Green shoots: Are trustees starting to see nature risks?

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The decline of the natural environment will eventually impact the economy. Nature risk is the hidden threat in pension portfolios, so is nature a topic that will soon be debated at trustee meetings? 
Nature is in crisis: one million wildlife species are threatened with extinction according to the UN, leading experts to call for a biodiversity target of fewer than 20 extinctions per year. Extinction is not the only problem; the careful timing between plants flowering and the emergence of pollinators is getting out of kilter as the climate warms, with consequences for crops and therefore humans. 

Hardly any pension funds considering nature investing 

Last year the government, in its response to the Dasgupta review on biodiversity, said it will bring in a target on species abundance for 2030 to halt the decline of nature. It plans to "leverage private finance into new natural capital markets for carbon, water quality, biodiversity, natural flood alleviation and other ecosystem services". 
Pension funds are no doubt among the sources of capital the government is looking to. The pensions minister said in March he would reach out to pension funds about deforestation. But are trustees ready to discuss nature-based investing? Some funds might be. 
Chris Wagstaff, independent trustee at the Atkins Pension Plan, said a just net zero transition is not just about employment but also about transitioning to a nature-positive world. “This shouldn’t come as a great surprise,” he says. Over half of global GDP depends on nature, according to the World Economic Forum, more than previously thought. Construction, agriculture and food and beverages are three of the industries that are most affected. 
Wagstaff says that since the publication of the Dasgupta review, discussions are now being held by a minority of schemes and providers around the role of introducing the transition to a nature-positive world into climate benchmarks. 
These schemes are breaking new ground, but for the majority, the discussion about nature has not started.  
“There is a lot of interest from asset managers, a lot of thought leadership, but little interest from clients so far. Hardly any are starting to consider it,” says partner at consultancy LCP, Claire Jones. 
Even though the topic is “hugely important”, she says it does not lend itself well to trustee considerations, believing it might be better suited to being addressed ‘in the background’ by asset managers.  
While this might be partly a question of knowledge, she says it is not easy for trustees to know what they should be doing. The nature crisis “will ultimately impact markets, but not in a way that can easily be linked to companies", Jones argues.  

E of ESG 'too often' interpreted as climate change 

Investors often state that they integrate environmental, social and governance factors into their investments, but although nature clearly falls under the E part of this, at the moment this is “too often interpreted as climate change,” said Jones.  
Climate is an urgent concern, she concedes, but “as we reach a more mature stage, we need to broaden our focus”, something that is now starting to happen in the investment industry. The government’s planned Sustainability Disclosures rules and the standards by the International Sustainability Standards Board that will provide the framework are expected to drive this further. 
Right now, except for the very largest funds, trustees have too much on their plate to do anything substantive on nature or explicitly discuss it with asset managers, she says, and many managers are themselves at an early stage of the learning curve. 
Climate has been pushed onto trustee agendas in part by the government’s requirements to report in line with the Taskforce on Climate-related Financial Disclosures. Will the Taskforce on Nature-related Financial Disclosures be built into reporting requirements in future?  
Not just yet, says Jones. “The TNFD is doing great work, it has the potential to play a role. Clearly, it’s at an early stage of development,” she says. The TNFD is piloting a draft reporting framework and is in consultation with industry over this. “How many companies will choose to fully adopt it remains to be seen,” she adds, suggesting it could also be subsumed in the wider Sustainability Disclosures regime. 

Is this the year the conversation will change? 

“Where we are with biodiversity is where we were with climate 10 years ago,” says Nick Spencer, founder of specialist consultancy Gordian Advice. This means some leading asset managers are starting to discuss it and engage.  
Investors can have more impact through stewardship than capital allocation, he argues, as what matters is often the supply chain. “It should be a more holistic farm to fork type thing,” he says. For Spencer, the focus needs to shift from harvesting nature to creating solutions like using nature for the built environment, for example. The use of technology in the agriculture and food industries in particular is another element he considers important. 
As a topic, nature risk is gradually moving in from the margins; one of the leading investors, Brunel Pension Partnership, has singled out biodiversity as a new priority focus in its latest responsible investment report. “This is the year where that conversation changes and you start to see investors talking about it more,” said Spencer. 
Have you started discussions about nature risk at your trustee meetings?
Claire Jones
Chris Wagstaff
Nick Spencer
Mike Clark
Sital Cheema

Are you interested in learning more about nature as an investment topic? mallowstreet is hosting a dinner on ‘Understanding Natural Capital and the Implications of Biodiversity Loss on Financial Capital’ in London on 7 July. 

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