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Pension funds edge towards biodiversity, report

Published: 24 July 2023

A report by Pensions for Purpose looks at how UK pension funds are incorporating biodiversity and natural capital into their investment decision-making. Different players from across the sector share views on the topic.

The consultant view: “It is so much more straightforward for clients to establish climate goals rather than biodiversity goals at this stage.” | Jenna Lee on Unsplash

The findings ‘Natural capital and biodiversity’ are worthy of greater scrutiny. The Pensions for Purpose report, commissioned by Gresham House, notes considerable speculation about definitions, and a realisation that currently frameworks are not driving asset owner interest in natural capital investment, but they are “inspiring discussion among trustees”.

In this regard, the report says consultants “are well placed to help pension funds understand the concepts of natural capital and biodiversity, as well as how to embed them into an investment strategy”.

The UK government is putting into place its ‘Biodiversity Net Gain’ (BNG) legislation, which will require property developers to invest in measures that increase the amount of plants and wildlife in local communities by 10%, part of the 2021 Environment Act. The ambition is to save up to 30,000 football pitches worth of habitat each year.

Consultant’s view

Monique Mathys-Graaff, head of sustainability solutions at WTW observes thatin the United Kingdom the majority of pension funds are mature [which] means the scope to implement biodiversity goals for investments is strictly limited”. But “for the other 30 to 40% there is much more opportunity [and]…some scope to directly apply biodiversity goals”.

There are many challenges, however. “It is so much more straightforward for clients to establish climate goals rather than biodiversity goals at this stage. They have a good idea of what their CO2 emissions are, whereas it is much more difficult to look at issues such as water quality or conservation. We need much more work to be done on impact measurement in this area.”

She salutes the freely available overlay assessment that has been created as part of the Taskforce on Nature-related Financial Disclosures (TNFD) known as LEAP. This allows pension schemes to get a better idea of the underlying exposures. “LEAP is at least the beginning of a standardisation framework although it is still at a very early stage. The only schemes which are able to go further are those with the scale of private market and alternative credit assets to be able to link investment strategies to biodiversity goals necessary.”

The questions raised in the report around definitions are echoed by Mathys-Graaff. “We also need greater certainty on which assets should be counted within the biodiversity space. Clearly, forestry is there but for example should we include technologies that help biodiversity? And it’s important to look at downstream applications… [and] biodiversity within our oceans. Given this background it seems sensible to have a very broad definition especially while we improve our understanding of how to measure biodiversity outcomes.”

The other major challenge is “the lack of available product” although Mathys-Graaff is optimistic “we will be able to get there faster than we did with climate products. Over the next couple of years I expect a lot more products to come onto the market with certain asset classes such as private equity and alternative credit leading the way”.

Asset managers’ view

Tony Dalwood, CEO of Gresham House who commissioned the report, is trying to help solve the product dilemma. Gresham is actively involved across the natural capital sector – including afforestation and carbon credits, vertical farming, and biodiversity net gain (BNG) credits through the development of habitat banks.

Dalwood says BNG “is helping to transform the UK’s landscape and enabling developers to comply with the new Environment Act. We are jointly creating the first institutionally investible solution to build landscape-scale ‘habitat banks’ that generate biodiversity net gain on typically unproductive land.”

But for Dalwood, there are significant challenges to investing in this area “not least the challenge of defining what natural capital means and how it can be valued by capital markets. We therefore spend a considerable amount of time educating people on this subject. The small number of managers who have any experience or track record in this area is also a challenge”.

One other experienced natural capital investor is Rob Appleby, founder and CIO at Cibus Capital. He is optimistic that “the natural capital investment universe is rapidly expanding. Heretofore we have ignored the cost of natural capital. Air, water, soil, etc has been ‘free.’ Regulatory pressures have altered this commonly accepted principal and with the work of the TCFD, TNFD, SFDR and other acronyms we are anticipating greater oversight, greater definition of the consequences of non-compliance and a market that measures, accredits and monetises natural capital, for the benefit of all future stakeholders.”

Alistair Cooper, head of venture at Cibus Capital highlights the importance of digitalisation and how “the technological revolution is attracting significant private investment capital to the sector”.

The digital provider

Oliver Lewis, founder and CEO of Joe’s Blooms, a digital solution that helps property developers to enhance their local environment by complying with the new BNG regulations, also shares his view.

According to him, the two main challenges that investors and pension funds have typically faced on biodiversity are visibility and lack of incentives. “Biodiversity loss has been less visible to those designing ESG strategies because it hasn’t been top of the priority list when it comes to reversing the effects of climate change, it is only in recent years that the devastating impact that biodiversity loss will have on our food security and ecosystems is clear,” he says.

In consequence, we are at last seeing the right government policies, Lewis continues, and “where tech comes into play is making policies like this work effectively, in particular for smaller companies that might not have in-house expertise on biodiversity loss. In the case of BNG, there are a whole host of issues that smaller developers need to grapple with – such as understanding whether the animals and plants in the habitat are of particular ecological importance, and how well the habitat is functioning.”

To make this as simple as possible, last year Lewis decided “to develop an easy-to-use digital platform that produces all of the site-specific data and legal documents required to secure planning permission to make it easier for nature positive developments to get planning approval.”

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