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At AlbaCore, we focus on the long-term. As one of Europe’s leading alternative credit specialists, we invest in private capital solutions, opportunistic and dislocated credit, and structured products. 

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Specialist in Asia Pacific, Japan, China, India and South East Asia and Global Emerging Market equities.

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Our philosophy is very simple. We are constantly searching for high quality businesses and when we acquire them, we will work relentlessly with them to create long-term sustainable value through innovation, ESG-led and proactive asset management.

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formerly Realindex Investments

Leader in active quantitative equities across Australian equities, global equities, emerging markets and global small companies.

Backed by a unique blend of research, portfolio construction and risk management, focused on uncovering original insights and translating them into investment strategies that are active and systematic, aiming to generate alpha.

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Specialists in equity portfolios in Asia Pacific, emerging markets, global and sustainable investment strategies

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Nature and biodiversity

Why is it important to us?

Nature is the foundation of our economy, society and life itself, and biodiversity supports all life on our planet. However, biodiversity is eroding at a pace that is severely damaging the natural ecosystems that provide us with food, water and clean air. This in turn poses significant risks to economic, financial and social stability.

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.

What is First Sentier Investors doing?

In 2022, we convened a Nature 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 900 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 Network.

As a member of the Responsible Investment Association Australasia (RIAA) Nature Working Group, FSI provided technical input in developing Nature in a 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 team progress

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

Fixed Income, Short Term Investments and Global Credit

Given the rise in extreme weather events in Australia in recent years, 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

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 (see feature) is a good example of something that cuts across multiple issues, including biodiversity, climate change and human rights.

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.

Global developments in biodiversity regulation

  • 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.

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

Reporting on progress

Sector materiality mapping

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.

Figure 10. 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 11. 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

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.

Table 3. Progress made under the Finance for Biodiversity Pledge

Commitment Progress made to date
Collaboration and knowledge sharing
  • Joined Taskforce on Nature-related Financial Disclosures (TNFD) Forum
  • Contributed to RIAA Nature Working Group
  • Held internal sessions to increase team members’ technical knowledge around nature and biodiversity
  • Part of the content in the Toolkit relevant to the finance industry will be publicly available, as a way for us to share our framework and lessons learned with our stakeholders more broadly.
Engaging with companies
  • In the process of finalising a Nature and Biodiversity Toolkit (internal resource) that will form the basis of company engagement on the issue for all relevant teams
  • Teams are in the process of identifying priority targets for engagement using the information provided in the Toolkit.
Assessing impact
  • Assessed sectoral water and deforestation exposure as a baseline for future analysis
  • Conducted an initial assessment of impact assessment tools and services offered by third parties.
Setting targets
  • A firm-level approach to key nature-related topics and sector guidelines is in development
  • This will be accompanied by monitoring, progress reporting, and our assessment of various nature-related commitments made by investee companies.
Reporting publicly
  • We will continue 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). 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.

Challenges

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.
 

Future plans

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 3, above, 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.

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