PI Partnership – Aon
Understand the risks Firstly, it’s important to understand the risks and impact of specific investments in portfolios on nature – and the ways in which biodiversity loss poses long-term risks to businesses, the economy and society. In its Handbook for Nature-related Financial Risks, the Cam- bridge Institute for Sustainability Leadership (CISL) identifies three types of nature-related risks: 1. Physical risks: These occur when ecosystems are damaged, impacting air quality, water security and food provision among other things. Physical risks affect governments and businesses which in turn can impact revenue, increase costs and lower production.
2. Transition risk: This happens through the process of trying to solve the issues caused by nature loss. Changes in regula- tion, technology, innovation and consumer behaviours can impact the viability of certain companies, industries and economies – and therefore people’s livelihoods.
3. Liability risks: These impact companies, individuals, and governments in the form of legal settlements, fines, reputa- tional risks and insurance costs incurred because of biodi- versity loss.
Appraising investments through the lens of these risks can help bring clarity to future investment strategy, decisions and portfolio outcomes. Through Aon’s partnership with the CISL, we also conducted a study to determine the dependencies of equity indices on the natural environment and ecosystems.
This work supports investors to better understand the risks in their portfolio, providing a baseline from which to measure progress.
Active stewardship
Using stewardship and the power of asset ownership, asset owners and managers can set expectations for companies to engage on the key themes of nature loss. A good example can be found in Nature Action 100+, an investor-led initiative engaging with key companies and policy makers to achieve their goal of reversing nature loss. Taking an active approach to stewardship – through voting and engagement activity – can be powerful for driving change. Investors can achieve this through a combination of clear dia- logue and communication with asset managers, holding them to account for action and progress, and critically evaluating the impact of this activity over time.
Consider ‘nature-positive’ investments Investment choices can be “nature-positive” – like investing in solutions
that reduce pollution. For example, sustainable equity strategies may include innovative companies which are acting to capture micro-plastics in marine transportation and shipping; improving water infrastructure and sanitation provi- sion; and developing clean energy solutions. Investors can also contribute to natural carbon sinks through allocations to responsible forestry, or which align with a low- carbon energy transition – such as allocating to greenfield renewable energy infrastructure developments, which serve to bring more energy generation capacity to the grid and reduce reliance on fossil fuel burning. At Aon, we have been supporting our clients to examine the solutions available – and increased activity in this area is driv- ing asset managers to take action and innovate for addressing biodiversity risks and opportunities.
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February 2023 portfolio institutional roundtable: Biodiversity
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