Biodiversity risk increasingly important in fixed income portfolios

Alongside the risks posed by biodiversity losses, Bamberger said increasing interest in investing with impact, as well as regulation, is driving the need for the integration of biodiversity factors into institutional fixed income portfolios.

Bamberger said: “Large asset owners are starting to measure their impact and consider how to adapt portfolios. At the same time, the risks are becoming ever more evident. 

Adoption may quickly filter through to mandatory reporting on biodiversity.Bruno Bamberger, Axa Investment Managers

“We expect companies that do not proactively address these risks and do not adopt more sustainable, nature-positive business models could face higher costs or lower revenues, therefore reducing their ability to repay debt in the future.” 

“Alongside this, the Taskforce on Nature-Related Financial Disclosures is set to release its complete recommendations for a biodiversity risk management and disclosure framework in September this year. 

“As with climate-related disclosures, adoption may quickly filter through to mandatory reporting on biodiversity, requiring a greater understanding of the topic among all investors."

Investor considerations

Biodiversity risk is typically broken into two key categories for investors to consider.

One focuses on physical risks from ecosystems degradation and depletion of natural resources, which can create significant pressures on issuer supply chains and manufacturing processes.

The other is transition risks, which is linked to global efforts to tackle the problem, including new technologies, evolving regulation, changing consumer spending patterns or even boycotts and litigation.

Important drivers of transition risks are regulatory changes like tax increases or bans of certain products.Marcus Weyerer, Franklin Templeton

Bamberger said he believes the interactions between these two categories of nature-related risks could eventually lead to a nature-related systemic risk with consequences for global economies around the world.

According to Bamberger, three ways to integrate biodiversity into fixed income portfolios, include:

• harnessing available data to better identify and properly manage nature-related impacts, dependencies, risks and opportunities;
• building biodiversity into investment process and starting the process of re-aligning their portfolio to reflect where best practice lies in biodiversity integration; and
• deeper engagement with companies to drive changes.

Biodiversity research is seen as the next step in assessing the potential impact of climate change on markets and the economy.

Marcus Weyerer, senior ETF investment strategist at Franklin Templeton, added: "Acute hazards (as a climate risk) include weather events like floods and droughts, whereas chronic hazards stem from long-term changes like rising sea levels.

"Important drivers of transition risks are regulatory changes like tax increases or bans of certain products, but also technological shifts and, crucially, changing consumer behaviour and societal pressure.

"It goes without saying that not all sectors, companies and even facilities face the same exposure to these risks and therefore exhibit different levels of vulnerability to climate change.

"Companies’ bottom lines will be affected in various ways, and the economy as a whole will be deeply impacted. Eventually, this will feed through to financial markets and ultimately, investor returns."

ima.jacksonobot@ft.com