ESG industry view – CDP
Laurent Babikian is joint global director of capital markets at CDP, an environmental impact data specialist
BIODIVERSITY’S THREAT TO ECONOMIC GROWTH
Climate change is already happening and is to some degree unstoppable. 2020 was the hottest year on record, and by mid- 2021 devastating floods and record-break- ing temperatures hit Europe and other parts of the world. The World Health Organisation estimates that climatic changes already cause more than 150,000 additional deaths annually, linked to extreme weather, natural disasters and malnutrition. We know that to prevent catastrophic and irreversible climate change, we must limit warming to no more than 1.5-de- grees above pre-industrial levels. This will entail policymakers, corporates and capital markets working together to halve global greenhouse gas emissions and eliminate deforestation by 2030 to achieve net zero by 2050. However, according to the IPCC, global average temperatures have already increased by 1.1-degrees, and the world is on track for more than 2-degrees warming. These effects are intimately tied to and reinforce a similar crisis in nature. Global wildlife populations have dropped by 68% since 1970, according to the World Wildlife Fund. 75% of the Earth’s ice-free land surface has already been significantly altered, most oceans are polluted, and more than 85% of wetlands have been lost. Biodiversity loss, caused by deforest- ation, intensive agriculture and misman- aged urban growth, created the condi-
tions for the Covid-19 pandemic, and triggered dire warnings of more to come. Half of global GDP depends on our natu- ral world and environmental risks also have a significant impact on global capi- tal markets. An increasingly concentrated group of banks, investors and insurers ultimately own the assets of the compa- nies exposed to the nature crisis through their shareholdings and loans. A fifth of the $100trn (£76trn) of assets under management in 2020 was managed by the top four funds (BlackRock, Vanguard, State Street and Fidelity) with 40% man- aged by the top 20.
This market dynamic has seen the main- streaming of ESG in financial institu- tions. 2021 was a record-breaking year for investment flows into ESG funds and issuances of green and sustainability- linked debt, with $649bn (£493.2bn) invested in ESG funds, up from $542bn (£412bn) in 2020. The Taskforce on Cli- mate-related Financial Disclosures (TCFD) is now widely supported by financial institutions and mandatory TCFD-aligned disclosure is on the hori- zon in many markets with multiple juris- dictions announcing roadmaps to enforcement. However, while ESG is widely embraced, action to address the nature crises lags behind other issues such as climate change – in terms of how well they are understood and integrated into invest- ment processes. In 2020, CDP released its reporting and accountability frame- work for the financial sector, requesting 695 publicly-listed financial institutions to disclose their environmental data. CDP’s analysis of this data, published in The Time to Green Finance, showed that while more than 80% of the 332 respond- ing financial institutions assessed at least one of their portfolios (lending, invest- ment, insurance underwriting) for expo- sure to climate risks, this figure dropped to around 60% for risks related to water security. With 70% of financial institutions
engaged either not responding or indicat- ing that they do not assess water risks for any portfolio, it is clear that the sector is failing to pay sufficient attention to water security. CDP’s recent analysis of Euro- pean financial institutions found that progress is similarly slow on other nature-related issues, with investors being nearly twice as likely to assess their portfolios for climate risks than for for- ests (88% vs 46%).
This is worrying given that water, forests and nature-related issues are largely non- diversifiable, in a similar way to climate change. The sectors and industries that account for the most water use and pollu- tion, such as food and beverage, materi- als and energy, are key to the functioning of our economy.
Universal investors like insurance com- panies and pension funds cannot con- struct portfolios that span the economy without exposure to those key sectors. Nor can investors diversify away nature- related
risks by investing across
geographies. Work is underway to expand our report- ing and accountability framework to cov- er all planetary boundaries. Over the next five years, we will cover a wider, more holistic approach to disclosing, analysing and improving environmental perfor- mance. Our accountability mechanism will also enable the tracking of progress and credibility of commitments made against initiatives, such as the Taskforce for Nature-related Financial Disclosure and the Science-Based Targets Network. Currently, just 5% of companies disclos- ing to CDP have a science-based emis- sions reduction target, a target for reduc- ing water withdrawals, and a best-practice forests commitment including zero-de- forestation. This is not good enough. The world’s converging crises in climate, nature, the economy and public health must be tackled together but we are far behind where we need to be. We must act now to prevent more deaths, more dis- ruption and more irreversible change.
Issue 112 | April 2022 | portfolio institutional | 21
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