• Harry Ashman and Joe Horrocks-Taylor
• Columbia Threadneedle Investments

Nature loss: a material risk for asset managers

Biodiversity loss creates financial risks for investors. A best practice framework can help.

The Earth’s biodiversity is rapidly declining with a quarter of species facing extinction by 2050, and on average, global wildlife populations have decreased by 69% since 1970. Climate change, land-use change, pollution, exploitation of natural resources, and invasive species are the main drivers of biodiversity loss, all fueled by corporate activities. As corporates contribute to and face increasing risks related to the loss of nature, the destruction of nature-based services poses severe risks for businesses. Nature contributes between $44 trillion and $150 trillion to the global economy each year. 75% of agricultural crops, worth $2.4 trillion rely on insect pollination, which is threatened by declining insect populations.

Biodiversity affects performance

Just like climate change, nature loss presents financial risks for asset managers. It can affect the performance of invested assets through various risk and return pathways, and it is crucial to address both issues concurrently.

As a signatory to the Net Zero Asset Managers Initiative, with a 2050 net zero target for our investment portfolios, we prioritise action to combat nature loss and follow the twin pathways of net zero and nature-positive to guide our approach to environmental issues.

Addressing the impacts of our investments on biodiversity loss and managing the risks that it poses to financial performance are key components of our Environmental Stewardship approach. We also assess the sectors we invest in which have the most substantial exposure to nature impacts and dependencies in their operations and supply chains (e.g. the food sector). However, unlike climate change, there is no one key measure of progress. The development of the post-2020 Global Biodiversity Framework should provide clarity for policymakers and corporates on the levers and level of ambition required.

Our engagement approach will also be shaped by the Nature Action 100 initiative, of which we are a lead investor. This collaborative initiative engages with companies in key sectors with large impacts on nature to encourage actions that protect and restore ecosystems.

Engagement in nature issues

The complexity of nature-related issues requires a clear focus on the materiality of specific issues for each portfolio holding and the risks and opportunities they entail. This approach also comes through strongly in the Taskforce on Nature-related Financial Disclosures (TNFD) and Science Based Targets for Nature frameworks (SBTs). We have also had a biodiversity voting policy for the past two years which enables us to reinforce our engagement messages. These policy flags companies with high exposure to and insufficient disclosure of nature-related risks for votes against management.

A notable engagement theme and collaboration with groups such as PRI’s Soft Commodities Practitioners Group is land use change and deforestation, a key driver of biodiversity loss, social issues, and emissions.

Evolving best practice

Drawing on our analysis of relevant issuers’ exposure, disclosure, and management approach, we have developed engagement objectives with reference to a best practice framework. As this is a nascent issue, we expect to refine this framework over the coming years.

Reporting on biodiversity by European and US companies is insufficient, with only 3 to 12% currently providing information, and when they do, it is often vague, making it difficult to determine business impacts. Accurate measurement and disclosure of nature-related risks are crucial for investors to understand the influence on businesses and for all parties to track progress.

To address all these issues, the biodiversity strategy components of our best practice framework are: For further information click here.

• ambition to be nature-positive
• set short-, medium- and long-term targets to address nature loss
• risk and impact assessment
• disclosure of biodiversity-related impacts, risks, and opportunities
• development of robust policies and procedures
• demonstration of how policy engagement is aligned with corporate and global goals on biodiversity
• demonstration of robust and effective board oversight and governance of nature-related issues
• social due diligence and engagement

Regulation and public policy are key

The global policy environment is crucial for addressing nature loss. We are actively involved in the Taskforce on Nature-related Financial Disclosures (TNFD) Forum and have provided detailed feedback on the framework’s draft versions. We anticipate that TNFD will become a mandatory framework for many issuers and will continue piloting the framework with other leaders in the financial sector.

It is urgent to prevent the collapse of key ecosystems, and an effective framework for nature action equivalent to the Paris Agreement’s temperature goals would be a great achievement. However, measuring, funding, and achieving these goals will be crucial for success. We will continue to engage with companies and the wider public on this critical issue.

By Harry Ashman, Vice President, Analyst, Responsible Investment & Joe Horrocks-Taylor, Senior Associate, Analyst, Responsible Investment

Columbia Threadneedle Investments is a leading global asset manager, entrusted with US$ 608bn* on behalf of individual, institutional, and corporate clients around the world. We have more than 2500 people including over 650 investment professionals based in North America, Europe, and Asia. We offer our clients a wide range of strategies across equities, fixed income, and alternatives, as well as specialist-responsible investment capabilities and a comprehensive suite of solutions. Columbia Threadneedle Investments is the global asset management group of Ameriprise Financial, Inc. (NYSE: AMP), a leading US-based financial services provider. As part of Ameriprise, we are supported by a large and well-capitalised diversified financial services firm.

*March 31, 2023