Industry Voice: Why investors must take action over biodiversity loss

Why do you think it is important for asset managers to integrate biodiversity more fully into their investment decision making processes?

The financial sector and the asset management industry in which we sit has a crucial role to play in helping to prevent further biodiversity loss. This is not something that is simply ‘nice to have' in the context of sustainable investing: it is in the long-term interest of our clients and our investment performance, along with our duty to do our best to use our leverage to protect the planet.

Robeco has been addressing biodiversity issues for a number of years, through a dedicated engagement program on commodity-related deforestation, through our palm oil policy, and by assessing biodiversity as a material factor in our ESG integration process. However, it is clear that there is much more that we need to do, both in terms of further engagement, and in embedding this factor systematically in our investment decisions. It's no longer just a question of avoiding those companies that are responsible for biodiversity loss through their environmentally damaging operations. We must also embrace those that are striving to protect biodiversity, directing more capital towards these sort of sustainable enterprises.

In economic terms, the impact of biodiversity loss is unprecedented. Ecosystems provide important services to people and businesses alike, for example through provisioning and regulating natural resources. More than half of global gross domestic product (GDP) is dependent on nature and its ecosystems[1] and more than 75% of global food crops, including fruits and vegetables, rely on animal pollination. The total global value of ecosystem services is estimated at €100-120trn (£83-£100trn) per year, equivalent to one and a half times the volume of global GDP[2]. Yet the world's ecosystems have deteriorated by 47% compared to estimated baselines[3], which poses a severe risk to our economies and businesses.

The World Economic Forum estimates that more than half of the world's economic output - $44trn (£32trn) - is at least moderately or highly dependent on nature, meaning that if natural systems collapse, so will our economic and financial systems. This is clearly an important issue for anyone involved in any sector on our planet, including its financiers.

The dependency of the global economy on nature and biodiversity is therefore ultimately also a financial risk. Similar to climate change, nature-related risks for financial institutions can be described through the lenses of physical and transition risks. Physical risks emerge from the dependencies of industries on ecosystem services, for example power utilities that require abundant access to water for cooling purposes. Transition risks arise from the impact that industries have on nature. Industries with high impact will sooner or later be subject to tighter policy and regulation, and to changes in technology and consumer preferences.

At the same time, nature offers many opportunities which are being increasingly recognised worldwide. The Future of Nature and Business report estimates that a nature-positive economy can unlock USD 10 trillion of business opportunities by transforming the three economic systems that are responsible for almost 80% of nature loss, namely food, infrastructure and energy.

Robeco has been addressing biodiversity issues for a number of years already - why are you stepping up your efforts now?

Our active track record on biodiversity has been driven by our existing knowledge of the financial materiality of the issue. New insights from the past two years have accelerated the pace of action we believe is necessary to comprehensively address the impact biodiversity loss is threatening to have on our ecosystems and dependent communities.

In June 2020, the Dutch central bank, De Nederlandsche Bank (DNB), and the Netherlands Environmental Assessment Agency published a report describing the exposure of the Dutch financial sector to biodiversity risks[4]. It has been estimated that Dutch financial institutions have €510bn of exposure to companies that are either highly or very highly dependent on one or more ecosystem service. This exposure to physical risk is equivalent to 36% of their portfolios; €28bn of assets were dependent on pollination alone.

Last year, Robeco conducted a heatmap assessment using ENCORE data[5] to understand the exposure of our investments to biodiversity risks. This analysis allowed us to identify asset classes and sub-industries with the highest exposure to dependencies and impacts on specific ecosystem services. The results stemming from this analysis are in line with the findings from research by DNB and other peers in the industry. Two key insights derived from this analysis are that roughly a quarter of our assets under management are either highly or very highly dependent on one or more ecosystem service, and that an estimated 29% of our investments are in sectors with potentially high or very high impacts on key drivers of biodiversity loss.

The impact and dependencies of investments on biodiversity are also integrated into the requirements of the European Union's Sustainable Finance Disclosure Regulation (SFDR). As part of the SFDR, investors will need to report to their clients on how investments have adverse impacts on biodiversity. While the EU taxonomy currently addresses climate change mitigation and adaptation objectives, it will also include other environmental objectives, including biodiversity and ecosystems. These legislative requirements will enhance disclosures from companies and improve both the data quality and availability of biodiversity-related metrics.

Furthermore, in September 2020, Robeco signed the Finance for Biodiversity Pledge. This pledge has been endorsed by more than 55 signatories representing more than €9trn in assets, committing to protect and restore biodiversity through their finance activities and investments. The pledge's signatories are committed to collaborate, assess the biodiversity impact of their portfolios, and set targets and report on biodiversity matters by 2024 at the latest. Additionally, in November 2021, we signed up to the Financial Sector Commitment on Eliminating Agricultural Commodity-Driven Deforestation. Signatory financial institutions commit to work on eliminating agricultural deforestation risks in our investment portfolios by 2025. This pledge was announced during COP26 and has been endorsed by more than 30 financial institutions with more than €8trn in assets under management. The commitment complemented one of the key deals from the climate summit where more than 100 countries promised to end and reverse deforestation by 2030.

As a first step to meet these commitments, Robeco established an internal biodiversity taskforce (BTF) in 2020, with the purpose of coordinating and driving our organization's approach to biodiversity in an overarching and leading strategy. The BTF consists of representatives from Robeco's investment teams and Sustainability Investing Center of Expertise. The BTF has defined a roadmap to deliver on the commitments mentioned above, and we're eager to make progress against the actions it has set out.

You have just partnered with the WWF - can you tell me a bit more about this?

We've entered into this partnership with World Wide Fund for Nature Netherlands (WWF-NL) because we recognise that the challenge is so complex, no single investor can do this on their own. It also compliments existing collaborations such as the Finance for Biodiversity Pledge, and the Task Force for Nature-Related Disclosure (TNFD), founded by the WWF and others. The TNFD was initiated in recognition that the financial sector needs information to understand how nature impacts immediate financial performance, as well as the longer-term financial risks and opportunities that may arise. The initiative aims to build a framework which will allow financial institutions to incorporate nature-related risks and opportunities into strategic planning, risk management and asset allocation decisions.

Joining forces with WWF-NL means combining our areas of expertise to integrate biodiversity into asset management. The partnership aims to develop a biodiversity investment framework and policy for Robeco and WWF will support Robeco when it will develop biodiversity investment strategies by advising on biodiversity research and reflecting on engagement outcomes with companies in portfolio. The partnership also aims to engage with clients and other stakeholders in the financial sector to create more awareness of the issue, and to inspire and activate them to integrate biodiversity into their investment policies.

What are you hoping the partnership will achieve and how will you change your approach to biodiversity as a result?

Our general aim is that within the next few years we will be able to measure and steer on our contribution as an investor to the protection of biodiversity and nature in partnership with WWF-NL and other collaborations such as the Finance for Biodiversity Pledge. The next steps in our roadmap to achieve this are the development of relevant metrics and targets, and the advancement of strategic partnerships in this area.

An important milestone in our roadmap consists of publishing a biodiversity policy in the coming period. We will prioritise our areas of action in line with the findings from our biodiversity materiality assessment, where we identify high-risk industries to which we have investment exposure and the relevant key ecosystem services that are under pressure. We have the ambition to incorporate this information in the portfolio construction process for relevant investment strategies. This will also shape our target-setting strategy, where we will aim to reduce the negative impacts of our portfolios on biodiversity. We will also explore and develop investment strategies and solutions designed to generate positive impacts on biodiversity, in collaboration with WWF-NL. Integrating biodiversity considerations into our risk management systems will also be a crucial part of our biodiversity policy.

We will continue our work on assessing how our investments are exposed to biodiversity impacts and dependencies. We aim to extend our assessment beyond the sub-industry level to understand how issuers are themselves exposed to biodiversity risks and impacts. This analysis will be crucial to develop a biodiversity framework that will enable us to measure the impact and dependencies of companies throughout our investment process. The economic and financial valuation of biodiversity at company level poses serious methodological challenges, but we believe it is a necessary step for integrating biodiversity into our investment decisions. We are currently addressing these methodological challenges with data providers and research groups, aiming to use the best available science to measure biodiversity impacts and dependences at the company level.

Collaboration and sharing knowledge is fundamental to being able to create the data and tools that we need to progress in the area of biodiversity. Robeco is therefore active in a number of collaborative initiatives with academia and practitioners. In line with our commitment from the Finance for Biodiversity Pledge, we collaborate and share knowledge on the assessment of methodologies, biodiversity-related metrics and financing approaches for positive impact.

All of these efforts, including our partnership with WWF-NL are designed to create an evidence-based approach to biodiversity in our investment process, informed by our improved understanding of how we are impacted by nature and in turn, the impact we ourselves have on nature's systems.

Peter van der Werf is an engagement specialist at Robeco