As asset managers adapt to the need to disclose their approach to climate-related financial risks, integrate sustainability risk management into their operations and capture carbon data from their portfolios, a parallel international regime for biodiversity, natural capital and related financial risks is developing at pace. Asset managers should turn their attention to these issues, as governments, regulators and stakeholder groups do the same.
The recent focus of asset managers on sustainability, driven by the introduction of the EU’s Sustainable Finance Disclosure Regulation and the UK Government’s focus on mandatory reporting in line with the recommendations of the task force on climate related financial disclosures (TCFD), has so far been heavily centred on climate risk and greenhouse gas emissions.
Whilst emissions are (relatively!) easy to calculate and compare across companies and portfolios, those asset managers who are forward thinking and looking to differentiate themselves should also embrace the challenge of capturing their impact on natural capital and biodiversity (and related financial risks) in their sustainability and responsible investment approach, particularly in light of two recent legal developments.
Natural capital refers, broadly, to the value to the real economy of the goods and services provided by nature. Natural capital is rarely factored into conventional economic metrics, and increasingly threatened by the devastating global decline of biodiversity and ecosystem services. The World Bank estimates that the collapse of select ecosystem services such as wild pollination, carbon storage, timber from native forests and food from marine fisheries could cause a decline in global GDP of $2.7tn by 2030. According to the WWF, the figure is $9.87tn by 2050.
In an effort to halt this decline, the secretariat to the UN Convention on Biological Diversity (CBD) has produced a new global biodiversity framework to guide worldwide action to reduce biodiversity loss by conserving at least 30% of global land and oceans, cutting harmful government subsidies by $500bn per year, and providing up to one third of global climate mitigation by 2030. The final draft of the Framework is due to be presented for approval at the fifteenth conference of the parties to the CBD in China in October 2021. If governments can set appropriate targets and create the necessary legal and policy change to meet them, the Framework has the potential to do for biodiversity what the 2015 Paris Agreement has done for climate change, driving an “inevitable policy response” that will shape dramatic future political, social, legal and economic developments.
Meanwhile, the taskforce on natural-related financial disclosures (TNFD), which launched in June 2021 can be expected to set the tone for the consideration of nature-related financial risk by business and investors in the same way as the TCFD has done for climate risk, shaping investor expectations and providing a blueprint for the development of mandatory nature-related reporting and governance standards. Managers will need to enhance their governance, data collection and reporting processes in response.
Taken together, the global biodiversity framework and TNFD set up an international regime for nature which mirrors the international climate regime in many respects and can be expected to shape regulatory and economic developments which are material to asset managers, the companies in their portfolios and the expectations of their investors.
Asset managers should get to grips with nature sooner rather than later to quantify their impact, pre-empt shifts in investor demand and regulatory pressure, and protect value in their portfolios, and would be well advised to consider whether any recent enhancements to their business models, governance and investment processes in relation to climate risk can be extended to accommodate the risks and opportunities presented by nature.