The dust may have settled on COP26, but a different – and potentially less disappointing – Conference of the Parties is on the horizon, and it’s one that investors should be watching closely.
COP15 is aspiring to do for biodiversity what COP21 did for climate change. Where COP21 was the birthplace of the Paris Agreement, the second leg of COP15 in May 2022 hopes to sign off on the Post-2020 Global Biodiversity Framework – an international agreement on how we can “live in harmony with nature” by 2050.
It could be argued that regulation is steering the agenda for climate finance, but when it comes to biodiversity investors are moving fast to make sure they stay ahead of the rulemakers. Over the past two weeks alone, there have been developments on all three of the core components needed to build a sustainability market: committed assets, disclosure guidelines and new financial products.
On Tuesday, nine more investors – including pension funds KLP, PensionDanmark and ERAFP – signed up to the Finance for Biodiversity Pledge. The pledge, which now has 84 backers, commits institutions to collaborating, engaging, setting targets and reporting on biodiversity by 2025.
Notably, there are just four pension funds signed up, suggesting asset managers and banks will leading the push. Although in August, one of the world’s biggest asset owners, Norges Bank Investment Management, published biodiversity expectations for portfolio companies, including a requirement for them to disclose “material impacts of activities, products and services on biodiversity and ecosystems”, using, where possible, “recognised reporting methods and metrics”
Those reporting metrics have taken a number of steps forwards this week, with the Climate Disclosure Standards Board (CDSB), Global Reporting Initiative (GRI) and European Financial Reporting Advisory Group (EFRAG) all making announcements.
EFRAG, which is advising the EU on the reporting standards that should underpin its sweeping new Corporate Sustainability Reporting Directive next year, will collaborate on its biodiversity proposals with the GRI, which is updating its Biodiversity Standard in 2022. Both bodies take a ‘double materiality’ approach – meaning they will think about the impact of business activities on natural resources, as well as how biodiversity loss could impact a companies’ ability to make profits.
CDSB, on the other hand, focuses exclusively on the latter (an approach known as ‘Enterprise Value’) in its new guide for companies on how to disclose biodiversity information to investors and other stakeholders. While the work of EFRAG and the GRI will steer EU rules, CDSB’s guidance is expected to contribute to global sustainability disclosure standards being developed by the new International Sustainability Standards Board.
On financial products, HSBC launched what it claims is the first investable benchmarks focused on biodiversity performance. The equity indices are based on data from Iceberg Data Labs (part-owned by investors Axa, Natixis, Mirova and Sienna, as well as index provider Solactive) and Sustainanalytics.
And there are more efforts in the pipeline to make biodiversity investable. In January, the UK’s Green Finance Institute will publish a plan for creating “high integrity nature markets”, followed by the end of Q1 by a draft framework from the Taskforce on Nature-related Financial Disclosures to help financial institutions and companies address their dependencies and impacts on nature. A final framework is slated for 2023, after testing with market participants.
Another influential reporting body, CDP, is due to add six biodiversity-related questions to its widely-used Climate Change questionnaire for corporates in 2022. That work is being funded by BNP Paribas Asset Management.
And then there is Nature Action 100+ , which is expected to provide a collaborative shareholder engagement forum similar to Climate Action 100+, targeting key companies on biodiversity. That network – which RI reported in June would be developed by the Finance for Biodiversity Pledge, the World Bank, the World Benchmarking Alliance and Dutch asset manager Robeco – will begin taking shape next year.
By the end of 2022, there will also be science-based targets for nature. The Science Based Targets Network told RI it aims to have developed rules for land, ocean, freshwater and biodiversity within the next 12 months.
At the start of 2021, RI’s Editor, Sophie Robinson-Tillett, pegged biodiversity as one of the top topics to watch after it exploded onto the scene in 2020. There is no question that 2022 will see the continuation of this meteoric rise, and investors will need to keep up.