Natural capital rising up the investor agenda
World Wildlife Day marks a day to remember and celebrate the natural world’s plants and animals, and reflect on the impact people and businesses have on the planets ecosystems, and the services and resources we rely on. Last year scientists warned that humans are driving the sixth mass extinction event in Earth’s history, with a UN assessment report finding that nature is disappearing at a rate tens to hundreds of times higher than the average for the past 10m years and the rate is accelerating - with satellite images showing the deforestation of the Amazon at its highest rate in more than a decade. In addition, Our Planet: Our business highlights the challenges the world will have to deal with in the future and reveals the costs of dealing with these challenges is estimated to be double today’s global wealth.
What is natural capital and how does it relate to climate change?
The impacts of climate change and natural capital are certainly inextricably linked, with IPCC finding that global warming has already impacted ecosystem services and this will increase overtime if temperatures continue to increase. However compared to climate, natural capital is described as' broader elements where companies derive a wide range of environmental goods or services that support its future prosperity, including water, minerals, air, land, soil, forests and ecosystem health'.
What are the financial implications and how are policy makers responding?
While climate change and achieving net zero emissions are currently buzzwords used in sustainable business and mainstream news - as more and more companies set ambitious reduction targets, natural capital has not yet reached tipping point among businesses and investors. However, there are signs emerging that 2020 may be the year that natural capital will catch up on the investor agenda. Firstly investors will be concerned with the increasing evidence of the financial impacts of natural capital degradation, with a recent report showing the cumulative cost to the world economy by 2050 from the loss of six ecosystem services in a business as usual scenario will be at least $10tn. Secondly, policy makers are increasingly shaping policy so that natural capital is considered in decision making. For example, as part of the EU Action Plan for Sustainable Growth, a taxonomy system on economic activities is being developed so that institutional investors and asset managers marketing investment products as environmentally sustainable will need to meet specific criteria in order to demonstrate the products contribute to specific environmental objectives, including the sustainable use and protection of water and marine resources and the protection of healthy ecosystems.
What role can investors play?
Investors will play a key role in allocating capital to projects that protect and enhance natural systems. This can also benefit investors by strengthening the resilience of their portfolio. A global survey of asset owners, asset managers and financial intermediaries found that many private investors are choosing to invest in natural capital to reduce risk, boost the resilience of their portfolios and/or enhance their reputation. In this regard, four asset managers AXA Investment Managers, BNP Paribas Asset Management, Sycomore Asset Management and Mirova have outlined their intentions to consider biodiversity in their investment decisions and have joined forces to develop a tool for measuring the impact of a company’s activity on biodiversity. In addition, investors are engaging companies to take action, an investment statement on deforestation signed by 230 investors with $16.2tn AUM last year requested companies to demonstrate a clear commitment to eliminating deforestation within their operations and supply chains.
How is natural capital reporting evolving?
As natural capital continues to rise up the investor agenda, data, disclosure and transparency will be key issues as investors increasingly assess their portfolios and expect companies to disclose the potential reputational, strategic, and regulatory risks from natural capital impacts and dependencies. To meet increasing market demands, several central banks, NGO’s and investors have proposed that a Task Force on Nature-related Financial Disclosures is set up including Axa and WWF stating that…. “the Task Force should identify and analyse business activities that have a material impact on biodiversity as well as activities with ‘transition’ potential to support biodiversity protection and restoration.” Furthermore, the UK Government have also highlighted the need to increase transparency beyond climate change, and to accelerate progress the Government will work with international partners to catalyse market-led action on enhancing nature-related financial disclosures.
However, there is a risk that creating another framework could be viewed by companies as an additional layer to the existing alphabet soup of ESG reporting frameworks, including the CDSB Framework and International <IR> Framework, which include recommendations and guidance for reporting on Natural Capital. CDSB are also currently holding a consultation on advancing nature-related financial disclosures. Whatever resources / framework is highlighted as the go to source for reporting natural capital information will need substantial market support, akin to the level of support the TCFD has received. Total global TCFD supporters recently passed the 1,000 mark including 473 financial firms responsible for assets of $138.8 trillion and government ministries, central banks, regulators, stock exchanges and credit rating agencies. Although, even with significant levels of support, Black Sun’s research paper from Ambition to Action on TCFD reporting across the FTSE100 shows that commitments to implementing the TCFD recommendations have not always translated directly into actual and comprehensive disclosures, and very few of these made authentic TCFD disclosures across all the recommendations in their reports. Natural capital disclosures appear even more in their infancy with few companies mentioning the term or discussing natural capital dependencies in their annual report, so both climate and natural disclosures need to accelerate to meet increasing market demands.
The time for action is now.
Black Sun incorporate natural capital and climate change in our horizons series research and have engaged our clients to help communicate information across a range of channels. For further information on how we can help you, please contact our Insights team.
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