Investors leveraging biodiversity statistics for financial choices
In the ever-evolving world of finance, UK pension funds, asset managers, and insurers are taking a significant step forward in integrating nature-related risks and opportunities into their operations. This shift is driven by a combination of market demand, evolving standards, and regulatory expectations, aiming to safeguard long-term portfolio resilience and sustainability.
One of the key players in this transition is Phoenix Group, a leading name in the industry. Chris Hart, the nature investment strategy lead at Phoenix, has been instrumental in driving this change. The company has issued an annual due diligence questionnaire with a substantial sustainability section, focusing on aligning with third-party managers and probing specific issues such as tropical deforestation and water security.
Phoenix Group is also piloting the TNFD LEAP reporting in 2023, as part of a second wave of nature-positive investing. To assess risks in its portfolios, the company uses the ENCORE tool. The improved availability of relevant data, including asset location data, is a welcome development for Chris Hart and his team.
Another pioneer in this field is Aviva, which has taken an integrated approach to nature, adaptation, and just transition issues. Aviva's in-house asset manager has developed a proprietary biodiversity footprint tool, and for real estate acquisitions, location-based assessments of biodiversity sensitivity are conducted to identify potential risks or the need for further due diligence.
The potential financial impact of nature loss is significant. More than half of global GDP is either highly or moderately dependent on nature. In the UK, nature-related risks could potentially lead to GDP losses ranging from 6 to 12% in the next decade.
This shift towards nature-focused investing is not without its challenges. There is a division among investors regarding the return profile of natural capital strategies. However, almost all UK asset managers have firmly established ESG policies and dedicated sustainability teams supporting the integration of nature-related risks alongside climate and social factors.
The UK government and regulators are also playing their part in this transition. They are emphasizing credible transition plans embedding both climate resilience and nature-positive strategies aligned with the Paris Agreement 1.5°C target. New proposals expect pension schemes, asset managers, insurers, and other regulated firms to disclose and regularly update these plans, enhancing transparency and accountability.
Mette Charles, a senior investment research consultant at Aon's Global Manager Research team, is working to bridge the gap between data, the issuer, sector, and production process. Her efforts are a testament to the growing importance of data-driven decision-making in this new era of sustainable investing.
As more UK pension funds adopt net zero targets (with over 60% having done so), the trend towards nature-focused investing is set to continue. It's an exciting time for those committed to a sustainable future, as the financial sector embraces its role in protecting and preserving our planet's natural resources.
[1] Source: UK Government Green Finance Strategy (2019) [2] Source: Bank of England (2020), Prudential Regulation Authority (2020) [3] Source: UK Government, Green Finance Strategy: Next Steps (2021) [4] Source: Net Zero Asset Managers Initiative (2021) [5] Source: Investment Association (2021)
- In line with the industry's transition, environmental science, specifically nature-related risks and opportunities, is now a key consideration for Phoenix Group in its investment strategies, as illustrated by their use of tools like the ENCORE and TNFD LEAP reporting, focusing on areas such as tropical deforestation and water security.
- Forecasting the financial implications of climate-change and nature loss, Aviva's integrated approach to nature, adaptation, and just transition issues includes developing a proprietary biodiversity footprint tool and conducting location-based assessments for real estate acquisitions, emphasizing the significance of environmental-science in their investment decisions.
