When thinking of potential topics for engagement between investors and corporates, the blood of horseshoe crabs might not immediately spring to mind. However, BNP Paribas Asset Management’s dialogue with pharmaceutical companies on replacing the substance with synthetic alternatives highlights how investors are becoming increasingly proactive in protecting nature.
Only a few years ago, investor engagement on biodiversity was completely different. “There wasn’t even enough to be a theme in an engagement report, and if it was, it was mainly on deforestation,” says Maria Nazarova-Doyle, head of responsible investments and stewardship at Scottish Widows.
A landmark report published by the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) in 2019 provided clarity on the drivers of biodiversity loss, says Peter van der Werf, head of engagement at Robeco. The IPBES found that out of an estimated eight million animal and plant species, around one million are threatened with extinction, due to factors including land use changes and the over-exploitation of resources.
“It kickstarted conversations among investors that the time for waiting was over,” says van der Werf. “We need to get our hands dirty and get to work on developing frameworks and expectations, so we can hold corporates and sovereigns to account.”
Investors take action
Since then, investors have been getting into the weeds and engaging companies – which brings us back to the horseshoe crab.
About 18 months ago, Adam Kanzer, BNPP AM’s head of stewardship for the Americas, learned about the rufa red knot, a bird with one of the world’s longest migration routes.
As part of its migration from the southernmost tip of South America to northern Canada, the rufa red knot feeds on horseshoe crabs’ eggs off the east coast of the US. But the bird is declining – it is classified as ‘threatened’ under the US Endangered Species Act.
The rufa red knot’s plight appears to be mainly the result of a drop in the number of crab eggs. This is partly caused by overfishing, but also by pharma companies using the crabs’ blood to test and manufacture injectable products, like vaccines, and devices implanted in the body, like pacemakers.
“In theory, the use of the blood is no problem as it saves lives and efforts are made, at least in the US, to maintain horseshoe crab populations, but we are in the midst of a mass extinction crisis,” says Kanzer. “Human health is relying on a keystone species that could disappear. More pandemics will come. Our need for endotoxin testing will only increase.”
Kanzer discovered a lab-made alternative used by pharma company Eli Lilly, which is more scientifically robust and cheaper. The company has had four drugs that use the substitute approved by the US Food and Drug Administration.
BNPP AM wrote to 14 pharma companies in late 2021, asking whether they would discuss switching to the synthetic alternative. Some seemed to be moving in the direction, but most did not respond, despite multiple follow-ups.
Not one to give up, Kanzer contacted the Pharmaceutical Supply Chain Initiative, which subsequently published a paper urging its members, including 75 of the world’s largest pharmaceutical companies, to adopt alternative technologies and minimise the demand for naturally derived testing materials.
“Now that we have a peer-developed set of good practices, we are going to go back to companies in our portfolios to see if we can restart the discussion,” Kanzer says. “This is a win-win-win as it relates to biodiversity loss, human health and solid business practices. We’re looking for more opportunities like this.”
Alongside this work, Kanzer reports that BNPP AM is also engaging on deforestation, water, pesticides, hazardous chemicals and oceans. “There are so many issues to work on – investors should focus on the key pressures on nature that scientists have identified and get started. It is a fast-moving, multi-faceted crisis. But there are solutions.”
Given their large impacts and dependencies on nature, the food and agriculture and mining industries are an obvious starting point for investors’ nature-related engagement efforts.
Snorre Gjerde, lead investment stewardship manager at Norges Bank Investment Management (NBIM), told RI that the manager of Norway’s trillion-dollar sovereign wealth fund has been engaging mining companies on how they approach operations in sensitive areas, as well as how they incorporate indigenous rights and engage said communities.
Gjerde says the majority have established policies to address their activities’ environmental impacts. A number are aligning with NBIM’s expectations on adopting international best practices, including the mitigation hierarchy approach, no net loss ambitions and commitments not to explore or develop mines in internationally recognised areas such as natural UNESCO World Heritage sites.
The leading firms have gone further by setting company-wide targets. Some companies aim to have a net-positive impact on biodiversity, and are employing new technologies to measure impact and progress.
Collaborative investor initiatives are also taking shape, including the development of Nature Action 100 (NA100) – billed as the biodiversity equivalent to Climate Action 100+.
In June 2021, Responsible Investor revealed Robeco, the World Bank, the World Benchmarking Alliance and the Finance for Biodiversity Foundation were exploring how to develop the initiative with several unnamed investors. Since then, heavyweights, including Storebrand Asset Management, BNPP AM and Federated Hermes, have come onboard.
In November, the Institutional Investors Group on Climate Change and Ceres were named co-leads of Nature Action 100’s secretariat and corporate engagement workstreams. The Finance for the Biodiversity Foundation and Planet Tracker were appointed co-leads of the technical advisory group.
The initiative was then “soft launched” at COP15 the following month. In June, it outlined investor expectations of companies, as well as the eight sectors from which the companies targeted for engagement will be drawn. A final list of firms will be unveiled later this year.
Corporates respond to pressure
Corporates are starting to take notice. Stephanie Hime, director of Little Blue Research, which works with corporates to measure their impacts and dependencies on nature, sees a willingness to meet investor demands.
“There is also an understanding that it’s not a quick tick-box undertaking. Nature is more all-encompassing than climate and there are data challenges and gaps.”
She notes that some firms are starting to integrate nature and biodiversity into decision-making. However, environmental initiatives are siloed in many organisations.“They’ll have knowledgeable environmental specialists on particular things, but how they feed into procurement, risk assessment and governance at board level shows there are gaps.”
Data challenges
One barrier to engagement noted by investors is data. “It’s not that there isn’t data. It’s just I find it’s either really broad but shallow, or in-depth but only for a small number of companies,” Nazarova-Doyle says.
The Taskforce on Nature-Related Financial Disclosures is set to help clarify data reporting requirements when it launches its finalised disclosure standards for companies to report on biodiversity risks and opportunities in September.
AXA Investment Managers, meanwhile, is aiming to get the most out of data that is currently available. In 2022, the French investor sought to continue the integration of biodiversity in its engagements and go beyond efforts on deforestation by extending the scope of companies and engagement.
“Our engagement initiatives were underpinned by the integration of new, biodiversity-specific data and a new metric – biodiversity footprint,” says Liudmila Strakodonskaya, ESG analyst at AXA IM.
“We used this new data from an experimental modelling approach designed by Iceberg Data Lab to help us select and prioritise sectors and companies which present a significant biodiversity footprint, and to focus our engagement efforts accordingly.”
Strakodonskaya says AXA IM will continue to enhance and inform engagement campaigns using biodiversity-specific data developed by Iceberg Data Lab.
Manager engagement
Asset owners are also starting to hold their managers to account; Scottish Widows has recently begun asking its managers to disclose their biodiversity policies and detail the engagements they carry out.
While all Scottish Widows’ managers are active on biodiversity, their public disclosure and thought leadership varies significantly. Of its three main asset managers, one has good disclosure and has shared its commitments, targets and activity on the topic; another has publicly discussed the scale of the topic and their commitment to it; while a third has minimal public disclosure on policies or activity in this area.
Scottish Widows will also be encouraging its managers to respond to consultations and engage in policy discourse on the barriers companies face, to encourage greater progress on halting biodiversity loss.
Before and during COP15 in Montreal, investors were proactively involved in the negotiations of the Kunming-Montreal framework. Policy advocacy is likely to continue.
Nazarova-Doyle says that Scottish Widows wants to hear about both successful and unsuccessful examples of engagement and how asset managers plan to escalate. “We will hold them to account through asking about specific biodiversity shareholder resolutions as they become more widespread,” she says.
AGMs in 2024
While investor stewardship is beginning to flourish, biodiversity is yet to become a prominent feature at AGMs. Analysis by Planet Tracker shows that between 2010 and 2022, only 38 proposals on biodiversity emerged – most were on deforestation, followed by genetics, with only a handful explicitly referencing biodiversity or nature.
A follow-up study published in May shows that investors were relatively unsupportive of these proposals. Of the 26,500 votes cast on biodiversity proposals in the same period, 62 percent were either cast against, or the voter abstained or did not vote.
Funds cited the overly prescriptive nature of some of these proposals as a reason for voting against, while also pointing to insufficient shareholder benefits and companies already having relevant policies.
Several investors told RI that 2024 is likely to see an increase in biodiversity-related resolutions, however.
Ultimately, BNPP’s Kanzer says he expects to see progress. “I am hopeful that we are entering a new phase of investor engagement on nature loss,” he says. “At a minimum, we expect all large companies to assess their key impacts and dependencies on nature and to develop a transparent and comprehensive strategy to address them. We hope to see all large investors embrace this as an urgent priority.”
Fixed-income focus
Nature is becoming a feature of bond engagements
David Zahn, head of European fixed income at Franklin Templeton, says the investor sent a sustainability questionnaire to 150 corporate issuers in 2022. Around one-third of respondents operated near a biodiverse risk area.
A follow up this year asked what issuers are doing to mitigate threats to high-risk areas.
“The response rate was high, with action varying from developed plans, to responders acknowledging the risk but yet to take action,” says Zahn. When the firm has reviewed answers, it will follow up with companies to make their policies more robust. It is also working on engaging sovereigns on biodiversity.
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