Biodiversity-linked vehicles are being overshadowed by the climate fund market, with momentum having slowed in the first three quarters of this year, according to Morningstar Sustainalytics. Global assets in 34 biodiversity open-ended funds and exchange-traded funds more than doubled over the past three years to US$3.7 billion, but in comparison, the climate fund market stands at US$540 billion. The report split biodiversity funds into three categories: risk-oriented, solutions-focused, and mixed – with only the second type having attracted net new money so far this year. Sustainalytics also deems biodiversity funds to have “underperformed” historically, citing their higher fees as a reason for lagging behind ESG and non-ESG peers. All 34 biodiversity funds identified in the report are domiciled in Europe, with the US and APAC generally lacking such products. “Strategies to execute on biodiversity objectives have proved difficult to develop, partly due to a lack of reported corporate data and standard metrics, and because biodiversity is at the intersection of other more easily investible and better-known themes such as climate change, water, and the environment,” said Hortense Bioy, Head of Sustainable Investing Research at Morningstar Sustainalytics. “Nevertheless, biodiversity is an emerging topic that investors can no longer ignore both as a risk factor and as an opportunity, particularly in the face of a changing climate and declining global habitat.”
Sustainable Investor
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The Asia Pacific (APAC) region needs to accelerate the deployment of mature technologies, support emerging climate solutions, and scale up finance for the energy transition to stay on track with the Paris Agreement, according to a new study. Published by research provider BloombergNEF and investment platform GenZero, ‘Asia Pacific’s Energy Transition Outlook’ said the region faces a “colossal but not insurmountable” challenge to decarbonise its economies, while also ensuring an affordable and secure energy supply to meet growing needs. Cost-competitive low-carbon solutions – such as solar, wind and passenger electric vehicles – represent a significant economic opportunity, it added, warning however that governments and corporates must intensify efforts to commercialise emerging technologies for deployment at scale. This, in turn, would need to be supported by a tripling of annualised investment in energy transition technologies to US$2.3 trillion over the 2024-2030 period. In addition, the report identified nine technology drivers for APAC’s net zero transition, with electric vehicles, renewable power, energy storage, and power grids described as “mature” – while nuclear, carbon capture and storage, hydrogen, sustainable aviation fuels, and heat pumps were characterised as not currently scalable or cost-competitive. “Different levels of socio-economic development mean not all countries have the ability to effect a just energy transition on their own,” said Frederick Teo, CEO of GenZero. “Cross-border collaboration and the ability to catalyse financing from the public, private, and philanthropic sectors globally will be key to accelerate the deployment of cost-effective solutions in the coming years to meet our targets.”
Advances in technology are enabling greater oversight of environmental impacts across supply chains for company management and external parties, according to Planet Tracker. Improved traceability can help firms comply with new regulations aimed at protecting nature, said the think tank in a new report, while warning of fines and reputational risk for companies that don’t invest to scrutinise their supplier networks. European legislation requiring firms to identify and minimise negative environmental impacts include the EU Deforestation Regulation and the Corporate Sustainability Due Diligence Regulation. By integrating procurement data within geographical information systems, companies can accurately trace and analyse their supply chains, linking raw materials and sourcing origins to quantify their impact on the environment, the report said. Planet Tracker also included a case study of food conglomerate Nestlé’s supply chain for key commodities, finding that fresh milk and coffee were generally associated with the highest absolute environmental footprints – particularly emissions for milk and unsustainable water use for coffee – while cocoa displayed the highest deforestation footprint per tonne sourced. The think tank recommended investors demand more in-depth supply-chain disclosures from their investees, and that lenders financially support companies in their traceability journey. “Only limited supply-chain data is needed by external observers to provide an estimate of the environmental impact of these food businesses, and to identify potential risk hotspots and locations where they are at risk of not adhering to international regulations,” said Giorgio Cozzolino, Quantitative Investment Analyst at Planet Tracker.
More than 100 NGOs, academics and private sector organisations have pledged support for The Global Biodiversity Standard (TGBS) – an independent certification scheme to check that nature-based solutions are achieving their intended goals. Expected to issue its first certificates at COP16, the standard was developed by a coalition of global experts in line with the goals of the Kunming-Montreal Global Biodiversity Framework. It is based on decades of research, extensive testing, and engagement with hundreds of biodiversity scientists across six continents. Although one in three tree species are at risk of extinction, many nature-based solutions – including tree-planting – are failing to integrate at-risk species, the statement noted. Meanwhile, around 90% of the world’s largest corporations undertaking ecosystem restoration fail to report ecological outcomes, while none of them quantify their social and economic impacts on local stakeholders and traditional owners. Today, EU member state ambassadors also confirmed their backing of the European Commission’s proposal for a 12-month delay to the EU Deforestation Regulation (EUDR). “For years, we have watched as well-intended nature-based solutions have failed to effectively restore our declining ecosystems,” said Paul Smith, Secretary General at Botanic Gardens Conservation International. “This standard will change that. It has the backing of hundreds of global experts, including from countries that are facing significant biodiversity loss – like Kenya and Madagascar. It provides a hope that nature-based schemes can be a solution to the biodiversity crisis. That we can reverse the decline and restore our natural world.” COP16 will also see the release of updated high-level principles for bringing integrity into biodiversity credit markets by the International Advisory Panel on Biodiversity credits, in collaboration with the Biodiversity Credit Alliance and the World Economic Forum.
Data, software and media provider Bloomberg has launched a platform enabling investors to assess nature-related impacts and dependencies across value chains. The tool can be used for up to 45,000 companies, utilising company-reported Bloomberg data and a number of biodiversity indicators. These indicators are underpinned by the Natural History Museum’s Biodiversity Intactness Index, water stress data from the World Resources Institute, deforestation risk analysis, and insights on actions being taken by firms to reduce nature loss. Insights provided by the tool include the percentage of company revenue invested in high nature-risk sectors, involvement in commodities associated with deforestation, exposure to water-stressed areas, and management of nature-related risks through governance and policies. The World Bank has previously estimated that biodiversity loss could result in a global GDP decline of US$2.7 trillion annually by 2030. “The dependency of societies and economies on nature is widely recognised, but evaluating the nature-related risks of companies is complex and cannot be reduced to a single metric,” said Christian O’Dwyer, Nature Solutions Product Manager at Bloomberg. “With Bloomberg’s new offering, users get a comprehensive assessment of all aspects of a company’s dependency and impact on nature, which can be integrated into decision-making.”
La Banque Postale has become the first French bank to publish a climate and nature report, in line with recommendations from the Task Force on Climate Related Financial Disclosures (TCFD) and The Taskforce on Nature-related Financial Disclosures (TNFD). The report follows a commitment from La Banque Postale in September 2023 to join the early adopters of TNFD. The bank carried out a detailed analysis of its nature-related impacts, dependencies, risks and opportunities, publishing a biodiversity footprint for 39% of its on- and off-balance sheet exposures. It did so by using the Global Biodiversity Score – a corporate biodiversity footprint assessment tool developed by CDC Biodiversité. The report also comes ahead of COP16 and COP29, with La Banque Postale looking to demonstrate its commitment to advancing best practice in the fight against global warming and biodiversity loss. “La Banque Postale has made strong commitments in the past, such as the validation of its decarbonisation trajectory by the SBTi [Science Based Targets initiative] or phasing out of fossil fuels by 2030,” said Chairman Stéphane Dedeyan. “This report marks a new stage in our efforts to factor environmental risks in our financial decisions … which will help us to better understand the challenges of climate change and biodiversity, and further advance market standards in sustainable finance.” The report details the bank’s actions to address climate and nature conservation issues, such as the integration of climate and nature issues at the highest level of its governance and in its risk-management framework. It also highlights specific commitments, such as the exclusion of fossil fuels from its financing and investment universe since 2021, and mentions new principles published last year for intervention in companies within sectors at risk of deforestation and ecosystem conversion – which the bank says go beyond European deforestation regulations by incorporating ecosystem conversion into its risk analysis.
European regulators should encourage firms disclosing under the Corporate Sustainability Reporting Directive (CSRD) to adopt targets validated by the Science-Based Targets for Nature (SBTN), according to the World Wide Fund for Nature (WWF). Alignment between the two means that use of SBTN guidance will ensure firms comply with CSRD’s disclosure requirements on nature targets, said the WWF in a new report. It would also improve the credibility and comparability of firms’ targets, contributing to the EU 2030 nature objectives and the European Green Deal, as well as to organisations’ long-term nature resilience and financial stability. CSRD requires firms to set and disclose targets related to pollution, water and marine resources, biodiversity and ecosystems, and resource use and circular economy. Large firms must report under CSRD from January 2025, with smaller firms following in three subsequent waves. SBTN published updated guidance earlier this year based on feedback from the 250 organisations in its Corporate Engagement Programme. The WWF said EU regulators should not only recommend the setting of SBTN-validated targets, but also establish a regulatory methodological framework to ensure credible and comparable nature targets, aligned with international commitments, such as the Kunming-Montreal Global Biodiversity Framework and the Paris Agreement. They should also harmonise EU directives and standards by defining a shared vision for environmental data, metrics and targets. “Future resilience and competitiveness rely on credible and comprehensive nature targets, and delaying this process increases environmental damage and financial stability risks,” said Sebastien Godinot, Senior Economist at WWF EU.
Scope ESG, a subsidiary of European credit ratings provider Scope Group, has enhanced its performance score to present a ‘3D view’ of companies’ sustainability efforts, adding strategy analysis to impact and risk assessments. Designed for firms of any size, the solution looks to respond to heightened pressure from investors and regulators to maximise long-term value. According to Scope, there is a lack of all-round assessments of the double materiality of impacts and risks, and of the systems and strategies companies have in place to mitigate those. Scope’s analysis shows stakeholders how they can create value sustainably, and how they can align with ESG disclosure requirements such as the EU’s Corporate Sustainability Reporting Directive and Sustainable Finance Disclosure Regulation. Scope assessed firms in Germany’s DAX40 benchmark index, ranking them through three core sustainability indicators. Deutsche Telekom led the company rankings with a weighted average of 81.1, ahead of Deutsche Borse (70.9), Infineon (69.9) and Allianz (67.5). “[A] double materiality approach requires integrating assessments of a company’s impact on the environment and society and the risks to the business from ESG factors, [but] we go a step further with our 3D approach,” said Wendy Fernandez, Director at Scope ESG. “What is vital is analysis of how companies manage those impacts and risks – in essence, their sustainability strategy – hence the extra value of ESG Performance Score to sustainability managers, investors and other corporate stakeholders.”
Fidelity International has launched what it says is the first blue transition fixed-income fund globally, as part of its commitment to developing thematic solutions addressing climate change and social issues. Fidelity Funds 2 – Blue Transition Bond Fund will aim to support an approach which balances ocean, coastal and inland river system usage and resources with the conservation of healthy and productive marine and freshwater ecosystems. A minimum 80% of investments will be used to meet environmental and social characteristics promoted by the fund. Fidelity will look to achieve long-term growth and support the transition towards improved ocean and freshwater health by investing in global bonds and bonds of issuers which: align with at least one UN Sustainable Development Goal (SDG); use bond proceeds to finance projects benefitting ocean and freshwater-related sustainability; aim to improve management of water-related risks and opportunities; and reduce the negative impact of climate change on oceans and freshwater. Though they play a crucial role in regulating the climate, providing food and livelihoods and supporting diverse ecosystems, oceans and freshwater and are under threat and their protection is underfunded, Fidelity said. SDG 14: Life Below Water remains the least funded – not far behind SDG 6 on ensuring access to water and sanitation for all. “The bond market is uniquely positioned to help support the blue transition, given its size and greater number of issuers across both public and private entities in the corporate and sovereign issuer space,” said Kris Atkinson, Portfolio Manager at Fidelity. “We are particularly focused on blue bonds – a sub-component of the green bond market, which finance ocean and freshwater related projects. However, [those] alone are not sufficient for investors looking to support ocean and freshwater themes while aiming to generate attractive risk-adjusted returns.” Atkinson argued for a broader, more holistic approach starting at the issuer level, with investors considering how a company operates, which products and services it offers, and how these align to the blue transition.
More than two thirds (69%) of institutional investors globally believe companies should set and disclose targets for reducing Scope 3 greenhouse gas (GHG) emissions, according to proxy advisor ISS Governance. Responding to the firm’s annual global benchmark policy survey, 47% of investors said all firms should disclose Scope 3 emissions reduction targets, with a further 22% agreeing only for companies for which these are significant. Meanwhile, a total 61% of non-investor respondents said companies should not be required to set Scope 3 emission reduction targets. When asked about supporting climate-related shareholder proposals, 33% of investors stated they generally did not view such requests as “overly burdensome” and tended to support them if shortcomings were identified in the company’s current approach. A smaller share (15%) said they were less likely to support proposals where “the technology necessary to achieve full value-chain net zero goals is not yet cost-competitive”. According to Morningstar Sustainalytics, average support for ESG-focused shareholder resolutions in the US stabilised at 23% in the 2024 proxy season. A slight majority (52%) of investors in the ISS survey said a board’s adoption of a “short-term poison pill” to defend against an activist campaign was generally not acceptable, while two thirds of non-investors said it was acceptable. On executive pay, 43% of investors supported the continuation of ISS’ pay-for-performance policy at US companies, which views the predominance of time-based equity awards as a negative factor. ISS Governance is a unit of Deutsche Börse-owned ISS STOXX, a provider of data-centric research and technology solutions to institutional investors and other capital market participants.
