Varma Takes Biodiversity Policy to Next Level
Data limitations make full visibility of portfolio risks an ongoing challenge, the asset owner admits in its 2023 sustainability report.
Finnish pension provider Varma is to dig deeper into the data after uncovering limited levels of progress by investee companies on biodiversity-related accounting and reporting.
In its latest annual and sustainability report, Varma summarised the findings of a 2023 biodiversity survey of 282 companies in its listed equities portfolio spanning high-risk sectors.
Portfolio companies’ publicly available biodiversity policies were assessed across three categories: expression of the will to act, commitment and detailed targets for considering biodiversity, and a detailed action plan for delivering on the commitment.
“With climate change, investors have realised that there are many risks they can be exposed to – such as transition risks and physical risks,” Hanna Kaskela, Senior Vice President of Sustainability and Communications at Varma, told ESG Investor. “But the same risk assessments now need to be applied to biodiversity, as so many companies stand to be affected by biodiversity loss.”
Of the surveyed companies, just 27% had set targets for considering the prevention of biodiversity loss in their operations, and 51% had expressed their intent to take action to consider or compensate for biodiversity loss. Only 5% were found to have a concrete action plan.
Twenty-two percent of surveyed companies had not yet considered biodiversity issues in their public policies.
Of the included sectors, forest industry companies, construction material manufacturers, and electricity producers were found to have made the most biodiversity-related progress.
“Varma’s investments are exposed to environmental risks, and at the same time, investments have major impacts on the environment,” the report said. “We invest increasingly in companies that take biodiversity loss into account in their operations by, for example, developing solutions for attending to biodiversity.”
Data challenges
To ensure a clearer picture of its portfolio exposures to biodiversity-related risks, Varma intends to expand its access to and deepen its understanding of corporate data, Kaskela explained.
“The whole topic is so complex – there’s no one biodiversity metric that can be applied to everything and issues are localised. There is huge variety in the risks and dependencies and impacts,” she noted.
“With listed equities and bonds, getting hold of the data is easier, but it gets more challenging across other asset classes – like private equity.”
In 2022, Varma published a biodiversity roadmap which outlined a framework for responsible investment requirements, policies and goals that prevent biodiversity loss. The roadmap was updated last year to align with the Taskforce on Nature-related Financial Disclosure’s (TNFD) finalised guidance.
“Our biodiversity policy is now in place, so the next step is to develop the data, which we expect will become gradually easier as investee companies start to report in line with the TNFD,” said Kaskela.
“The TNFD is a great place for [investors and companies] to start when putting together disclosures,” said Kaskela. “Just like the Task Force on Climate-related Financial Disclosures, the TNFD has the potential to become an industry standard for how responsible investors assess financial biodiversity risks in their portfolios.”
Varma is also a member of Nature Action 100, a global investor engagement initiative launched last year to drive action to reverse biodiversity loss.
In 2023, Varma engaged both independently and collectively with investee firms over 64 possible or likely environmental-related violations of its policies and 11 possible or likely violations linked to Indigenous Peoples.
Climate progress
Climate-focused allocations – in which investments align with its climate targets, including companies whose business benefits from climate change mitigation and who cause no significant emissions – accounted for 37% (US$23.5 billion) of Varma’s investment portfolio by the end of 2023, the firm’s annual and sustainability report noted.
In addition, as of the end of 2023, the report noted that Varma’s absolute emissions were down 32% compared to 2022 – a major reduction largely attributed to calculation factors, such as updates to carbon footprint accounting. Emission reductions reported by portfolio companies accounted for 5% of this overall reduction, it added.
Also in 2023, Varma’s greenhouse gas (GHG) emission reduction targets – which aim to cut operational GHG emissions by 60% by 2030 compared to 2021 levels – were validated by the Science Based Targets initiative (SBTi).
“We joined the SBTi to make sure that our climate targets are aligned with international climate agreements,” said Kaskela. “Varma’s now-validated targets are short-term targets, and we are also committed to setting long-term targets.”
Varma has pledged to increase the share of portfolio companies committed to the SBTi to 51% by 2027.
As an active owner, Varma regularly promotes sustainability themes with external asset managers, the report added.
The asset owner said it expects portfolio managers to closely scrutinise sectors with high sustainability-related risks, such as the oil and gas or textile industry. In addition, portfolio managers are asked to apply due diligence when the investment concerns alcohol, gambling, adult entertainment, cannabis, and the arms industry – the latter of which also extends to the defence industry.
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