Asset managers are increasingly turning their attention to addressing biodiversity loss, but moving beyond just exclusion and actively making investments that improve the landscape will be an uphill battle.
It has been a year since a damning report from ShareAction claimed that asset managers are blind to biodiversity loss, which pointed out that none of 75 of the world’s largest asset managers had a dedicated policy on the matter.
The report by the non-profit organisation found that biodiversity loss was included in generic ESG integration, with little consideration, while only 11% of managers had policies requiring their portfolio companies to mitigate harmful impacts on biodiversity.
“The fundamental lesson here is that humanity’s relationship with nature is broken and urgently needs to be repaired,” said Dr Henning Stein, global head of thought leadership at Invesco. “Asset managers can play a significant part in conveying that message and delivering the necessary solutions. Ultimately, as with any facet of ESG and responsible investing, we need to encourage positive change over the long term.”
Since ShareAction’s report, asset managers have banded together and admitted the importance of focusing on biodiversity loss – both by announcing they will no longer invest in certain parts of the market and also improving disclosure of data.
For example, Federated Hermes, BNP Paribas and Natixis were among 30 financial groups that backed the launch of the Natural Capital Finance Alliance’s ENCORE biodiversity module in May to allow investors to assess the potential impact of their investments on biodiversity loss.
Elsewhere, Axa Investment Managers banned investing in commodities that are linked to biodiversity loss through an Axa policy developed with input from the Iceberg Data Lab and I Care & Consult, two providers of data on “biodiversity pressures and dependencies related to industries/issuers”.
According to Dr Stein, fund managers can encourage positive change through several avenues, including effective collaboration, direct engagement and proxy voting.
“It’s about using the power of active ownership and ensuring our voice is heard. We have to back businesses that are already committed to biodiversity and we have to educate those whose policies and practices aren’t yet up to scratch. Since this is a relatively new consideration for many investee firms, we find most companies welcome the insight and guidance we can offer.”
Public vs private
Mirova, a investment manager subsidiary of Natixis Investment Managers dedicated to sustainable investing, has always considered biodiversity but in the last couple of years the efforts to stem its loss and make dedicated investments has picked up pace, according to Mirova’s head of sustainability research Ladislas Smia.
Mirova invests both in the private markets and public equity markets, but in Smia’s opinion addressing biodiversity loss directly is easier to do in the former.
“It’s complicated to do it in listed equity and fixed income,” he said. “You have no players who directly own a farm who are typically listed. If you want it from a direct perspective, not through investing in agricultural companies or solutions providers to farmers, you need to invest in another way than in equity and fixed income.”
Through the group’s non-listed division, it invests in small scale projects that help address biodiversity. For instance, Mirova has a project in Peru to reverse land degradation by implementing sustainable coffee agroforestry systems, while also promoting social inclusion. Another investment is in Bhutan where Mirova is supporting a company called Mountain Hazelnuts to establish sustainable hazelnut production. A third project is in West Africa where Miro Forestry & Timber Products provides sustainable forestry and timber products while protecting and regenerating indigenous tree species.
Mirova is also involved in a partnership in an innovative blended finance facility to improve the management of Belize’s marine protected areas. (photograph above)
“When we launched the division it was kind of tricky, but we believe we have a role to help the market develop, by bringing money, raise awareness and help the development of these projects,” said Smia. “It’s not as easy or mature as what we were doing in renewables. But step by step the market is developing more mature projects and more robust projects.”
But he admits that when investing in small scale projects it can be tricky to achieve the same kind of returns one would have in a more mature market. But Smia said the team believes it’s getting more mature and they will have higher financial returns as a result.
“Doing responsible investment shouldn’t be only about mitigating risk and divesting. It should also be about investing in solutions,” he added.
Difficult to find opportunities
For Stefano Bacci, ESG manager at environmental sustainability asset manager Ambienta, finding opportunities to invest in has been a challenge.
“It’s probably the environmental metric out of 11 that we have leveraged the least so far. You don’t find many biodiversity-driven businesses,” he said.
But making sure that it’s included in its assessment of businesses has helped keep the asset managers away from some companies that it may have invested in.
“For example, we have never invested in palm oil. It’s a controversial proposition, if you look at palm oil and plantations this is the best way to get cheaper [products], effectively. From a biodiversity perspective it’s the worst possible way. The biodiversity is so reduced even insects can’t fly there,” he said.
“I remember looking at a bakery business in Italy, with very high growth rates, a prime brand and great financially, but we weren’t convinced from a biodiversity impact angle. There were a number of question marks so we didn’t do the deal,” he explained.