Nature and biodiversity

Nature and biodiversity matter to investors because the very companies we invest in not only impact, but truly depend on nature; yet we increasingly see a rapid loss of nature and biodiversity. Biodiversity conservation and climate action are intrinsically linked. As the planet’s best defence against climate change, it is important for investors to consider biodiversity and nature’s protection in meeting net zero targets and building a more climate resilient future.

Globally, there is a growing momentum to address biodiversity loss, which is becoming more tangible. At the UN Biodiversity Conference (COP-15) in December 2022, heads of States agreed to adopt the long-overdue Global Biodiversity Framework and its new targets and goals.

In line with the adopted targets, companies and financial institutions will increasingly be expected to assess and disclose nature-related risks, opportunities, dependencies and impacts in the near term, to deliver the Post-2020 Global Biodiversity Framework goals and targets.

Financial institutions have an important role, as providers of capital, to mobilise the necessary investment and opportunities for nature protection and restoration, and as regulated entities to monitor, assess and disclose nature-related risks, dependencies and impacts on nature across investment portfolios.

As long-term investors, we believe biodiversity loss and land degradation is financially material and addressing it is crucial to achieving a net zero and climate resilient future. Protecting nature is therefore in our own and our clients’ best interests.

Nature and biodiversity toolkit

Investors Can Access Nature Now (ICANN)

The unprecedented threats to nature and biodiversity, fundamental to our global economy and the fight against climate change is prompting investors to assess and disclose nature-related risks. To help investors start assessing nature, we have developed a guide that outlines a due diligence approach and resources, focusing on freshwater and forests.

Download toolkit

In 2022, we convened a Nature and Biodiversity Working Group, comprised of members from nine of First Sentier Investors’ 15 investment teams¹. A key output of this group was the delivery of a Nature and Biodiversity Toolkit launched in 2023, which provides a framework for assessing and engaging with investee companies on nature-related issues available to our investment teams. In 2023, we followed up on this work with the launch of a guide on these issues, to share our experiences and insights, and help to equip other investors with actionable tools on this topic. Investors Can Assess Nature Now (ICANN) is a guide for investors to better identify and assess materiality, exposure and responses to nature-related issues, to be used in company engagement and disclosure.

Other activity included the First Sentier MUFG Sustainable Investment Institute producing an engaging video that makes the case for protecting nature and explains how investors can take action. Two investment teams joined the investor engagement group on this issue, Nature Action 100.

¹ There were 15 teams at the time First Sentier Investors convened the Nature and Biodiversity Working Group in 2022.

Background

In 2021, First Sentier Investors (“FSI”) became a signatory to the Finance for Biodiversity (“FfB”) Pledge, which includes five commitments to deliver by 2030 (Collaboration and knowledge sharing, engaging with companies, assessing impacts, setting targets, and reporting publicly). Out of the five commitments, setting targets has been regarded as a more challenging one to deliver, due to its technical nature and the difficulty of balancing ambition and feasibility. This commitment notes ‘we will set and disclose targets based on the best available science to increase significant positive and reduce significant negative impacts on biodiversity’.

To support investors in setting credible and robust targets, FfB Foundation’s Target Setting Working Group, which FSI is a member of, launched the second edition of the Nature Target Setting Framework for Asset Managers and Asset Owners (“The Framework”) in June 2024. The Framework requires that financial institutions that signed the FfB Pledge before 2024 are required to set ‘Initiation Targets’ before December 31, 2024. Recommended Initiation Targets include governance, assessment and training targets. The asset class coverage of this version of the framework is listed equities and corporate bonds.

FSI Initiation Targets² on nature

As a signatory to FfB, FSI has set three types of Initiation Targets following the recommended framework, which relate to Governance, Assessment and Training. We have outlined our targets below, supplemented with implementation plans setting out how we intend to meet these targets and our disclosure plan.

Whilst our Governance and Training targets cover all asset classes, our initial asset class scope for the Assessment target is listed equities and fixed income (as recommended by the Framework), but we will continue seeking guidance in relation to private markets and short-term investments and work with the relevant teams once that guidance is available.

Governance

By the end of 2025, FSI will disclose a clear firm-wide governance structure for nature outlining board oversight and management responsibilities in an integrated manner with the existing governance structure for broader ESG issues.

FSI already has established board oversight and management responsibilities within our ESG and climate governance structure. We will integrate nature-related oversight in the existing structure. In order to ensure that both board and senior management are aware of the responsibilities related to nature, RI team will provide necessary training and hold discussion sessions and revise our current ESG governance structure accordingly.

Our governance structure, similar to climate-related governance, will guide the roles and responsibilities of board and senior management related to monitoring, oversight and decision-making processes related to nature.

Assessment

By the end of 2025, a dependencies, impacts, risks and opportunities assessment for our in-scope investments (listed equities and corporate bonds) will be conducted and publicly disclosed.

FSI has disclosed our sector-level impacts and dependencies across our listed equities investment, and our exposure and approach to nature in 2022 and 2023 Responsible Investment reports, as well as in the Investors Can Assess Nature Now (“ICANN”) guide published in 2023.

We are planning to start using ISS’s Biodiversity Impact Assessment Tool in Q4 2024, which would generate a quantitative assessment of our impacts and dependencies for in-scope investment portfolios. The assessments will be based on our data as of Q3 2024. In addition, our impacts, dependencies and risks across our direct operations will be also assessed and disclosed. To the extent of available data and our knowledge, we will add our qualitative assessment on nature-related risks and opportunities.

Training

By 2025, all relevant employees will have completed training on the relation between nature loss and investment.

FSI has conducted two training sessions for all staff on nature, in addition to a number of smaller sessions tailored to investment teams since 2022. In 2023, FSI launched a Nature and Biodiversity toolkit, which has been developed in our Nature and Biodiversity Working Group consisting of responsible investment representatives (“RI representatives”) from different investment teams. Through this process our RI representatives in most investment teams are familiar with our work on nature.

Given our affiliated organizational structure, the RI team will conduct dedicated training sessions tailored to each investment team throughout 2025, focusing on how to utilise the assessment data (see Assessment target section above) in their investment research and engagement process. In addition, the RI team will provide follow up training to all staff as an update to prior training sessions.

Disclosure plan

Starting from 2025, FSI will disclose its climate and nature-related risks, opportunities, dependencies and impacts in a single integrated report. Progress made to achieve these targets will be disclosed in this report going forward.

² The measurement, data or estimate are based on information sourced from investment team from third parties including portfolio companies and such information may ultimately prove to be inaccurate. The targets are based on assumptions as to future matters, such as government policy, enhanced future technology and the actions of portfolio companies (all of which are subject to change). The targets depend on the ongoing accuracy of such information and representations as well as the realisation of future matters.

Investment team progress

Investment teams have been increasingly focused on nature and biodiversity, as demonstrated below.

Global Listed Infrastructure

The Global Listed Infrastructure team has identified the higher-risk sector exposures within its investable universe, using the TNFD priority list. These include the toll road, railroad, offshore wind and water utility sectors. The team has begun engaging with the companies in its portfolio to understand the monitoring systems, disclosures, policies and pledges they have in place, and is planning to expand these activities in the coming year.

Stewart Investors

Stewart Investors notes that when considering individual companies bottom-up, the team is focused on specific, tangible factors such as pollution, supply chains and plastic packaging, which feed into biodiversity outcomes and are more in the control of management than broad measures of natural capital. Further, the team explains that it is increasingly looking at the interconnectedness and dependencies between the issues outlined in this report. Its work on smallholder farmers is a good example of something that cuts across multiple issues, including biodiversity, climate change and human rights.

The French Energy-Climate Law Article 29 already requires companies and financial institutions to disclose biodiversity risks and impacts. France also became the first country in the world in 2020 to pass legislation requiring all new domestic washing machines to have a microfibre filter fitted, as standard, from the beginning of 2025.
‘Biodiversity sensitive area’ and ‘emissions to water’ indicators in the Principal Adverse Impacts of the EU Sustainable Finance Disclosure Regulation (SFDR), which fund managers need to disclose for the targeted funds.
The European Union ban on imported goods that contributed to deforestation or produced in deforested lands. This new law will prevent the sale of products including beef, soy, and coffee linked to deforestation in the EU market.

Although these examples are European, we expect that there will be trickle-down effects from these regulations to other regions.

Feature

Microplastics policy advocacy update

We believe in our collective responsibility to consider degradation of the natural environment as an investment risk in our decision-making processes, and further proactively collaborate with our industry to encourage the adoption of measures that reduce and mitigate this threat to human and environmental health.

Microfibres have been finding their way into our beaches, rivers and deep ocean, in the air we breathe and the food we eat for decades. Research by the First Sentier MUFG Sustainable Investment Institute (SII) outlines the sources and distribution of microfibre pollution, reasons for its urgent address and steps to prevent it.

Studies have shown the effectiveness of filters on washing machines in capturing microfibres before polluting our aquatic ecosystems².

Since 2020, First Sentier Investors is leading, in collaboration with the UK’s Marine Conservation Society, a program to engage with the manufacturers of domestic and commercial washing machines to fit filtration technology to their products, as a standard feature. In addition to engaging with companies, we have engaged with a number of regulators as part of this initiative. There has been considerable progress, as shown in the advocacy update below.

Table 1. Policy advocacy on microfibres

United Kingdom

On 2 November 2022, the Microplastic Filters (Washing Machines) Bill had a second reading in the UK Parliament, requiring manufacturers to fit microplastic-catching filters to new domestic and commercial washing machines.

In support of the Bill, we engaged with the then UK Secretary of State for the Environment and various other senior ministers from across Government in collaboration with the UK Marine Conservation Society and UK Womens Institute who have long been campaigning this issue.

The Bill, sponsored by Alberto Costa MP, was withdrawn as it has lapsed. The Bill however, will be re-submitted, and if passed would mandate washing machine manufacturers to include microplastic catching filters as a standard feature on all new machines for sale or use in England and Wales by 1 January 2025.

We believe the UK Government could take a global leadership position and prioritise this recommendation on microplastics, specifically to mandate the installation of microfibre filters in new washing machines by 2025.

Australia

Following a visit to our Sydney office by the Australian Minister for the Environment expressing an interest in the issue, we met with CEO Tony Chappel and the team at the New South Wales Environment Protection Agency.

The Agency was very aware of the risks of microplastic pollution and were interested in the engagement work that we had been undertaking.

In Australia, the government announced in its 2021 National Plastics Plan that it would introduce microfibre filters in commercial and residential washers by July 2030. This is however expected to be a voluntary requirement.

European Union

As of January 2025, all new washing machines sold in France will have to include a filter to stop synthetic cloth fibres from polluting waterways.

We are now engaging with policymakers to gauge the potential or ongoing discussions for the French Law to be adopted across the EU.

² Washing Machine Filters Reduce Microfiber Emissions: Evidence From a Community-Scale Pilot in Parry Sound, Ontario, https://www.frontiersin.org/articles/10.3389/fmars.2021.777865/full

Feature

TNFD scoping exercise and Core Sector Metric Disclosure

In December 2022, First Sentier Investors joined the Taskforce on Nature-related Financial Disclosure (TNFD) Forum. Our approach to implementing the TNFD framework will build on the Nature and Biodiversity Toolkit, developed in 2023, and leveraging the collective knowledge of our Natural Capital and Biodiversity Working Group, convened in 2022. In line with the TNFD’s LEAP (Locate, Evaluate, Assess and Prepare) framework, we started to scope our assessment in 2023.

Initial scoping results

As First Sentier Investors is in the asset management industry, the functional business consists of separate investment teams (of which there are currently 11). In terms of our asset classes, as of December 31, 2023, we invested in listed equities (55%), cash and short-term investments (21%), unlisted direct infrastructure (12%), fixed income (7%), and private debt (5%). For initial firm-level nature assessments we would start with listed equities and corporate fixed income, covering 58% of our total AUM. Our potential interaction with nature would be mostly through our investments, either via listed investments or via direct investments in infrastructure businesses.

Within the in-scope asset classes, we allocate capital to several countries around the world, with 29% of our capital allocated to companies headquartered in Australia, followed by India (15%), US (12%), Hong Kong (11%), Mainland China (5%), Japan (5%), Taiwan (4%), and Singapore (3%). These countries make up about 84% of our total AUM. These countries will be the main focus of our Locate section of the LEAP exercise (material locations³) moving forward in relation to our investments.

TNFD’s Additional Guidance for Financial Institutions version 1.0 notes that financial institutions should disclose a metric that represents the financial exposure to a defined set of sectors considered to have material nature-related dependencies and impacts (one of the core sector metrics for financial industry). The TNFD has identified sectors that should be considered and we have analysed our exposure to these 22 sectors. The percentage of in-scope companies’ AUM with exposure to the TNFD material sectors, relevant to the firm’s total AUM, is 19%⁴. In other words, 33% of our listed equities investment and 31% of our corporate fixed income investment are allocated to these material sectors.

Within this 19% exposure, our listed equities and corporate fixed income investments are allocated to a number of sectors material to nature-related issues, including: metals and mining, semiconductors, electric utilities, food products, oil and gas, transportation infrastructure, household durables, automobiles, personal care products and pharmaceuticals.

Figure 1. TNFD material sector breakdown

Source: TNFD. (2023). Additional guidance for financial institutions. First Sentier Investors. Data as at 31 December 2023.

Note: sector allocation of in-scope companies only; multiple sectors include Chemicals, Textiles Apparel & Luxury Goods, Ground Transportation, Diversified REITs, Beverages, Gas Utilities, Construction Materials, Commercial Services & Supplies, Construction & Engineering, Water Utilities, Independent Power & Renewable Electricity Producers, Passenger Airlines, Containers & Packaging and Marine Transportation. These are grouped together as we have 2% or less exposure to each of them.

Sector mapping and biodiversity sensitive area exposure

The LEAP framework’s L2 question is: “where are the sectors, value chains and direct operations with potentially moderate and high dependencies and impacts located?”. So, we mapped our listed equity holdings using December 2022 AUM data and a heat map, to identify sectors where there is exposure to nature-related issues. This result was disclosed in the second iteration of the Nature and Biodiversity Toolkit, Investors Can Assess Nature Now (ICANN) guide, which was published in September 2023. We note that “a list of environmental assets, ecosystem services and impact drivers by portfolio sector identified in the heat mapping exercise in the Locate phase” is mentioned as one of the outputs of the LEAP framework’s Evaluate phase for financial institutions. From this exercise, we were able to understand key dependencies and impact drivers upstream and in direct operations, per each material sector, especially the dependence on terrestrial ecosystem use and water use, as well as impacts via water and soil pollutants and soil waste.

In addition to the general sector mapping using the Sector Materiality Tool as above, we worked with a number of investment teams to map their investment holdings to high freshwater and (agriculture-related) forest risk sectors and countries, two areas we are focusing on in relation to nature and biodiversity. Our approach to assessing and engaging in these issues is further detailed in the ICANN guide.

Finally, the other core sector metric recommended by the TNFD for financial industry is the exposure to companies with activities in sensitive locations (absolute amount or percentage of invested or owned assets for asset managers). Using reported and estimated data sourced by Sustainalytics⁵, our AUM exposure as of December 2023 was 5.57%, with about 81% data coverage for the in-scope companies. Where data is available on such sensitive locations, we will try to use it in conjunction with our analysis on material locations⁶, in order to identify priority locations and to prioritise companies for further assessment and engagement. We use many other indicators collected from various sources, as discussed in the ICANN guide.

In 2024 we plan to work closely with the Corporate Sustainability team to disclose our direct operation locations. Together we will start assessing impacts, dependencies, risks and opportunities in our offices using the TNFD’s core global metrics and documenting firm-wide processes for identifying, assessing and prioritising such nature-related issues in our direct operations.

³ TNFD (2023). Taskforce on Nature-related Financial Disclosures (TNFD) Recommendations

⁴ This figure therefore does not include material sector exposure of other asset classes that are out of scope (e.g. cash and derivatives)

⁵ According to Sustainalytics, ’Biodiversity-sensitive areas’ refer to Natura 2000 network of protected areas, UNESCO World Heritage sites and Key Biodiversity Areas (KBAs), as well as other protected areas, as referred to in Appendix D of Annex II to Commission Delegated Regulation (EU) 2021/2139, we view that this definition is aligned with the TNFD’s definition of sensitive locations

⁶ TNFD (2023). Taskforce on Nature-related Financial Disclosures (TNFD) Recommendations

It is our view that biodiversity and nature issues, if not properly addressed, can exacerbate the existing problems, or if better handled, can provide solutions to other issues.

In order to understand the relationship between our investment holdings, and their pressure on nature loss, we used the Science Based Targets Network (SBTN)/United Nations Environmental Program (UNEP) World Conservation Monitoring Centre (WCMC) Sector Materiality Tool. The goal was to understand how, at a sector level, our portfolio holdings may be contributing to the pressures that cause environmental degradation and nature loss. This year we assessed listed equities, but plan to expand coverage over time.

The tool presents materiality ratings for 12 impact categories, themselves grouped by five nature-related issue areas: land/water/sea use change, resource exploitation, climate change, pollution and invasives, and other⁷. This tool has been recommended by TNFD for sector-level research and is in line with the Encore tool⁸, which provides information on the materiality of potential impacts on a sector level.

As an initial exercise, we used this tool on our listed equities teams’ holdings⁹ to understand which pressure/impact categories are more material. This tool only has data for direct operations and upstream operations (i.e. supplier) in the supply chain; downstream (i.e. customer) impacts could not be assessed at this stage. Additionally, although the tool uses International Standard Industrial Classification of All Economic Activities (ISIC), we mapped our holdings using the Global Industry Classification Standard (GICS) subindustries (which is less granular than ISIC), due to data availability issues¹⁰.

Using a 5-point system to translate the materiality scores of Very High (VH), High (H), Medium (M), Low (L) or Very Low (VL), we found that climate change, with a score of 4.0 (High materiality), has the highest weighted average materiality score of the 5 nature-related issues. Our analysis found this is partly due to a relatively high materiality score for climate change in general, and due to our exposure in certain sectors like metals, packaged foods and healthcare.

Figure 2. FSI weighted average scores for nature-related issues

Source: First Sentier Investors as at 31/12/22, SBTN Sector Materiality Tool 2022

In order to break down which of the impact categories we have the highest exposure to, we aggregated sector-level AUM with a materiality score of 4 or more for each impact category and compared the result for upstream supply chain and direct operations. We found that we have a relatively high investment exposure in sectors with high GHG emissions impact in the upstream, but for water and most other impact categories we have greater investments in sectors with impacts occurring at a direct-operation level.

Through this exercise we observed that the overall scores for upstream tend to be lower than direct operation impacts, hence causing the discrepancy in results. It also showed the importance of addressing pollution and waste issues as well as climate change and water.

Figure 3. FSI AUM (A$bn) with high materiality to nature-related pressures

Source: First Sentier Investors as at 31/12/22, SBTN Sector Materiality Tool 2022

⁷ As defined by Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES)

⁸ Exploring Natural Capital Opportunities, Risks and Exposure (Encore) https://encore.naturalcapital.finance/en

⁹ Of the US$88.8bn of AUM across the listed equities teams as at 31 December 2022, US$65.7bn, or 74%, is in GICS Subindustries that could be mapped to nature-related pressures using the Sector Materiality Tool. Thus our analysis is based on this level of coverage. In the next iteration we plan to cover fixed income security holdings

¹⁰ We are in the process of incorporating the ISIC data into our holdings data and will aim to update the analysis using the ISIC.

We are also continuing to meet our requirements for the Finance for Biodiversity Pledge, an initiative calling for and committing to take ambitious action on biodiversity, as outlined in the table below.

Table 2. Progress made under the Finance for Biodiversity Pledge

Commitment	Progress made to date
Collaboration and knowledge sharing	Over the course of 2023, we joined more collaborative engagements and industry initiatives on nature and biodiversity, continuing our efforts made from the previous year Microplastic pollution engagement lead (since 2020) TNFD Forum member (2022) Responsible Investment Association Australasia (RIAA) Nature Working Group (2022) Hong Kong Green Finance Association Biodiversity Working Group (2023) Finance for Biodiversity Foundation Target Setting Working Group (2023) Cambridge Institute for Sustainability Leadership (CISL) ShareAction Biodiversity Hub member (2023) Spring (PRI stewardship initiative on nature) endorser (2023) Nature Action 100 investor participant (2023) Mining 2030 supporter (2023) Held multiple internal sessions to increase team members’ technical knowledge around nature and biodiversity Published Investors Can Assess Nature Now guide and engaged with stakeholders on our framework and learnings.
Engaging with companies	Use of the Natural Capital and Biodiversity Toolkit for company engagements on freshwater and deforestation Some investment teams have started identifying priority targets for engagement, collecting data and questions, following the engagement framework provided in the Toolkit.
Assessing impact	Conducted sector materiality and developed a heatmap across our listed holdings Monitored biodiversity-related indicators in the SFDR Principal Adverse Impact Engaged with various impact assessment service providers to start impact assessment.
Setting targets	Continued monitoring the development of the Science-Based Targets Network’s work on science-based targets for nature (land and freshwater) Reviewed Nature Target Setting Framework for Asset Managers and Asset Owners published by Finance for Biodiversity Foundation in November 2023 and started exploring options for target setting.
Reporting publicly	Continued to report on progress in our annual RI Report and other specific reports where appropriate.

We aim to develop a firm-level approach to key nature-related topics and sector guidelines. This will be accompanied by monitoring, progress reporting, and our assessment of various nature-related commitments made by investee companies.

We will continue to develop our work on scoping assessments using the Taskforce on Nature-related Financial Disclosures (TNFD). Along with this work, we aim to equip our funds with the resources to report on nature-related disclosure criteria, such as the ‘biodiversity sensitive area’ or ‘emissions to water’ indicators in the Principal Adverse Impacts of the EU SFDR.

Challenges

As a complex and interconnected issue, there are many challenges for investors.

We believe that assessing our exposure to water and deforestation, mapping various data points to our holding companies, assessing priority companies in depth, and engaging on material issues and gaps, can provide us new opportunities to understand our risk and dependency on nature. However, current data availability is patchy at best, and certain datasets are more accessible than others.

On a positive note, as more companies start to focus on this issue, there will be more opportunities for investors to assess nature-related risks, dependencies, and impacts. We believe improved disclosure is an important objective for company engagement, as this area continues to evolve.

Another challenge is approaching this topic in a more holistic way. Many financial institutions are already engaging with companies on other ESG issues like climate change or human rights. It is our view that biodiversity and nature issues, if not properly addressed, can exacerbate the existing problems, or if better handled, can provide solutions to other issues. This is especially relevant to deforestation issues, where nature loss, climate change and human rights abuse are often intricately linked in a certain biome or location.

Since signing the Finance for Biodiversity Pledge in 2021, First Sentier Investors has been working towards delivering 5 actions by the end of 2024 (see Table 2). The most challenging parts for us are Step 3: assessing impacts; and Step 4: setting targets. Regarding impact assessment, we are speaking with various providers of biodiversity footprinting methodologies, to understand their approaches and decide on a way forward for the firm.

A starting point for assessing impacts includes reporting fund-level nature-related disclosure criteria, such as ‘biodiversity sensitive area’ and ‘emissions to water’ indicators as part of the Principal Adverse Impacts disclosure under the EU SFDR.

On target setting, we will continue monitoring the development of the Science-Based Targets Network’s work on providing guidance for financial institutions’ target setting approaches. Target setting will be largely based on the progress made in impact assessment, as it would help us understand the baseline.

Our other plans include taking part in collaborative engagements on deforestation; making updates to the Natural Capital and Biodiversity Toolkit; and continuing to take a leadership role on engaging with washing machine manufacturers and policy makers on the issue of microfiber pollution.

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