is because we want to understand who is causing the impact, where it occurs, what drives the impact, and what can be done to address it,” he says.
“And we are trying to identify those companies that are not only least damaging, but also the ones that do provide solutions to address biodiversity loss.”
Kulionis says Pictet AM’s ReGeneration strategy. which he manages along with two colleagues, does not invest in what one might describe as “transition companies”.
“We invest in relatively clean companies, whenever there is possibility for that,” he says.
“If you think about biodiversity loss, the majority of it is driven by land use mainly for animal agriculture. Addressing this will require solutions that reduce land use, such as alternative proteins. Other key drivers, including water stress, climate change, and pollution, will also need to be tackled with technologies that mitigate their impacts to effectively address biodiversity loss.”
Four ways of addressing the issue
Millot says CDPQ thinks about biodiversity loss in four ways. The first is conservation, which it cannot address because there is presently no efficient mechanism to do so, although there may be in future.
The second part is preventing deforestation and the destruction of nature, and the third part is “investing proactively for nature”.
“This is investing in sustainable forests and sustainable land; sustainable agriculture; potentially one day mangrove forests and other restoration, if there is mechanisms to do so at a large scale,” Millot says.
“At the moment, our efforts are constrained, concentrated in forestry and sustainable land and agriculture land, where we are buying areas that are not husbanded sustainably today, and making sure that they become that way; turning land under normal agricultural practices to organic agriculture that is much better for the planet.”
Millot says CDPQ intends to allocate C$2 billion in the forest and agricultural land sectors by 2026, but “it is, to be completely transparent, not an easy area for a large investor”.
Those investments are relatively small by our scale, and a small project is the same work as a big project,” he says.
The fourth part is engaging with the companies it invests in, Millot says.
“So, engaging food companies, engaging mining [companies], engaging governments, potentially engaging industry to stop what they’re doing and do it better.
“Normal engagement efforts are more effective when the supply chain is short,” Millot said.
“In the case of agricultural and nature, supply chains are usually very, very long – even if you look at wheat in Australia or wheat in Canada, we may own an agri business company or supermarkets, but between the supermarkets and the field, there’s four, five, six different levels, and therefore the engagement weakens at each step.”
Millot says engagement on biodiversity can be complicated “but that does not stop us from doing it”.
Capital allocation
Hesta’s Farrant says the fund is seeking to halt and reverse nature loss though both engagement and capital allocation.
“A lot of the engagement that we do is around that halting loss, with companies who are already operating,” she says.
“Then, the capital allocation piece comes into more the halting, but also really into that reversing: looking for better management practices; looking for agritech to help deliver some of those solutions; looking for nature-based offsets to reverse some of that damage as well.”
Farrant says that Hesta recognises that being nature-positive isn’t an issue for just one organisation, “it’s a system-level objective, and so we recognise that everything needs to come together to achieve that halting-and-reversing of nature loss”.
Hillis says this view informs the thinking of the pension funds coalition to which CoE, Hesta, CDPQ and others belong.
“The group we’re working with collaboratively is much more focused on the more systemic view and going, OK, how could we work together to actually call out some of these risks and try and address them over time?” she says.
“There is a lot of things that you can do in terms of looking at your portfolio, a lot of things you can do in terms of engaging with companies that you own as well. But fundamentally, success really depends on getting the right policy positions into place.”
Kulionis says addressing biodiversity loss is related to but broader than addressing climate change.
“When you think about biodiversity, its scope is broader, encompassing additional environmental drivers such as land use, water stress, and pollution. And therefore, the technologies that required to address biodiversity loss are also going to cover a much broader spectrum.”
Solutions such as renewable energy, EVs, that helps to mitigate climate change will also help to address biodiversity loss, Kulionis says.
“But because biodiversity loss is caused by multiple factors, we will need a wider range of technologies to address it,” he says.
