Feature – ESG Club Conference 2022
getting that across the passive and active equities is tough. In the private market bit, it is easier to look for that information and ask for it.” She does, however, see a cross-over between the physical risks of climate change and nature. “They are the poor rela- tions of decarbonisation. They are geographic specific. There is a lack of data and the science is depressing. Where does that take us?
“It is about gathering information from our companies and understanding the risk,” she added. “The TNFD could pres- sure companies to release that data. Similarly, we have to ask that all the way down the chain, too.”
Up in smoke So there is strong evidence that rather than biodiversity being a lesser risk than climate change, the two are connected and should not be approached in isolation.
“ESG has been dominated by climate issues, but it is difficult to look at biodiversity and climate issues as mutually exclusive. They are intertwined,” Boyle said. For example, one of her colleagues lives in a part of northern England which has been heavily affected by flooding. “They have had a one in 100 year flood every year for the past five years,” Boyle said.
“In that area, a lot of peatland is being burned, so that natural sink for rainwater to reduce the effects of that flooding is being taken away.
“Only about 3% of the world is covered in peatland, but it cap- tures about 30% of soil carbon. Not capturing that carbon makes our climate issue worse.” Boyle believes biodiversity’s impact goes beyond climate change, and having links to the other pillars of ESG, such as healthcare.
“Land use change is one of the main drivers for infectious dis- eases, which, as we saw with Covid, can be a huge systematic risk for the whole investment environment,” Boyle said.
A two-solution problem Stopping biodiversity’s loss is a two-pronged approach. “When we think about our dependency as a global economy on nature, there are many harmful actions we have to stop doing,” Skeates said. “But we have to build back again, too. And this restoration brings some interesting dynamics to what it means from a risk and opportunity perspective.
“If you believe there is going to be more transparency, more investor and regulation-driven awareness of biodiversity, then you have to think beyond best practice, but having a transform- ative business model that works for your industry. “On the opportunities side, if we are thinking about restora- tion, which sectors are most involved in the impacts of depend-
48 | portfolio institutional | September 2022 | issue 116
encies. Is that where the opportunity is going to be built purely with those sectors or will we see new players emerge?” Skeates said she could help build restorative practices into vehicles and structures, which include “all the right safe- guards” and community voices.
In more traditional portfolio construction, is there is an asset allocation topic that you need to consider that would embed nature-based solutions in a sustainable portfolio? “For some people, it is becoming quite an exciting time to try and bring lots of topics that have always been on the outside of industry, much more to the mainstream,” she added.
Setting targets But is investing in a way that tackles biodiversity loss some- thing that helps relieve investors’ consciences or is it a driver of alpha? “We need to put this into the context of what is happen- ing, not just in the industry, but within the inter-governmental world,” Skeates said, pointing out that there is a COP confer- ence focusing on biodiversity. “There is hope that we are going to get towards an understand- ing of what the targets and goals are for biodiversity,” she added. “As you may have seen, there are toolkits designed to try and protect land and oceans. The hope is that we are going to have more idea of what the overall target is, and, therefore, the idea of a transition towards this target in the same way that we have towards net zero.”
If we get clarity around the risks involved – be it through pollu- tion, land use change, the use of pesticides, or fishing – then there is the potential to understand what the direction of travel should be.
“This brings us back to the idea of being able to identify the risks appropriately – seeing which companies are positioned for this change,” Skeates said. The final word on this topic came from Mark Hill, who advised investors to “stay engaged with what’s happening in terms of regulation” if they want to fight biodiversity loss. “Get engaged with the TNFD to help drive its development and adoption, but also stay engaged with your data providers, your asset managers and your advisers to drive that understanding. “It is not just about the risks, but the unintended consequences and impacts of what we do. Only in that way will the under- standing improve.
“I appreciate everybody here is on that journey,” he added. “We have a taxonomy that is evolving in the UK and EU, and we will have a global taxonomy eventually. We have seen proposals by International Financial Reporting Standards (IFRS) around bring us into alignment for an international standard. “We know that data standards are evolving. We know that skills and expertise are increasing, but first and foremost, it is that engagement at all levels where I would set as a priority.”
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