How Asset Managers Can Meet the Biodiversity Challenge

In the latest edition of AXA Investment Managers global insights series Chris Iggo, Chair of the AXA IM Investment Institute and CIO of AXA IM Core, discusses the four critical elements for asset managers to meet the biodiversity challenge.

Iggo says the biodiversity system is deteriorating at an alarming rate and its loss is causing damage not only to the natural world but to the wider planet, society, and the global economy.

Asset managers he adds, cannot address the environmental crisis alone, but they do have a role to play in protecting lives and livelihoods through the way they engage with companies or issuers and direct clients’ capital.

Taken together, he believes there are four critical elements required for asset managers to meet the biodiversity challenge.

1: Make Biodiversity a Priority Alongside Climate Change

Iggo says Biodiversity is multifaceted. Damaging a complex system like the natural world has innumerable economic consequences.

For instance, intensively farming land with pesticides and fertilisers limits its ability to continue producing food by reducing crop yields – and agricultural expansion has reached the point where over a third of terrestrial land surface is being used for crops and livestock.

Polluting water supplies has terrible consequences for those affected, but it also puts the company responsible at risk of reputational and regulatory backlash, which could result in fines and/or higher taxes. Consumers may also boycott their products.

These are economic risks that asset managers cannot afford to ignore. As such, biodiversity must have equal billing with climate change when asset managers consider and make long-term investment decisions for their clients.

2: Implement specific engagement strategies around biodiversity

It is only in recent years that biodiversity has become a mainstream concern for investment managers. As a result, a comprehensive risk and disclosure framework has hitherto been lacking.

A major step forward will be made in September with the launch of the Taskforce for Nature-related Financial Disclosures (TNFD).

With higher-quality reporting from companies on their environmental footprints, asset managers will be better equipped to identify those businesses most exposed and how they individually impact the environment.

Nevertheless, he says, asset managers need to implement their own specific biodiversity engagement strategies or risk squandering this opportunity to drive consequential environmental change.

3: Use the data

Given preserving biodiversity and ecosystems are now urgent priorities, it is crucial that we have the metrics and tools to measure the impact of investments on the environment. Collecting, analysing, and reporting environmental data is accordingly key.

Today, companies like Iceberg Data Lab offer assessment tools and data solutions that demonstrate the environmental impact of issuers and assets throughout their value chain.

This should enable investors to make detailed assessments of biodiversity-related risks and opportunities – and therefore make more informed investment decisions.

However, having the right tools does not automatically mean that asset managers will use them. This will require a genuine commitment to tackling biodiversity loss, which is not yet wholly evident across the sector.

4: Develop strategies backing biodiversity solutions

As with carbon emissions, the investment approach to biodiversity is twofold. We can seek to mitigate risks by allocating capital to companies reducing their biodiversity footprints. But we can also allocate to biodiversity-friendly solutions. The latter, we believe, will most excite investors seeking to have a real impact on the environment says Iggo.

Policy in this space will ultimately be key. Government interventions such as banning plastic packaging for food, which will eventually occur, will be game changers for providers on the right side of future legislation. But to help these companies scale and innovate, we need dedicated biodiversity strategies able to channel capital to them.

Around US$133bn is invested annually in nature-based solutions – including US$18bn from private sector finance – but this needs to at least triple by 2030 if the world is to meet its climate targets. To support a sustainable global economy, we need increasing numbers of single-focus strategies to help meet the risk that biodiversity loss poses to us all, Iggo says.