The cascading impacts of climate change and society’s overexploitation of the land and sea is giving rise to unprecedented devastation of nature and biodiversity. In the last 50 years, there has been a devastating 69% drop in wildlife populations1. The unfolding crisis is risking the very foundations of our economy, society and life itself, impacting humankind’s food security and access to clean water and air.
Investors need well-functioning economies and societies to create stable markets. Given our economies are dependent on nature and we cannot get to net zero without nature, it is in investors’ interests to limit nature loss and protect the ecosystems.
While many investors have started to identify and assess materiality, exposure and responses to nature-related issues, drawing from the framework outlined by the Taskforce on Nature-Related Financial Disclosures (TNFD), the topic is still relatively new.
We recognise that access to nature-related data can be challenging. It can be inaccurate, difficult to access, complex and not standardised. This is especially the case when seeking detailed commodity-related data at the country- or sector-level, which is either unavailable or in the development phase. Adding to this is the challenge of knowing what tools are available and when to use them, and alternate routes to conduct due diligence on investee companies.
To address these gaps and drawing from an approach we developed for our investment teams to use, we have launched a nature and biodiversity guide for investors to undertake nature-related company assessments and develop engagement approaches to biodiversity risks. Titled ‘Investors Can Assess Nature Now’, we focus specifically on freshwater and forests, two areas that we view as fundamental to both the global economy and the fight against climate change.
In our guide, we share a due diligence framework and the tools / resources to use for appraising and evaluating companies. We share an overview of the three critical steps we detail in our guide below.
Step 1: Identify and assess sector-level exposures, dependencies and impacts
- Specific sectors and industries are more likely to depend heavily on nature and be affected by nature-related risks and opportunities. A useful starting point for investors is to consider the water and deforestation risks in the priority sectors outlined by the TNFD, identified as being more likely to be financially impacted given their dependencies and impacts on nature.
- There are different water risks associated with different sectors. For example, sectors with physical assets such as real estate and infrastructure are vulnerable to flooding risks caused by storms whereas the textile and fashion, food and pharmaceutical sectors can be sensitive to water quality.
- The guide focuses on the sectors that produce or process agriculture-driven soft commodities such as soy, beef, palm oil, timber, and pulp and paper, because unsustainable production and sourcing of such commodities is a leading cause of deforestation. Financial institutions that lend to or invest in companies that process, procure or use such commodities can be also exposed to deforestation risks.
- Investors can add other data points to supplement the sector-level assessment, such as country-level water and forest risk data. Sector Materiality Tool and Heatmap exercise are useful resources to conduct this sector-level assessment.
Step 2: Company prioritisation and assessments
- A priority list of target companies can be developed based on the sector-level assessment and using available nature-related databases. These may include metrics such as water use, water intensity, water risk management or on the topic of forests, land and biodiversity use, sustainable agriculture programmes, and the strength of zero deforestation commitments. ESG data providers offer company-level data on many such metrics, although the availability of data from companies may still be limited.
- Once a list of target companies has been developed, the next step is assessing these companies more deeply using corporate reports, website disclosure and other existing resources such as industry white papers. This due diligence process should also consider the company’s location and supply chains.
- On freshwater, investors can examine how a company sources water, where the water is sourced from and used (locations), and how it manages and uses water (purpose and its role in the business). Linking the source location and its significance to business with location-based water risk data can provide insights into a company’s water-related dependency and impacts in addition to information on company’s water use management.
- On deforestation, identifying high forest risk soft commodities involved in company’s operation processes and products is an important step, then investors can assess related targets, certifications, sourcing policies or locations per each commodity. With improved traceability and supply chain disclosure on key commodities, we can expect to see more commitments and targets set out by companies to eliminate commodity-driven deforestation and land conversion.
Step 3: Company engagement
- Building on steps 1 and 2, it is important for investors to understand the materiality of the issues and develop clear objectives for engagements, setting time-bound implementation plans in those areas and sharing best practices with investee companies and linking to solutions. Going through a set of questions included in the guide can provide a framework for effective engagement.
- When there is a lack of disclosure on nature-related issues, investors can strive to make this topic better acknowledged and understood by the company, so that the company starts examining this issue especially in relation to their sourcing locations. During this process, investors can try to raise awareness in the existing resources and databases that companies can utilise to improve disclosure.
- Taking this approach is especially important given corporate disclosure on nature and biodiversity is still nascent. As investors and companies become more aware of the dependencies and impacts on nature, and as data becomes more available, investors can develop more outcome-driven objectives to engage with investee companies.
Assessing nature is not easy, even before considering quantitative analysis of risks, impacts and dependencies. The metrics and targets will be more complex than climate disclosure, and as the biggest global issues of our time are intrinsically connected, investors must take a broad view of not only nature and biodiversity but also climate change and human rights. Corporate data is still in its early stages, making it ever more challenging for financial institutions to navigate this yet unknown space. But we cannot let our unfamiliarity with the topic or the lack of data act as a roadblock to assess our risks in this area. This guide is intended to demonstrate that financial institutions can start their journey in assessing nature now.
1 World Wide Fund for Nature (WWF), 2022: “Living Planet Report”
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