Biodiversity: our engagement strategy for equity portfolios

1 March 2024

Why the concern?

Among the various descriptions of biodiversity, the definition offered by Wikipedia as 'the variety and variability of life on Earth’ resonates the most. This richness of life is under threat, with biodiversity loss rising rapidly up the scale of investor concerns. These concerns are fuelled by an awareness that 55% of global GDP is ‘moderately or highly dependent on nature’1 and that addressing biodiversity loss and deforestation is integral to tackling climate change.

What is being done on a global policy basis?

At the end of 2022, the Kunming-Montreal Global Biodiversity Framework committed 196 nations to halt and reverse nature loss by 2030. This framework includes targets to safeguard and sustainably use biodiversity.  As with the 2015 Paris Agreement on climate change, this global alignment towards a common goal has steered investor action and provided context for the setting up of collaborative initiatives to address biodiversity conservation and sustainable practices.

What is the risk to investors?

Depletion of natural capital leads to a host of risks. There is the ‘baseline’ risk of the physical impact to companies, with water scarcity, soil erosion, and habitat destruction having the potential to disrupt supply chains, damage infrastructure, and otherwise affect asset performance. Additionally, heightened regulatory, litigation, and reputational risks are concerns, prompting us to integrate biodiversity-related risks and opportunities in our engagements with companies.

How can we engage?

We prioritise collaborative engagement with companies we invest in where we can, as experience has shown its effectiveness in pooling knowledge and expertise towards achieving positive outcomes. In 2023, we joined the Nature Action 100 investor engagement initiative, targeting 100 companies in eight sectors deemed systemically important to reversing nature loss. The initiative identifies the sectors due to their large impacts on habitat loss and overexploitation of resources, and their contribution to environmental pollution. We co-signed correspondence to companies from these sectors calling for urgent and necessary actions to protect and restore nature and ecosystems and thereby mitigate financial risk. For 2024, we have joined engagement teams for three portfolio holdings: AstraZeneca, McDonald's and Zoetis.  

As with climate change, biodiversity loss is a fundamentally systemic issue, and we have the nexus with public policy and shaping regulation at top of mind. As part of the signatory advisory committee for ‘Spring’, the PRI stewardship initiative for nature, we've contributed to developing an engagement strategy focused on promoting policy alignment and implementation in regions at high risk of future forest loss. By actively engaging with companies on their lobbying and trade association activities we can support coordinated policy action to protect nature and the long-term financial risk of portfolios. The initiative will be officially launched in the second quarter of this year, and we will identify any companies for engagement as we progress through 2024.

Looking ahead

As these are new initiatives, it is early days to envisage their potential impact. Nature Action 100, partly modelled on Climate Action 100 (CA100), outlines expectations for companies to act in terms of ‘ambition, assessment, targets, implementation, governance, and engagement’ and as with CA100, there will be an annual assessment of company performance against a benchmark to monitor progress.

There have been some criticisms about an overlap of initiatives and with others working in this space. Being aware of this, we have been deliberate in our choice of initial companies for engagement to ensure clarity of engagement objectives. Both initiatives maintain open communication and aim to complement and reinforce each other's work. We are clear on the benefits of the difference in approach of the two initiatives we are participating in, particularly valuing the policy focus of ‘Spring’.