We are facing a twin crisis. The cascading impact of climate change and economies' overexploitation of the land and sea have given rise to unprecedented devastation of nature and biodiversity, resulting in a 69 per cent drop in wildlife populations in the past 50 years.
The unfolding crisis has prompted the UK government to place nature at the top of its agenda.
Its green finance strategy outlines its approach for meeting ambitious climate and environmental objectives, including to incorporate nature and climate adaptation.
Capital allocators are also following suit, realising that the stability of our global economies and societies is dependent on nature and they must factor in nature risks into investment decisions.
With the Taskforce of Nature-related Financial Disclosures sharing its final recommendations on disclosure metrics in September, the economic imperative for investor action is gaining traction.
Yet the topic of nature and biodiversity is still relatively new and existing guidance in this area is still in its infancy, posing a barrier for many investors looking to start evaluating their exposure in this area.
At First Sentier Investors, addressing the complexities in nature and biodiversity is an ongoing journey for us, but we believe that if capital allocators can work together, we can accelerate industry practices in this area.
Why nature matters to investors
Our global economy’s greatest asset is nature. We are wholly dependent on the natural resources and the ecosystem services that nature provides in areas like climate regulation and the provision of water and food sources.
However, nature losses and devastation caused by economic activities can disrupt companies and industries.
While still a nascent topic for many investors, perfect should not be the enemy of good.Companies that fail to adequately identify and manage their impacts and dependencies on nature could face financial, reputational, legal and other consequences that can pose financially material risks to investors.
Given these dependencies and the target for a net-zero future, it is in investors’ interests to limit nature loss and protect ecosystems by broadening due diligence approaches to include consideration for the materiality of nature-related issues and by deepening engagement on nature.
Challenges in assessing issues
Yet investors are faced with many challenges when assessing nature and biodiversity, such as understanding key concepts, accessing and interpreting nature-related data, as well as utilisation of various tools and resources.
Despite these challenges, understanding nature-related issues, opportunities, impacts and dependencies are becoming more tangible as disclosure frameworks and methodologies emerge.
Data will also improve as more investors and companies begin to focus their attention in this area.
Although many investors do not have easy access to asset-level location data or the supply chain data of a company, there are alternate ways for investors to conduct due diligence and start identifying nature-related risks among portfolio companies or portfolio-wide exposure material to investors’ own risk management.
For instance, in developing an approach for our own investment teams to use, we recently launched a guide providing investors with a due diligence framework on nature-related company assessments and engagement approaches following these steps:
- identification of sector exposures;
- dependencies and impacts;
- company prioritisation and assessments; and
- company engagements.
Accelerating industry practice
While still a nascent topic for many investors, perfect should not be the enemy of good.
By assessing nature-related issues, prioritising portfolio companies and engaging on material issues and gaps, investors will have new opportunities to understand risks and dependencies on nature and biodiversity.
It will uncover areas where investors can drive positive outcomes by sharing best practices with investee companies and linking them with solutions and innovative players.
Industry practice will continue to accelerate and evolve as more investors and companies work together and start to build knowledge in this area, measure impacts and dependencies, and disclose more information and data. They can start assessing nature now.
Joanne Lee is responsible investment specialist at First Sentier Investors
