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Despite growing attention, biodiversity integration into investment processes faces challenges
Even though measures to halt biodiversity loss have been increased globally, biodiversity is still deteriorating more rapidly than ever. Therefore, severe measures are required to prevent and stop biodiversity loss. Increasing awareness is resulting in growing concern among investors and financial institutions about emerging risks in their portfolios related to biodiversity loss.
The aim of my thesis was to gain better understanding of the consideration of biodiversity loss when investing in listed-equity in the Nordic pension investor context. This thesis aimed to identify and define the gap between the current understanding and future needs on how to take biodiversity into account in investment decision-making. Following qualitative approach, primary data was collected with 14 semi-structured in-depth interviews of two target groups: pension investors in the Nordic countries and ESG specialists which refers to specialists in sustainable finance or biodiversity related sustainability fields. The thesis was carried out in co-operation with Varma Mutual Pension Insurance Company and Gaia Consulting Oy.
After careful analysis of the data, the results indicate, that taking biodiversity into consideration in investment processes is constantly evolving and Nordic pension investors are paying increasing attention to the topic. Nevertheless, integrating biodiversity risks into the investment process is found to be challenging because investment instruments, tools and best practices are not yet well established. Hence, many market participants, including pension investors, find biodiversity risks difficult to price and incorporate into investment decision-making because of the systemic nature of the risks and a lack of disclosure by portfolio firms.
When making investment decisions, data is the biggest barrier in taking biodiversity systematically into account. It was noted that there is high-quality nature data available, but its utilization in investment decision-making is difficult and incomplete. Reliable, transparent, and comparable data is required for investors to be able to analyze portfolio firms in terms of biodiversity loss. In order to solve the challenge of lacking, transparent and comparable data, companies are expected to disclose material nature-related risks, dependencies and impacts throughout the value chain, and report associated metrics and targets. Furthermore, lot of pressure is being put on the future regulation, such as the TNFD, and is expected to be effective in creating standardized frameworks to help evaluate portfolio firms’ performance when it comes to preventing biodiversity loss.
When asked how credibly existing assessment frameworks and datasets provide the required information/analysis of the companies’ biodiversity impacts, it was recognized that there are shortcomings. However, the interviewed Nordic pension investors are highly motivated to find efficient and reliable ways to manage portfolio risks. According to the investors, available biodiversity measurement approaches and data are not suitable from a financial materiality point of view. While there is a lot of valuable nature data available, it is lacking financial materiality and the impacts on the real-world return expectations, and return-risk-profiles.
Even though biodiversity loss and all of its implications to the real economy are not well understood, it is vital to start measuring and disclosing biodiversity impacts, risks and dependencies alongside climate change. Lack of overall measurement approaches or data cannot be a limiting factor. It is vital for companies/portfolio firms to start disclosing their business dependencies and impacts on biodiversity transparently. This way it becomes possible for investors to gain and so evaluate and compare portfolio firms with each other, for example within an industry, and to measure the effects of their own investment portfolio on biodiversity.
Based on the findings, investors are preparing for increasing statutory and voluntary regulation. When it comes to taking responsibility for biodiversity protection, asset owners and managers lack the strength that governments have through legislation and enforcement. However, investors have the capacity to leverage their position as shareholders to employ responsible investment strategies to make a difference.
As a conclusion, biodiversity is gaining momentum in investor decision-making. However, data is the biggest barrier to taking biodiversity systematically into account when making investment decisions. To solve the challenge of lacking financially material, transparent and comparable data, companies are expected to disclose material nature-related dependencies and impacts, and report associated metrics and targets. In addition, strong cooperation is needed from society’s actors to achieve the common goal of halting biodiversity loss.
Alina Matula
Sustainability Specialist, Responsible Investment and Corporate Responsibility
Varma Mutual Pension Insurance Company
