Money talks: ESG, sustainable investing and biodiversity
In this article, we interview our Managing Director Stephanie Wray about how environmental, social, and governance (ESG) strategies and sustainable investing are delivering on biodiversity.
Sustainable investing is about investing in companies or practices that have a positive impact on the world. It has been growing in popularity over the past decade and today, 85% of individual US investors are interested in sustainable investing, according to a study by the Morgan Stanley Institute for Sustainable Investing. Investors look to ESG criteria to help screen potential investments to identify which are sustainable.
Biodiversity is now moving up the agenda in ESG criteria and sustainable investing. This year (2022) marks the release of the beta version of the Task Force on Nature-related Financial Disclosures (TNFD) framework and COP15, when the draft post-2020 Global Biodiversity Framework will be finalised to guide actions to live in harmony with nature.
We talk to our Managing Director Stephanie Wray, who has over 25 years of experience in biodiversity consulting, to get her insights on how ESG and sustainable investing are performing on biodiversity.
1. How do you feel ESG is working at the moment? Is it delivering the required outcomes?
Yes, companies are delivering the right outcomes through their ESG strategies, but I would say that it’s a bit of a mixed bag at the moment – some companies are making great steps in certain areas but others are still struggling to get to grips with it.
2. There is a lot of demand for ESG investment; do you think the options available to customers are meeting their needs?
There is a whole raft of opportunities to invest more sustainably. There is exclusion investing, where financial companies avoid investing in certain damaging elements, like perhaps fossil fuels, and there’s impact investing where they seek out more sustainable options to invest in, although those opportunities are somewhat limited at the moment.
Impact investing includes investing in renewable energy, green transport and sustainable agriculture (Image source: Andrew Roberts on Unsplash)
I think there is a shortfall in what’s available in line with the demand. Some companies are also not necessarily completely transparent, which makes it hard for your regular investor placing their pension pot to really understand what the money is invested in.
3. What areas of ESG do you think could be improved?
There’s definitely scope for improvement in all of them and I think the straightforward issues are being dealt with really well. Let’s take the ‘G’ for example: does the company have a policy about X or Y?
I think the next generation for ESG is around seeing where those positive impacts are happening and monitoring progress towards targets for being carbon net zero and nature positive, for example.
I think it’s certainly true that people are starting to get the idea that biodiversity is important and that they need to take it into account, but it’s not necessarily being actively included as part of companies’ ESG strategies just yet.
4. Do you think that companies are doing enough to include biodiversity in their ESG reporting?
Well, clearly not. Last year, we released the FTSE 100 biodiversity report card, in which we looked at how the top 100 companies by market capital in the UK were doing on biodiversity. The results were quite disappointing in many ways: although biodiversity was mentioned by a lot of companies, the evidence for active engagement was much more limited. We are working on an Asian stock market review of the same issue, in which we’ll be looking at the stock markets in Japan, Hong Kong, Thailand and Singapore. Again, we’re finding a similar pattern that companies haven’t got to grips with biodiversity.
5. What do you think is the future for ESG and sustainable investing?
I hope that there will be a point during my career when impact investing is just investing. That it’s not acceptable to invest in technologies or industries that are causing irreparable damage to the natural environment. I’m hoping that what we’re doing here is working towards a more regenerative economic system. I think there is a long way to go on that but there’s a huge amount of energy in the market about making this work.
6. What do you think are the biggest challenges preventing high quality ESG and consumers’ ability to invest sustainably?
The biggest challenge preventing people from being able to invest sustainably is understanding what is and what isn’t a sustainable investment.
I think mandatory reporting is going to help, rather than companies being able to disclose whatever bits of information they like about their corporate social responsibility performance. Mandatory reporting frameworks, such as the TNFD framework, will create a level playing field. We’ll all be reporting against the same standard so we can see where people are really sustainable.
This year, we have COP15, in which governments and organisations will be aiming to agree the Post-2020 Global Biodiversity Framework. Target 15 in that framework talks about reporting by companies and the big question on that subject will be “will we get the word ‘mandatory’ agreed within the clause?” If we have governments around the world committed to mandatory reporting on biodiversity and the natural environment, we can get a good idea about whether a company or an investment or product is sustainable or not.
COP15 will hopefully go ahead in August or September this year (Image source: Monika Kubala on Unsplash)
7. How do you think the pandemic has affected sustainable investing?
During the pandemic, a lot of people were spending time at home, slowing down and starting to think about how they engaged with the natural environment. I think that helped awaken an interest in sustainability.
It certainly drove a big push of interest at COP26 last year and I hope that the ‘pandemic effect’ of us feeling closer to nature will be sustained and will help us to build this movement towards a more sustainable economy.
The real danger zone is that now we’re all in this mindset that the pandemic is over, people may start to go right back to business as usual and push too far the other way.
8. How do you see the TNFD affecting businesses?
I think it’s a positive step, as this is the first time there’s been a general framework for businesses to work to. Businesses can be compared against a standard and other businesses to objectively measure their performance. It’s a really important step forward and I hope that lots of businesses will get behind TNFD.
I think we should really try and make it an industry standard, even if the government doesn’t make it mandatory, in the same way that ISO 14000 is the general standard for environmental management systems, even though it has never been made mandatory.
Let’s make it the basic standard you must adhere to. I’m using the term ‘basic’ here deliberately: I don’t think the TNFD is a low standard, but I think it shouldn’t be the ceiling of our ambition.
9. What steps can businesses take to establish high quality ESG frameworks?
I think the first thing businesses need to do is understand where they are now. It’s critical that organisations do that stocktaking to know where they’re starting from.
Businesses need to make a stand about what their red lines are; for example, making sure their value chains don’t include any embedded deforestation. These red lines need to look beyond direct operations to include everywhere the company can have an impact.
Lots of organisations have shied away from addressing their Scope 3 impacts. We have until 2030 to reverse the tide of biodiversity loss, so we can’t spend the first ten years just looking at our direct operations, we need to look at the whole value chain right now.
10. What should investors be doing to ensure they consider ESG comprehensively in their portfolios, for example, filters and assessment criteria?
There are lots of tools and rating agencies out there that can help with this. They’ve all got different strengths, but I would say that from our perspective, none of them go into a great deal of detail on biodiversity.
Biodiversity is a tricky one and I think it’s important to dig a little deeper into biodiversity than for other topics. With biodiversity, the impact of doing exactly the same thing with exactly the same materials will differ depending on where they’re doing it. People need to geospatially reference their portfolios in more detail than perhaps they do for some of the other ESG impacts.
The risks to nature of a potentially polluting activity are much greater in a biodiversity hot spot than in a city suburb (Image source: Jeremy Bezanger on Unsplash)
Thank you, Steph, for your insights into this topic.
Does your business want to invest sustainably or are you looking to refine your ESG performance? Nature Positive can provide expert advice to help you understand how nature is at the heart of ESG, to take a closer look at how biodiversity impacts your investments or to provide support in investment screening options.
Nature Positive article authors: Steph Wray and Luka Brown
*Banner photo by Alexey Marchenko on Unsplash