Pension funds and asset owners should be warming to the potential and necessity of biodiversity-themed investments, according to Pensions for Purpose, which produced the report commissioned by Gresham House.
Investment in biodiversity and natural capital-related themes is still not clearly on the radar for many UK pension funds, but that picture is one that is set to change in the near future, according to Karen Shackleton, founder and chair of Pensions for Purpose, a UK body promoting greater impact investing.
The organisation has just published a report which found that at least 62% of UK pension funds are not currently invested in natural capital solutions despite growing awareness of biodiversity risks.
The report – Natural capital and biodiversity: where are UK asset owners on their journey? – was commissioned by Gresham House, the London-based alternative asset manager focusing on sustainable investment. A total of 22 participants were surveyed, including 13 asset owners, and five investment consultants, among others.
Shackleton told Impact Investor that she expected asset owners to increase their biodiversity investments in the near-term.
“Many public sector funds are going through their strategy reviews, and I’m fairly confident that, as they start to change their asset allocations, they will be thinking about natural capital,” she said. Shackleton is well placed to assess the direction of travel, given her role as an advisor to several UK local authority pension schemes.
Most asset owners interviewed for the report agreed that addressing biodiversity loss was at least as important as tackling climate change, but said challenges with how to measure impact and the availability of investment products made it difficult to understand how biodiversity loss could be addressed through direct investment.
The report acknowledges there is still an overall lack of supply of investible solutions that meet investors’ risk, return and impact profile, but finds they are already available in areas such as sustainable forestry and biodiversity habitat banks.
Shackleton said there were more avenues for profitable biodiversity investment than many asset owners realised. Those interviewed for the research were seeking returns in the 5-8% and were willing to show flexibility on returns if the assets could offset their own carbon emissions.
“There is this perception that there isn’t the available product range to consider investing, or scale an allocation, but I think that will change,” she said. “We’re in that interesting space where there are quite a few asset managers developing funds and starting to look for cornerstone investors.”
Pension funds are often reluctant to provide early investment in a fund, preferring to wait until it already has substantial backing. However, as the number and variety of biodiversity-themed funds increases, opportunities to invest either in early stage or post-first close funds should open up for pension funds, Shackleton said.
On whether pension funds have a responsibility to invest in natural capital, the research reveals mixed views. Although 38% of those surveyed said it did fall within their remit, a similar percentage did not, while remaining respondents were undecided. In practice, many pension funds currently confine their biodiversity-themed investments to those that help them reach net zero targets, as forestry investments might for example.
Pension funds should consider the distinct systemic impact of biodiversity loss in the same way as they look at the impact of climate change, according to the report.
That is currently not the case for those surveyed, 80% of which said they did not view biodiversity risks separately from climate risks. This contrasts with the findings of Sustainable Policy Institute research, which concluded that 35%-54% of financial institutions’ assets are highly or very highly dependent on ecosystem services supported by biodiversity.
The hope is that biodiversity investors will benefit from the strategies developed to facilitate climate change-related investments and broaden out from the areas in which the two overlap. Shackleton said that it would not be negative if pension funds did focus on biodiversity investments in the short term only because of their climate change benefits, so long as that spurred greater interest in wider natural capital investments.
“I’m a great believer in funds going on a journey, so if that’s where they start, that’s absolutely fine. I think that, as they invest, they will start to learn more about the fund in which they’re investing and then they will recognise the biodiversity risks that it is addressing and start to see these as a separate topic,” she said.