Investors Quantifying Nature Risks, Wielding Stewardship
Scottish Widows outlines portfolio impacts and dependencies in new report, encouraging peers to enhance engagement efforts.
UK-based life insurance and pensions company Scottish Widows has urged peers to assess their nature impacts and dependencies by detailing its own in a new report, with a number of other institutional investors also highlighting their exposures.
Scottish Widows said it was “crucial” for asset owners to use their position as long-term investors to identify and manage risks and opportunities arising from nature-related issues, in order to support portfolio resilience and global goals for biodiversity.
The report – published in partnership with the Zoological Society of London (ZSL) – offers insights to peer organisations looking to assess their exposure to nature-related risks and opportunities.
Last year, PwC found that 55% of global GDP – equivalent to about US$58 trillion – is moderately or highly dependent on nature. The World Bank previously estimated that nature loss could result in a decline in global GDP of US$2.7 trillion annually by 2030.
Scottish Widows said that by detailing its methodology and challenges it hoped to encourage others in the pensions industry to “follow suit and take their first steps towards better understanding both the impact and dependency of their investments on nature”.
The report emphasised the role of stewardship in addressing nature-related risks, with Scottish Widows intending to use the outputs from the project help prioritise companies for direct engagement, as well as incorporating relevant findings into existing dialogue.
“Stewardship through engagement with corporates and the wider financial industry are a core part of our approach as an asset owner to tackle nature related risks in our portfolios,” Eva Cairns, Head of Responsible Investment at Scottish Widows, told ESG Investor. “Exposure to nature-related risks is something many large diversified owners will face given how the natural environment underpins economic activity across many sectors”.
Accelerating engagement
The report comes as governments and companies face increasing pressure to step up their efforts to support the goals of the Global Biodiversity Framework (GBF) after mixed progress at COP16. Only a minority of governments produced plans outlining their implementation GBF strategies, and negotiators failed to reach settlement on a resource mobilisation strategy due to a row over funding.
Ahead of COP16, the Finance for Biodiversity Foundation, a finance sector lobby group which includes several prominent asset managers and owners, called for more ambition and clarity from governments on nature-positive policies. The summit also saw the release of a benchmark report from the investor-led Nature Action 100 found more urgency was needed by corporates “to mitigate the growing material financial risks their businesses face from nature loss”.
Last week, L&G Mastertrust published its first sustainability report, expanding the scope of its Task Force on Climate-related Financial Disclosures reporting by incorporating disclosures on nature.
“The interdependencies between climate and nature are of critical importance,” said Tegs Harding, Chair of L&G Mastertrust’s investment committee. “A changing climate threatens natural ecosystems, and nature loss amplifies climate change by reducing the ability of ecosystems to store carbon.”
A unit of Legal and General, the L&G Mastertrust is the largest commercial master trust in the UK market, responsible for the retirement savings of almost two million members, with £28.9 billion (US$37.2 billion) in AUM.
While the trust “recognise[s] there is a lot more to do”, Harding said that the report was a “positive step in the right direction”, calling on others in the sector to “follow suit and recognise the scale of the structural challenges we face.”
L&G Mastertrust said it was “working at pace” augment its capabilities. It also noted that a key focus of its engagement activity will be to improve assessment of dependencies and impacts at the individual company level throughout its investment portfolios. Earlier this year, the trust introduced a new governance framework to enhance its oversight of stewardship and engagement activities.
Scale of exposure
Scottish Widows’ Cairns acknowledged that most asset owners were at an earlier stage in assessing their nature footprints compared to their understanding of climate-related exposures.
“Undertaking an assessment to understand exposures to particular sectors or themes with high impact and dependency on nature can provide a really useful starting point for prioritisation, especially given that the topic of nature is so vast,” she said. “For us, we have identified water use as a key nature related risk in our portfolios and will initially focus our engagement on construction companies, pharmaceuticals, and water utilities – a clear tangible output from the assessment.”
Scottish Widows’ portfolio assessment revealed that it has circa 10% of its holdings invested in the 20 sub-industries most impactful on nature. Roughly 12% of the company’s total corporate holdings are invested in the 20 most nature dependent sub-industries.
The pension provider’s report detailed five key nature-related risks, with water use shown to be the most severe risk according to scoring defined by nature risk measurement tool ENCORE. L&G Mastertrust also used ENCORE to determine the sectors with the highest nature impact and dependencies within its Target Date Funds.
Scottish Widows reported that 50% of 1,000 companies in its portfolios – representing 84% of total corporate investments – had a “high to very high” impact on water, particularly from companies in the pharmaceutical sector.
L&G’s Mastertrust’s report identified four key nature sub-themes, including water. The report noted that physical risks, such as flooding and water availability, transition risks, and reputational risks could arise due to an investment’s direct operations or anywhere in their value chain. Water also has an impact on natural capital, one of L&G’s other four nature sub-themes.
Scottish Widows’ report also found pollution to be an important portfolio risk, with 24% of the 1,000 firms having a high impact and 41% a medium impact, suggesting that many industries “contribute significantly” to pollution and pose a potential risk to biodiversity loss.
Investee company action on addressing nature-related risks still seems to be lacking, including sectors most exposed. Last week, analysis by Finnish pension provider Varma found that just 9% of its listed high-risk investee companies have an action plan accounting for biodiversity loss in their operations.
The €63.2 billion (US$67.3 billion) AUM asset owner’s second survey of the biodiversity accountability attitudes of companies included 318 firms operating in high-risk sectors – including the agricultural, automotive, mining, and oil and gas industries – and revealed that 18% of companies had not factored biodiversity-related issues into their policies.
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