Wednesday, March 3, 2021
Biodiversity on the balance sheet
Last summer, the investment arm of northern Europe’s largest financial services group dropped Brazilian meat giant JBS from its portfolio. Nordea Asset Management, which manages roughly $280 billion, gave several reasons for the decision, including JBS’s links to farms involved in Amazon deforestation.
“The exclusion of JBS is quite dramatic for us because it is from all of our funds, not just the ones labelled ESG,” Eric Pedersen, Nordea’s head of responsible investments, told The Guardian.
Until very recently, investor demands regarding environmental impact have largely focused on the climate crisis and greenhouse gas emissions. Now, investors are beginning to wake up to the threat of habitat destruction and biodiversity loss and we’re beginning to see examples of action by means of both carrots — such as sustainability-linked loans tied to biodiversity-related metrics — and sticks like the one which Nordea whacked JBS with.
Recent research by Leaders Arena ESG Advisory Services finds that institutional investors managing more than $7 trillion in equity assets consider biodiversity issues to some extent, including Allianz Global Investors, BNP Paribas Asset Management and California Public Employees’ Retirement System, better known as CalPERS. Both S&P Global Ratings and Bloomberg rank biodiversity among the top ESG themes for 2021, the latter naming Fidelity International and AXA Investment Managers as examples of firms that have made it a priority.
That said, huge as it sounds, that $7 trillion represents only a fraction of the more than $100 trillion in global assets under management. Most investors and companies still don’t put a price tag on natural capital, or the cost of losing it, and biodiversity becoming a top “theme” only means people have begun talking about it.
Still, progress in this area could move faster than we’ve typically seen in ESG-land, for a few reasons:
- The coronavirus pandemic “has focused investors on the vulnerability and resilience of the financial system,” according to a new report from the CFA Institute, an association of investment professionals, which found 85 percent of its members now consider ESG factors when making investment decisions. The fact that the pandemic has illustrated in such a brutal way what can happen when we jackboot into nature’s territory could make habitat destruction and biodiversity loss especially relevant for investors going forward.
- A decade of pressure on companies to report on and reduce their contribution to climate change has created something of a blueprint for investors to demand the same in terms of the separate but interconnected biodiversity crisis. This past summer, a coalition that includes the UN Environment Finance Initiative and World Wide Fund for Nature announced the Taskforce on Nature-related Financial Disclosures, which takes a page from the 2015 Taskforce on Climate-related Financial Disclosures, and aims to deliver a framework to guide financial reporting on biodiversity and natural capital by the end of 2022.
- Abundant research revealing just the urgency and existential nature of the biodiversity crisis has heightened awareness. In its Global Risks Report for 2021, the World Economic Forum ranks biodiversity loss as the world’s No. 5 risk by likelihood and No. 4 risk by impact. It estimates that $44 trillion of economic value generation, or more than half of global GDP, is moderately or highly dependent on nature and its services. The most dependent industries: construction, agriculture, and food and beverage.
- New metrics, such as the ones proposed this week by the UN Statistical Commission that go beyond GDP to include natural capital. Dubbed the System of Environmental-Economic Accounting — Ecosystems Accounting (SEEA – EA), this method of measurement would fundamentally change economic and policy planning in countries that adopt it.
Given that we now have less than a decade to address the double whammy of climate change and biodiversity loss, and given that the technology to monitor and track, for example, deforestation or overfishing already exist, the slow pace of progress can be maddening.
Nordea’s divestment, along with pressure from other institutions, such as Norwegian pension fund KPL, led to a pledge from JBS to use blockchain to monitor its entire supply chain by 2025, including the problematic “indirect suppliers” that have been linked to illegal deforestation. Still, these particular investors weren’t satisfied.
“JBS’s 2025 target for tracing cattle is too far away, we need immediate action,” Jeanett Bergan, head of responsible investments at KLP, told The Guardian. “It is a positive step, but we have to see the detailed evidence in practice.”
Here are a few other recent examples of the financial industry walking the walk in the name of biodiversity.
- Paris-based Ossiam just launched a global equity ETF that invests in food companies making efforts to minimize habitat and biodiversity destruction. The Ossiam Food for Biodiversity ETF is listed on Deutsche Börse Xetra and is available to trade in euros or U.S. dollars.
- Bank of Ayudhya, Mizuho Bank and MUFG Bank last month syndicated a $400 sustainability-linked syndicated loan for Thai Union, one of the world’s largest seafood companies, which was two-times oversubscribed. The interest rate on the five-year loan is tied to three performance metrics, one of which is a new commitment from the company to reach 100 percent transparency in its international tuna supply chain by 2025, through electronic monitoring and human observers. The company will pay a lower interest rate as long as it continues to make progress toward its goals, measured annually against a 2020 baseline. Thai Union, known for household tuna brands such as Chicken of the Sea and John West, has partnered with The Nature Conservancy on the monitoring effort.
- Finnish forestry company UPM last year secured a $905 million revolving credit facility with an interest rate tied to its ability to meet long-term climate and biodiversity targets. To receive a lower rate the company must show a net-positive impact on biodiversity in its forests in Finland and a 65 percent reduction in CO2 emissions from fuels and purchased electricity between 2015 and 2030.
- BNP Paribas, France’s largest bank, last month pledged to stop financing companies that produce or buy beef or soybeans cultivated on land in the Amazon cleared or converted after 2008.
- Britain’s Prince Charles in January said he had established the Natural Capital Investment Alliance under his Sustainable Markets Initiative. The alliance — with founding partners HSBC Pollination Climate Asset Management, Lombard Odier and Mirova — aims to accelerate natural capital as an investment theme and mobilize $10 billion across asset classes by 2022.
The one undeniable fact in all of this is the plant’s finite resources. For theirs and everyone else’s sake, let’s hope companies make the move more like an über-fast cheetah, of which there are roughly 7,000 left, and less like a pygmy three-toed sloth, of which there are fewer than 100.
On the docket
- 2020 was a good year for ESG investors. Funds screened for ESG factors proved to be more resilient than their conventional fund counterparts, according to a recent Morgan Stanley report.
- Activists are pushing the U.S. Securities and Exchange Commission to make it easier for shareholders to advance climate resolutions at oil and gas companies, another early test of the Biden administration’s efforts to tackle the climate crisis.
- Banks have more exposure to climate risk than they’re letting on. More than half of bank lending is potentially exposed to climate risks due to the failure of many companies to plan for the transition to a net-zero economy, according to a report from Ceres.
- Cevian Capital, Europe’s largest activist investor with $12 billion in assets under management, is pressuring companies to set ESG targets when deciding executive pay.
- The UN Joint SDG Fund has allocated another $41 million toward accelerating the SDGs. The allocation brings the fund’s investments to date to $223 million across 112 countries.
- Out of 100 large companies in the U.S. and Europe, 32 percent don’t disclose biodiversity initiatives within their business operations, according to a new study from Leaders Arena ESG Advisory Services.
- A new World Bank report, Pension Fund Investment in Forestry, aims to address a lack of knowledge about forestry as an asset class. The report details the nature of forestry investments, including the mechanics, challenges and case for investing.
- A number of Spanish clean energy companies are planning IPOs or stake sales within the next two years, taking advantage of a boom in green assets to raise funds to build more wind farms and solar parks.
- Humankind Investments, a quantitative asset manager specializing in socially responsible investments, launched its first ETF. The domestic equity fund invests in “companies that contribute the greatest value to society.”
- GreenBiz’s upcoming webcast, “ESG in 2021: the State of Play,” hosted by Joel Makower, will delve into the key ESG metrics investors are examining, the opportunities for sustainability professionals to play a leadership role in their company’s strategy and how the Biden administration will affect the trajectory of ESG transparency and disclosure, among other topics.