As a trustee of a small defined contribution-based scheme, considering impacts such as biodiversity loss is an important part of my fiduciary duty. I’ve also focused on the impacts that ESG and climate risks have on my scheme’s investments.
Nature is very close to my heart, and I’ve been determined to make climate change an important topic of consideration for pension schemes.
Climate change is amplified by the destruction of ecosystems, which undermines nature’s ability to regulate greenhouse gas emissions. Restoring biodiversity presents an opportunity to help mitigate climate change, which also acts as one of the main drivers of biodiversity loss. Given the connection between the two, natural capital and biodiversity are going to be key areas of focus for asset managers and pension schemes alike.
A great example of the connection between climate change, nature and society was recently reported in the Economist Impact, which highlighted that “forests are huge carbon skins, absorbing around 7.6 billion tonnes of carbon dioxide a year — almost one and a half times the amount of carbon that the US emits per year”.
It added: “Global biodiversity is also dependent on healthy forests, which house around 80 per cent of the world’s terrestrial plants and animals. People rely on forests, which contribute nearly US $1.5 trillion to national economies each year.”
In 2021, the UK Treasury commissioned a report that called for changes to how the UK measures economic success. Put simply, many kinds of natural capital assets are free to the user. Therefore, the report recommended that natural capital should be introduced into national accounting systems.
Working with animals gives you a wonderful insight into their unique personality traits they have. I compete with horses in dressage and have found them to be sensitive and emotional animals, capable of forming deep bonds with humans.
Working with animals and having this insight into animal behaviour — and the uniqueness of species — inspires me to protect the animals that live on our planet, and to look after the environments that they rely on to survive. I also recognise the positive social impact that biodiversity has on us as human beings. You only have to take a walk through one of the amazing country landscapes in the UK, or relax in an urban park, to realise the positive impact that the natural environment has on the individual; we are embedded in the natural environment.
Establishing these connections to the environment is something I really care about. To expand this understanding to my team, I took them on a volunteering day to Spitalfields Farm. The farm looks after rare breeds and creates a space for the community to enjoy, while also connecting people with nature.
Education also remains high on my agenda. I’m working closely with Mattea Pauc to help her realise her ambitions for Re-Educating Earthlings, an environment-based education platform she founded that teaches young school children about nature and biodiversity.
Highly balanced
What really fascinates me is that although ecosystems are self-regulating they can be thrown off-balance, creating the conditions for an ecosystem collapse. Back in the 1930s, wolves became absent from Yellowstone National Park as a result of hunting. Following this, the elk population exploded and overgrazed on willows and aspens.
Without those trees, the bird population declined and beavers could no longer build dams, which meant that riverbanks started to erode. 25 years ago, the park reintroduced wolves and, over time, the ecosystem was restored. This example shows that it only takes a small change to dangerously unbalance an ecosystem.
The scale of the challenge
As our human numbers grow, our impact on the planet increases. We often take the natural environment for granted and don’t recognise that it provides valuable goods and services to society — businesses rely on natural assets such as forests, rivers and soil to function. Therefore, it’s no surprise that around half of the world’s total GDP has some dependence on nature. In numbers, this equates to US $44 trillion.
We’re also seeing significant population growth. By 2050, the world’s population is expected to reach 9.7 billion, up from its current 7.7 billion. With some 56 per cent of us living in cities, we’ve created a distance between us and the natural world. This places additional pressure on natural resources.
Education becomes key to understanding our engagement with nature. The funding to reverse the decline of biodiversity by 2030 is estimated to be between US $722 and $967 billion a year – which requires a significant reallocation of capital to increase both our stock of nature and its regenerative rate.
As stewards of capital, asset managers and asset owners have an opportunity to use their roles to protect nature loss and ecosystems. They can achieve this through increasing engagement with companies that they invest in. Nature must be considered as an important factor when assessing risks and opportunities.
Supply chain focus
In the future, stewardship and engagement are going to be key considerations for both asset managers and asset owners. They’ll need a clear understanding of how companies they are investing in are considering the impact of nature-related risks across their operations and supply chains.
For asset owners, this means establishing a due diligence framework. The framework could help them gauge their asset managers’ thinking and how the companies they hold are interacting with nature, as well as their dependence on nature. From there, they should review the risks and opportunities. This is where new reporting initiatives, such as the Task Force for Nature Related Financial Disclosures (TNFD), will become increasingly important.
Reporting requirements
With governments focused on reaching net zero targets by 2050, and with the scale of the climate crisis becoming clearer, more ESG-related regulation is likely to be implemented. The financial industry is also beginning to see the emergence of reporting frameworks for natural capital. In November last year, the TNFD released the third iteration of its framework, which includes draft disclosure recommendations. It incorporates the requirement to report on the negative environmental impact of supply chains.
This year we are expecting a final draft of the TNFD, which should standardise the assessment of natural capital so that organisations (including asset managers and asset owners) can report and act on evolving nature-related risks — and integrate nature into decision-making.
Asset owners and asset managers should also start thinking about laying foundations for how they might look at natural capital. This could involve increasing awareness and understanding of natural capital and diversity by becoming familiar with emerging frameworks, such as the TNFD.
And for asset owners, it’s about engagement with asset managers on the topic to ensure that nature-related risks are being considered as part of the investment process.
Where next?
It’s really positive to see that the topic of natural capital is becoming more familiar across the industry. We have to start somewhere, and providing education on the risks and opportunities of natural capital is a good starting point.
In addition, the TNFD reporting frameworks will provide a more structured way of assessing how organisations, asset managers and asset owners are capturing and considering nature-related risks and opportunities.
The World Economic Forum’s Global Risk Report 2023 highlighted that biodiversity loss and ecosystem collapse is one of the most challenging global risks of the next decade. Perhaps that should be a wake up call for us all.
