Sydney-headquartered investment manager First Sentier Investors (FSI) has launched a guide for institutional investors to identify, assess and respond to nature and biodiversity risks like freshwater and agriculture-driven deforestation.
Released on Sept 7, FSI’s guide comes ahead of the Taskforce on Nature-related Financial Disclosures’ (TNFD) final recommendations and guidance, which will be released on Sept 18 at the New York Climate Week.
Titled “Investors can assess nature now”, or ICANN, the guide focuses specifically on freshwater and forests, two areas FSI views as fundamental to both the global economy and the fight against climate change.
FSI says the guide will help bridge the gap between the framework to be outlined by the TNFD and the practicalities of navigating the data available.
The guide maps a due diligence framework for appraising and engaging on three critical issues.
Firstly, the guide helps investors identify sector exposures and understand material nature pressure areas.
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Secondly, the guide prioritises due diligence, metrics to look for and country-level assessment.
Finally, the guide helps investors conduct company engagement, outlining how to interpret nature and biodiversity-related data, along with questions to ask.
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Kate Turner, global head of responsible investment at FSI, says there is growing global momentum to address nature and biodiversity risks, but the topic is still relatively new for many investors. “While there is a data challenge, knowing what tools are available and when to use them can also be a roadblock. This guide provides an outline of the available resources for assessments, including raising alternate ways to navigate data issues.”
Joanne Lee, responsible investment specialist at FSI and author of the guide, says most investors are unfamiliar with the topic and face challenges collecting nature-related data. “But we can’t let perfect be the enemy of good. Although many investors still don’t have easy access to asset-level location data or supply chain data of a company, there are other ways to conduct due diligence, enough for investors to start identifying areas material to their own risk management as well as the company’s business and its impact.”
Lee, formerly senior manager of sustainable finance at the World Wildlife Fund (WWF) in Hong Kong, believes quality of data will improve as more investors and companies begin to focus on biodiversity and nature. “As allocators of capital, investors have the opportunity to help improve nature-related data and company practices.”
Even so, investors cannot “just sit there” waiting for companies to disclose “100% of all the things we want in the way that we like”, says Lee in a Sept 6 webinar.
When the desired data becomes available, investors must also know how to parse through large amounts of information.
Lee points to step two of the guide, titled “Company prioritisation and assessments”. “Because investment managers usually deal with hundreds, if not thousands, of companies, we’re trying to set up a tool where investors can narrow down the scope of companies. So, instead of having to look at thousands of them, based on materiality, [for example, they can say:] ‘Okay, these are the eight companies that are mostly critically impacting our portfolio on nature, or the [companies we are] most dependent on or the ones with the most issues or controversies.’”
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Nature and biodiversity
FSI expanded the focus of its responsible investment agenda to include nature and biodiversity in 2020, alongside other focus areas of diversity, climate change, human rights and modern slavery.
In 2022, FSI convened a nature and biodiversity working group, comprising members from nine of FSI’s fifteen investment teams.
The main task of this working group was to develop a nature and biodiversity toolkit to support investment teams.
Of the TNFD’s “four realms of nature” — land, freshwater, ocean and atmosphere — the working group decided to focus on freshwater and forests of various land biomes in the first edition of the toolkit.
Of all the impact drivers and pressures that contribute to nature loss, the quantity and quality of freshwater is a key indicator of resource exploitation and pollution, reads FSI’s guide. “The interaction between surface and groundwater in terms of the water cycle is critical for businesses that depend on water resources given water recharge rates and flow speed differs, and over-withdrawal of groundwater exceeding the amount of recharge into an aquifer can cause depletion.”
Meanwhile, forests play an important role in climate change mitigation, absorbing one-third of the carbon dioxide released from burning fossil fuels every year, says FSI. “Yet, tropical forest deforestation related to ‘forest-risk’ agricultural commodities, such as palm oil, soy, beef, pulp and paper, accounts for 8% of all CO2 emissions, more than the emissions produced by the EU as a whole.”
Deforestation is a key driver of nature loss, says FSI. “Direct drivers of deforestation include agricultural expansion, extractive industries and human settlement-related activities, such as transport, urbanisation and other infrastructure projects.”
Investors need well-functioning economies and societies to create stable markets, says FSI. “Given our economies are dependent on nature and we cannot get to net zero without nature, it is in investors’ interests to limit nature loss and protect the ecosystems.”
Nature is defined by the TNFD as “the natural world, with an emphasis on the diversity of living organisms (including people) and their interactions among themselves and with their environment” and exists across four realms: land, ocean, freshwater and atmosphere.
Meanwhile, biodiversity is defined by the TNFD as “the variability among living organisms from all sources, including, inter alia, terrestrial, marine and other aquatic ecosystems and the ecological complexes of which they are part; this includes diversity within species, between species and of ecosystems”.
Biodiversity can be thought of as a characteristic of nature, just as portfolio diversification is a characteristic of investment portfolios, says FSI.
Walking the talk
FSI looked inwards to assess the materiality of its own equity investments on land, water and sea use change, as well as resource exploitation, climate change, pollution and invasives.
FSI scored its portfolio as at December 2022 on a five-point system and found that some 70% of listed equities that it invests in are in sectors with “high” or “very high” pressures to nature through climate change.
Another 25% of such listed equities is invested in sectors with “high” or “very high” pressure on terrestrial ecosystem use, 16% on water use and 7% via biological alterations/interference.
Material sectors for nature within FSI’s portfolio include diversified metals and mining, packaged foods and meats and biotechnology.
Looking ahead, FSI says it will develop the second edition of its natural capital and biodiversity toolkit, and develop another toolkit focusing on mining, infrastructure (including the energy and power sectors) and property investments.
FSI manages A$222.8 billion ($194.81 billion) in assets as at June 30 on behalf of institutional investors, pension funds, wholesale distributors, investment platforms, financial advisers and their clients worldwide.
In August 2019, the firm was acquired by Mitsubishi UFJ Trust and Banking Corporation, a wholly-owned subsidiary of Mitsubishi UFJ Financial Group. It now operates as a standalone global investment management business with offices across Europe, the Americas and Asia Pacific.
FSI is B Corp certified and a signatory to the UK Stewardship Code.
Infographics and photo: First Sentier Investors
