The asset management industry risks being wrong-footed by a wave of regulations designed to protect biodiversity, according to an analysis by Jefferies International Ltd.
(Bloomberg) — The asset management industry risks being wrong-footed by a wave of regulations designed to protect biodiversity, according to an analysis by Jefferies International Ltd.
“Investors be aware,” Luke Sussams, ESG strategist at Jefferies, wrote in a note to clients.
The warning comes roughly a month after a landmark deal was struck at the COP15 biodiversity summit in Montreal, at which negotiators set a goal of shielding 30% of the world’s natural assets by 2030. The agreement means that the finance industry, which currently devotes far fewer resources to biodiversity than to climate strategies, will need to dramatically expand its focus.
Even among investors focused on environmental, social and government goals, biodiversity currently gets short shrift. A Dec. 5 report published by Morningstar Inc. identified only 14 funds with $1.6 billion of combined assets that have strategies based on biodiversity. Meanwhile, climate strategies are targeted by roughly 1,100 funds holding over $350 billion in global assets, Morningstar estimates.
Sussams said that a European implementation of the Global Biodiversity Framework (GBF) agreed at COP15 “is well under way,” although this is a development of which “investors might not be aware.”
The current gap between biodiversity and climate-themed funds doesn’t reflect the ESG risks that both the planet and its financial actors face in reality, according to scientists. In fact, a key goal of the two most recent climate summits — the COP26 in Scotland and COP27 in Egypt — was to drive home the point that biodiversity is inextricably linked to climate.
Meanwhile, there’s a huge effort under way to give financial market participants the tools they need to assess how well companies are living up to new biodiversity standards. The Taskforce on Nature-related Financial Disclosures, the Science-Based Target Network, the Partnership for Biodiversity Accounting Financials and Align are leading efforts to define how companies and institutions can assess and measure their impacts, set targets and identify information that should be publicly disclosed.
There’s also the IFRS Sustainability Disclosures Standards, which are set to incorporate nature into their climate disclosures, a biodiversity chapter of the European Sustainability Reporting Standards, and the Global Reporting Initiative’s biodiversity standard, which is out for public consultation.
And on Tuesday, S&P Global Sustainable and the UN Environment Programme (UNEP) announced the launch of Nature Risk Profile, which is a methodology designed to help companies and investors assess and analyze companies’ nature-related risks, including impacts and dependencies on biodiversity.
“The global economy is fully dependent on nature, yet it is driving nature loss at unprecedented rates,” S&P said. “It is imperative that these risks are effectively identified, measured and mitigated.”
Sussams at Jefferies said that the most “significant” targets and regulations for EU firms and their investors over the medium term include a requirement that nothing be imported from deforested land. New regulations may also impact investments in energy, mining and industrial activities, he said.
And the Jefferies analyst warned of the fallout from regulations impacting the use of fertilizers, as well as food waste. Technologies targeting improvements in these areas will come into focus in investment strategies, he said.
In the coming years, there’s likely to be a “ramp up of emissions reduction targets for the agriculture sector,” which will also force investors to react, Sussams said. He expects to see an evolving market for nature-based carbon credits, as well as biodiversity credits.
“Investors should familiarize themselves with this EU regulatory landscape and subsequent corporate exposure to nature-related transition risks,” he said.
(Adds S&P comment on biodiversity risks)
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