Asset managers accused of 'blind spot' over biodiversity risk and climate crisis

For all the growing interest in Environmental, Social, and Governance (ESG) investing and high profile investor demands for corporates to tackle escalating climate risks, many asset managers remain 'blind' to the threat to their portfolios posed by global biodiversity loss and are consistently failing to engage with carbon intensive businesses.

That is the conclusion of two major new reports from responsible investment campaign group ShareAction, which today reveal how none of the world's 75 largest asset managers has a dedicated policy on biodiversity, while 39 per cent still make no mention of climate change in their investment policies.

Moreover, only 11 per cent of asset managers have policies requiring portfolio companies to mitigate harmful impacts on biodiversity.

And while growing numbers have moved to divest from carbon intensive firms or strengthen investment criteria, 84 per cent of the world's largest asset managers have no policies to exclude coal companies from their investment portfolios, and 93 per cent have no policies prohibiting investment in tar sands.

The study - which analysed firms with assets under management equivalent to over half of the world's total GDP - found that while some encouraging if insufficient progress has been made in addressing the climate risks faced by portfolios, the risks presented by biodiversity loss and the degradation of natural ecosystems remain a blindspot across much of the industry.

Only 11 per cent of the surveyed managers state in their investment policies that they expect portfolio companies to mitigate the negative impacts of their operations on the natural environment. Instead, if biodiversity loss is mentioned at all it is often included in generic ESG integration strategies resulting in little detailed consideration of the risks companies may face.

The analysis also shows that asset managers' understanding of the systemic risks that biodiversity loss poses to their portfolios is critically underdeveloped, with only around half of managers identifying examples of biodiversity-related risks to their investments, largely with regard to environmental regulation. Similarly, only a third identify any positive and negative impacts for their investments that relate to biodiversity.

This lack of engagement with biodiversity risks comes despite biodiversity loss being considered among the greatest risks facing society today, according to the World Economic Forum.

Academics have long argued that the loss of natural habitats denies economies and individual businesses crucial ecosystem services, such as clean and reliable water supplies or fertile soils that are at the foundation of many businesses' operations.

Moreover, some experts have argued that the coronavirus crisis and increased pandemic risks have their roots in habitat loss and the mismanagement of biodiversity.

"The current pandemic is a sharp reminder of the consequences that human encroachment on ecosystems can have for the global economy and human health," said Krystyna Springer, an analyst at ShareAction and author of the report. "This is only the latest in a tide of disease outbreaks that have emerged over the last few decades, driven by land-use change and habitat depletion.

"Covid-19 has also shown that predicting the timing and the scale of shocks originating in the natural world is fraught with complexity, and cannot be managed through the lens of financial materiality and the traditional risk-return approach. Biodiversity loss is not a new, in-vogue ESG theme - it is closely intertwined with the climate crisis and threatens to compromise the efficacy of global climate action, and if economic actors don't start tackling it in the next few years, the damage will irreversible."

The report reveals a systemic failure by much of the industry to engage with even high profile biodiversity risks with a direct impact on businesses' operations and reputation.

For example, despite deforestation being the main focus of biodiversity-related engagement by asset managers, only 31 per cent of managers engage on certifications guaranteeing minimum sustainability standards in the sourcing of palm oil and other soft commodities. Similarly, less than 10 per cent of asset managers indicate that they engage on the issues connected with overfishing, ocean health, and World Heritage Sites protection, and only three of the asset managers analysed mention instances of engagement around the impact of pollinators on businesses.

Meanwhile, over half of asset managers have little interest in improving oversight around the biodiversity risks their portfolios may be facing. Only 46 per cent of asset managers request better disclosure of the impacts of company value chains on biodiversity in their dialogue with companies and only 49 per cent discuss corporate strategy on biodiversity, the study found.

In contrast, engagement with climate risks is more mature with a majority of top asset managers now accepting that climate impacts and the net zero transition present a systemic risk to their portfolios.

However, translating this realisation into clear policies and effective engagement remains patchy.

ShareAction found 39 per cent of the surveyed asset managers still make no mention of climate change in their public investment policies and only a small percentage make specific commitments relating to portfolio decarbonisation.

The report also highlights how some investors' tacit consent to corporate lobbying against climate policy remains in place, with only 15 per cent of assessed asset managers considering company involvement in trade groups opposing climate policy to be an engagement priority.

Springer said asset managers urgently needed to enhance their understanding of climate and biodiversity risks and significantly enhance engagement across their portfolios or risk fuelling a major environmental and economic crisis.

"The window of opportunity is closing rapidly as we enter a critical decade," she said. "We need transparency and urgent and disciplined action by asset managers, asset owners, regulators and policymakers, for a fundamental shift towards a truly sustainable and resilient global financial system."

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• Topics
• Investment
• Risk
• Management
• Biodiversity
• Climate change
• Share Action
• ESG