Investors must deal with biodiversity loss – right now

Biodiversity loss

In February 2021, Preventable Surprises held a week-long online dialogue to set an investor agenda for biodiversity loss. In this Chatham House-rule, text-only online format, participants were invited to discuss and respond to a series of  “provocations” – short texts written by leading experts, designed to yield creative thinking, test the wisdom of the crowd and challenge the status quo. We are publishing these provocations on our blog this month in an effort to broaden this conversation.

By Wolfgang Kuhn, Director of Financial Sector Strategies, ShareAction

Investors are woefully unprepared to deal with biodiversity loss. According to ShareAction’s latest asset manager survey, none of 75 of the world’s largest asset managers has a dedicated policy on biodiversity. Only 11% of asset managers have policies requiring portfolio companies to mitigate harmful impacts on biodiversity.

In a recent scoping study, ShareAction described that the “majority of interviewed investors said they planned to focus on biodiversity as an ‘engagement topic’ but do not have plans to develop an overarching biodiversity policy or commitment on biodiversity.”

Five thoughts on the topic:

  • The dance around data

Without complete data, financial markets are not able to do anything about biodiversity, it sometimes seems.  Which is odd, given that financial markets participants normally (I.e. when it isn’t about sustainability) know very well how to navigate their way in the face of uncertainty and incomplete data. What is also odd is that when it comes to divestment, investors ensure us that it is much more productive to engage with companies, and that great engagement streams are in place. 

Question: If that is so, and if data is so important, why haven’t investors told companies to provide the data?

  • SFDR lobbying

We are saddened to see that the proposed EU Sustainable Finance Disclosure Regulation technical standards have been decimated (“not enough data”…). One of the metrics that have bitten the dust fell under “Deforestation”: The Share of investments or investee companies without a deforestation policy”. Might not be easy to come by that information. 

Question: But if investors are not even prepared to obtain information of such basic nature, what chance is there that investors will do anything more demanding?

  • Natural capital

The Dasgupta Review has kicked natural capital accounting into the limelight. Biodiversity loss is a market failure, market participants say. If only governments put the right price on stuff, markets would work perfectly and serve people and planet. While theoretically, that may just work for a price of carbon (which is most likely going to be too low for political reasons), how is that going to work for the amazon. For bees? For less appealing insects? Pricing has the potential to drive investment decisions and capital flows in important ways but can we safely ‘price’ nature without implying that for $X, you have the right to destroy nature? Looking at the history of carbon pricing may also be instructive. 

Question: Is it going to be possible at some point to arbitrage prices of insects? Hedge with derivatives?

  • Environmental materiality

Why is a double materiality angle important? Because investors have enough information to know what needs doing. However, they don’t have enough information to prove to themselves that the changes that are (obviously) needed will get them exactly the same returns as not making those changes. For that, the world is too complex, and causality chains are too long. You will never be able to calculate what the amazon burning means for your 2021 portfolio return. But this is not about financial materiality. It is about responsibility. Investors are responsible for biodiversity destruction caused by the economic activity they finance, whether it is through equity or debt. At some point, society will put a price on that responsibility.

Question: How do we get beyond that focus on financial materiality, which essentially says that I care about biodiversity only to the extent that caring doesn’t affect my investment returns?

  • What to do beyond fretting about data and disclosures?

“A number of data sources exist that can be used to construct sector-specific campaigns to transform the biodiversity performance of individual companies and industries. For instance, analysis by ENCORE and others have identified priority industries which have the most significant impacts and dependencies on biodiversity, and datasets such as SPOTT and TRASE which provide detailed information at the sector level. Since financial actors have a limited understanding of the relevance of biodiversity to sectors beyond agriculture, it will be important to elevate how other industries such as chemicals, apparel, mining and construction also impact and are impacted by biodiversity.”

Question: Can we expect asset managers to invest in the additional resources needed when they are mainly focussed on climate change? Will they be ready to change their investment processes?

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Necessary Transformations: How are global policy efforts responding to the challenge of biodiversity loss? What is the role of investors?

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