Nature and biodiversity

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.

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 crucial to achieving a net zero and climate resilient future. Protecting nature is therefore in our own and our clients’ best interests.

In 2022, we convened a Natural Capital and Biodiversity Working Group made up of members across FSI investment teams globally, conducted an assessment of sectoral water and deforestation risk for Working Group members, and developed a framework for company engagement.

We also increased awareness of biodiversity internally and developed a knowledge base for our staff, in particular investment and distribution teams. Our investment teams understand the importance of this work, have the relevant data to assess their exposure, and some have developed a list of priority companies for engagement.

We became a member of the Taskforce on Nature-related Financial Disclosures (TNFD) Forum, along with 800 other institutions. As a member, we support a shift in financial flows toward nature-positive outcomes in following the development of target-setting methodologies and metrics by the TNFD and Science Based Targets Network⁵.

As a member of the Responsible Investment Association Australasia (RIAA)’s Nature Working Group, FSI provided technical input in developing Nature in Nutshell resources and shared our journey with other financial institutions.

Throughout the year, we also continued our engagement with commercial and domestic washing machine manufacturers and policy makers alongside other investors on the issue of plastic microfibre pollution.

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

Given the rise in extreme weather events in Australia over the past 18 months, the Fixed Income, Short Term Investments and Global Credit team engaged with Australian utilities to understand progress on bushfire management, and the Australian REIT sector around physical risks to climate change – for example, a Brisbane shopping centre was damaged beyond repair in 2022. The team also continued engagements with relevant companies on increasing recycling content in packaging.
Stewart Investors notes that when considering 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 (see feature on p. X) is a good example of an issue that cuts across multiple issues, including biodiversity, climate change and human rights.
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.

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 other¹. This tool has been recommended by TNFD for sector-level research and is in line with the Encore tool², 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’ holdings³ 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 issues⁴.

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.

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.

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

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

3. 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

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

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.

Over the last 18 months, studies have shown the effectiveness of filters on washing machines in capturing microfibres before polluting our aquatic ecosystems¹.

As outlined in our Responsible Investment Report 2020, FSI is leading, in collaboration with the UK’s Marine Conservation Society, a programme 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 2: Policy advocacy on microfibres

United Kingdom

On Wednesday 2 November, 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.

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 i 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.

It is due to hold a consultation early in 2023 on priorities, agreeing to include the issue of microfibre filters in that process.

European Union

As of January 2025, all new washing machines sold in Frssue,ance 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.

¹ (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)

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 Disclosure’s (TNFD). This is a new risk management and disclosure framework that aims to enable organisations to report and act on evolving nature-related risks. 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.

Quality data continues to be a major challenge. In the absence of solid company-level data on nature, our assessment relies on external data providers that are specialised in specific topics of nature such as water and deforestation. However, physical risk and company-level location data are not robust or comprehensive enough to connect company responses and practices with their exposures.

For example, we would encounter significant data challenges in mapping high-forest risk commodities such as beef, and their sourcing locations, for each company to assess how our investee companies’ supply chain is contributing to deforestation. We are, however, beginning to see more transparency from some of the leaders.

Engaging with companies on issues such as biodiversity, climate change and human rights cannot be done in isolation. We need to assess companies holistically, and in some cases, there can be trade-offs between these, for example mining copper in primary forests where indigenous communities are present, to support the rapid manufacturing of electric vehicles or solar panels. We need to better understand this nexus and set up a more holistic engagement framework, which will be a future focus.

A key output for the working group will be the delivery of a Nature and Biodiversity Toolkit, to provide step-by-step guidelines and a framework for assessing and engaging on nature-related issues in support of the investment teams. This will form the basis for our engagement on nature and biodiversity with investee companies. The Finance for Biodiversity Pledge – which we signed in 2021 – is an agreement initiated by a group of financial institutions calling on global leaders to protect and restore biodiversity through their finance activities and investments. As part of this commitment we continue to monitor our progress under each commitment (see table on p.33 for more details). This includes assessing our firm-level impacts to nature, which will start by understanding the approaches taken by various biodiversity footprinting methodology providers and mapping a path forward for FSI. Any targets we establish are likely to be dependent on the outcomes of the impact assessment.

We aim to develop a firm-level approach to key nature-related topics and sector guidelines.

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