Investors are just starting to take biodiversity into account, but time is running out fast. Biodiversity is an important investment issue both because the value of portfolios is at risk when biodiversity is lost, and because the issuers held in the portfolio can worsen the dangerous long-term trend of biodiversity erosion.
The conundrum is that the complexity of biodiversity makes it difficult to measure, and tricky to incorporate in the investment process. We do not have the luxury to wait for perfect data or for a ready-to-use comprehensive framework. Neither can we afford to wait for a “Paris Agreement” on biodiversity, which would impose global objectives and regulation. Time is running out. It is our responsibility as investors to develop innovative ways to understand, assess and integrate biodiversity, well beyond traditional ESG analysis.
Tackling the challenge
With the measurement of biodiversity in an investment context still in a very early stage of development, what are the key elements to consider when selecting strategies that incorporate biodiversity considerations? How should asset owners conduct their due diligence?
Analytical Process: Similar to climate change, it is important to develop a dedicated biodiversity framework that can incorporate the multifaceted and complex nature of biodiversity. In practical terms, this means that investors must go much further than traditional ESG analysis, and focus on developing dedicated biodiversity indicators and methodologies that integrate asset-level data.
The notions of biodiversity impacts and dependencies must be integrated, but also differentiated to understand the associated risks and impacts. Asset owners should thus deploy specific due diligence to assess the quality of biodiversity assessments and how they are translated into investment decisions.
For countries, the management of natural capital, including life on land, in the air, and marine life, should be carefully assessed with specific indicators[1].
Data: Because biodiversity is best assessed and interpreted locally, investors need to consider new types of data and new indicators. Difficulties lie both with the collection of such data but also with their interpretation. Emerging indicators such as msa.km2 (mean species abundance) and geospatial data shed some new insight, but they suffer from limitations. As for climate, we can expect a myriad of biodiversity indicators with different objectives and time horizons will be developed, both historical and forward-looking.
Asset owners will have to consider the meaning and usefulness of indicators selected very carefully, along with the potential biases. Like all investors, asset owners should be particularly vigilant regarding ‘net biodiversity positive’ claims and assess to what extent they are substantiated by relevant indicators.
Engagement: Accelerating the integration of biodiversity in investing will require tremendous engagement efforts for both sufficient disclosure, and for biodiversity management. Successful engagement requires high-quality data and relevant methodologies. Asset-level data is necessary to target engagement efforts if we are to address the most material biodiversity impacts and risks and foster real-life change. As for many ESG topics, engagement which brings together various stakeholders can be a powerful way to harness change. Asset owners should carefully consider biodiversity-related engagement efforts and focus on engagement outcomes with meaningful KPIs in assessing the quality of engagement strategies.
The way ahead
As this complex journey has just begun, efforts should be focused both on engaging with corporates to improve disclosure practices, and to share best practices through collaboration with peers and stakeholders. We must start down this road today if we are to meaningfully assess and integrate biodiversity.
Asset owners play a key role in the integration of biodiversity in investments. By requiring asset managers to set dedicated methodologies and engagement efforts that fully consider and integrate the complexity of biodiversity, asset owners can be a powerful spearhead in this investment frontier.
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[1] https://www.candriam.com/en/professional/SysSiteAssets/medias/publications/brochure/research-papers/sustainability-in-the-age-of-the-grey-swan/2022_11_sovereign_report_en_web.pdf
