Subscribe and listen on your favorite player:
- Curtis File, Editorial Manager, ESG and Sustainable Finance
- Sune Andersen, Manager, Stewardship
- Dr. Simon Butler, Associate Professor, University of East Anglia
- Gayaneh Shahbazian, ESG Research Manager, Biodiversity
The statistics are troubling. In October of 2022, the World Wildlife Fund’s living planet report found that wildlife populations have declined by an average of 69% in the past 50 years.1 The International Union for the Conservation of Nature (IUCN) estimates that as much as 28% of all species are facing extinction.2 In the face of these troubling numbers, investors must take action to ensure their investments aren’t doing more damage to an already vulnerable ecosystem.
In this episode of ESG in Conversation, we’re exploring the question: how can investors address biodiversity loss? You’ll hear from Dr. Simon Butler, a professor whose work in acoustic ecology highlights the urgency of our need to address biodiversity issues. You’ll also hear from Morningstar Sustainaltyics’ stewardship and ESG research teams, with insights about investor engagement on biodiversity and the challenges corporations face when disclosing on nature-related risks.
|00:03||Biodiversity in Decline|
|02:10||Scientists Sound the Alarm on Biodiversity|
|04:17||Reconstructing Natural Soundscapes|
|06:43||Investors and Regulators Engage on Biodiversity|
|09:42||The Importance of Good Stewardship|
|10:30||Initiatives to Support Nature-Related Disclosures|
|13:42||Are Companies Ready to Disclose on Biodiversity-Related Risks?|
|15:16||Data Gaps Hinder Disclosures|
|15:53||Investors Must Be Mindful of Greenwashing|
|17:58||Is It Really Possible to Address Biodiversity Risks In Time?|
|00:03||Curtis File: When I was a kid, I spent a lot of time playing out in nature and camping. And one of the things I remember most from that time is the noise. The chorus of nature. |
Now, as an adult, I can't help but notice it's gotten a lot more quiet. That is thanks in large part to a dramatic loss in biodiversity. In October of last year, the world wildlife fund’s living planet report found that wildlife populations have declined by an average of 69% in the past 50 years.
|00:41||Sune Andersen: Biodiversity at the moment is declining and as measured, has been declining in Europe for a very long time and is still declining, but especially also in some of the key biodiversity areas around the world. Southeast Asia, South America, Africa, we're seeing a very steep decline and biodiversity is estimated at around 50% of natural ecosystems have now been declined and around 28% of species are threatened by extinction.|
|00:53||CF: That’s, my colleague, Sune.|
|00:54||SA: Hello, my name is Sune Andersen, and I am a manager in Morningstar Sustainalytics’ stewardship team.|
|01:01||CF: In spite of the dire numbers, Sune is hopeful that change is coming. He says that investors have taken note of the urgency.|
|01:08||SA: investors are really the actors within the market that is most focused on biodiversity so far. They are the ones who are most advanced of thinking about setting targets and have strategies, whereas companies are a bit more behind and that also creates a really important opportunity for investors to then engage with companies and to use their influence to ensure that the companies are appropriately managing their both impacts and dependencies on biodiversity.|
CF: I’m Curtis File, Editorial manager with Morningstar Sustainalytics and your host for this episode of ESG in Conversation – the podcast where ask big questions about ESG and use interviews, research, and storytelling to uncover the answers.
In this episode, we’re asking, just what is the role of investors in ensuring that we protect biodiversity?
|02:11||CF: Investors might be driving change in the markets, but, as usual, its scientists that are sounding the alarm.|
|02:18||Dr. Simon Butler: You know, I can remember, similar to you, that being out and hearing, sort of, vast numbers of different species and individuals, and you don’t get that now.|
You know, I grew up in rural Kent, in the southeast of England in a little village. Spent a lot of my youth just outside walking, exploring. And that's been at the heart of my studies ever since.
|02:40||CF: That’s Dr. Simon Butler. I’ll let him introduce himself.|
|02:44||DR. SB: Yeah, sure. Hi, I’m Dr. Simon Butler. I’m an associate professor at the University of East Anglia in the UK with a particular interest in conservation biology and acoustic ecology.|
|02:54||CF: Dr. Butler wanted to better understand the implications of these changes to our natural soundscapes. So, he turned his attention towards bird populations.|
|03:03||DR. SB: In recent years there've been a couple of really big papers, both in the US and in Europe, that have thought about or reported on large scale declines in biodiversity.|
So, in the States it's been 3 billion birds lost from the American avifauna over the last five or six decades. And in Europe we've lost 600 million birds from the European avifauna over the last three or four decades.
It's really difficult to understand what that means for us as individuals as we go about our daily lives. And so, I was trying to think about ways that we could interpret those kinds of data to reflect more tangible impacts of biodiversity, decline at the individual level.
We had a huge number of people that take pleasure from watching and reporting birds and collecting data on birds. And we have large scale citizen science projects where volunteers will go out and collect fantastic datasets on bird abundance and species reach right across the globe. And those kind of massive datasets have been really, really useful into exploring some of these large scale questions.
|04:06||CF: Thanks to the abundance of data on bird populations, Dr. Butler was able to look back at historical records and reconstruct soundscapes of the past.|
|04:17||DR. SB: There are hundreds of thousands of sites across the two continents that recorded every year. So, we have a fantastic dataset there. And we also have online repositories of recordings of individual bird species. So, we can download sound files of American Robin or Eurasian Skylark or, you know, different species. We can get individual sound files.|
So, we took the list of species and number of individuals of those species and combined that with recordings of those species. So, if we started with an empty sound file and we had it was recorded that there were three American robins as the first on the list, we would insert three sound files, for American robins into our soundscape. And then move onto the next species in the next species, and layer up those different sound files to build a composite soundscape.
And so, if you have a really rich biodiversity, then you have lots of different types of song and call in the area. And you can measure the diversity of the sound there. And you can, sort of, compare it perhaps to an orchestra.
When you've got a full orchestra, each of those different instruments might be a different species. And each the players of those instruments are individuals of that species. When you’ve got a full orchestra, you've got that really rich sound. But as species composition changes, as we lose individuals of species, so you start to lose players from that orchestra. And the sound quality and diversity reduces as a consequence.
|06:02||CF: And so now we know that a soundscape that once sounded like this...now sounds like this.|
|06:23||DR. SB: What I hear now compared to what I would have heard 30 years ago is very, very different. And part of the reason that we did this piece of work was this concept of shifting baselines. And that's what we hear now, and what my kids here now, they think is normal and what it should be like. Whereas what we had 30 years is dramatically different.|
|06:41||CF: Thankfully, investors are beginning to listen as scientists like Dr. Butler are sounding the alarm. And they’re maturing in their understanding of how biodiversity issues relate to so many of our most important industries.|
|06:54||SA: From an investor perspective, biodiversity is also fundamental to many of the companies that they have invested in. Agriculture, for example, depends on biodiversity for their agricultural produce. Both for pollination but also for the fertility of the soil. Less recognized is the pharmaceutical industry is also to a high degree dependent on biodiversity. For example, the medicine, penicillin, the antibiotic that has saved more than 200 million people's lives, was actually derived from a fungi called penicillium. And this is just one case of many other medicines that have been derived by looking into what is available within biodiversity.|
And I think with all companies that are now being increasingly impacted by climate change, they will also see impacts in relation to biodiversity loss because biodiversity is so integral for our ability to mitigate climate change, but also to adapt to the extreme weather events that we're seeing and so forth.
|07:52||CF: As a result, there has been a more general push from investors and regulators for companies to address their impacts on biodiversity loss. Most recently , in December 2022, 196 nations adopted a new Global Biodiversity Framework (GBF) at the UN Biodiversity Conference (COP15). The framework is a multilateral agreement which sets out global targets to address biodiversity loss, restoration of ecosystems, and the protection of indigenous rights.|
Gayaneh Shahbazian: What is happening within the framework is there is a focus on especially high impact industries.
So, for example, target seven is looking at pollution. So, pesticides and hazardous chemicals as well as plastic pollution. So, that will have implications for primary industries that will need to identify sources of pollution across the value chain and reduce those sources of pollution or invest in alternatives.
|08:48||CF: That’s my other colleague, Gayaneh.|
|08:51||GS: My name is Gayaneh Shahbazian, and my job title is, ESG Research Manager for Biodiversity.|
|08:57||CF: Other important regulations putting pressure on investors include the EU Taxonomy and Sustainable Finance Disclosure Regulation, or SFDR.|
The EU Taxonomy aims to provide a standardized system for defining exactly what counts as a sustainable economic activity. Economic activities included in the Taxonomy must contribute to one or more of the defined sustainable objectives, which include the protection and restoration of biodiversity and ecosystems.
The SFDR, on the other hand, was introduced to improve transparency in the market for investment products. And it requires investors to report on one biodiversity-specific Principle Adverse Impact. These are activities negatively impacting biodiversity-sensitive areas.
So, as the regulatory landscape continues to expand, just how can financial institutions and investors conduct biodiversity due diligence to make meaningful decisions? Well it starts with good stewardship.
|09:53||SA: As an investor, some of the things you can look for when you're engaging with a company could be whether the company recognizes biodiversity as being a material topic. Whether the board of the company has oversight and sufficient expertise to address biodiversity loss. How the company has assessed its impact, its risks and opportunities associated with biodiversity loss. What is the company's strategy then to actually address these risks and opportunities and what targets is the company set to then actually make sure that it's meeting its goals and ambitions in relation to its strategy?|
|10:31||CF: To help address this, there are a number of initiatives being developed. The task force on nature related financial disclosures, or TFND, is playing a pivotal role in this regard.|
|10:41||GS: So, the TFND is a market led initiative launched to develop disclosure recommendations for companies and financial institutions to report and act on nature related risks and opportunities. And ultimately the aim is to support a shift in global financial flows away from negative outcomes and towards nature positive outcomes. It's following in the footsteps of the taskforce on climate related financial disclosures, and the final version of the recommendations are due to be released in September.|
|11:16||CF: In addition to disclosure recommendations, the TFND has been developing guidance for companies and financial institutions. And that guidance is called the LEAP framework.|
GS: So, the LEAP approach is voluntary guidance to support companies and financial institutions to undertake a nature related risk and opportunity assessment. So not everything within the LEAP approach is being asked to be reported within the disclosure recommendations.
And moving on to A, once you understand your dependencies and impacts, you can Assess your risks and opportunities to your organization. And as well, consider what action are you currently taking to mitigate and manage these risks and opportunities, and what additional actions should you be taking?
|12:55||CF: To help companies and investors take action, the Science Based Targets network has developed science-based nature targets.|
|13:02||GS: The Science Based Target Network is finalizing methods which will enable companies to set science-based nature targets. So, those are currently set up for companies. But the SBTN also has developed a framework on action to take, which can be supported by investors. So, the steps in this framework draw from the mitigation hierarchy that prioritizes the avoidance and reduction of negative impacts prior to restoration and offsetting.|
|13:33||CF: So, the regulations are rolling out. And the frameworks are in place. And the regulations are rolling out. But, are companies ready for it? Well, not according to Morningstar Sustainalytics research. |
GS: Well, our research shows that companies highly exposed to biodiversity and deforestation issues are not prepared to address nature related risks. So, for example, 41% of the utility industry and 47% of oil and gas producers either have a weak or no biodiversity program in place. And we also looked into the deforestation programs of companies within the agricultural value chain and found 62% either have a weak or no deforestation program.
And we also found that not many companies are disclosing targets either. We only found 17% of companies reported about of is to target. And that, unsurprisingly, equates to a lack of action as well on biodiversity. So, we found that only 21% of companies are currently implementing the mitigation hierarchy, which is an approach that prioritizes the avoidance and reduction of negative impacts on biodiversity.
And this is really important to integrate biodiversity issues at the governance level, to have it incorporated within decision making, within decisions around strategy, and finance as well. But, it doesn't look like companies are currently incorporating biodiversity within that governance. We found that only 33% of companies have managerial or board level oversight on the topic.
|15:16||CF: One of the main challenges holding companies back is a lack of data.|
|15:20||GS: That's particularly tricky for companies with long and complex supply chains. And that frameworks such as the science based targets, the nature, they are finalizing their methods on target setting. And within those methodologies there's a wealth of information on tools and resources on how to prioritize target setting. And also data sources that you can find in order to prioritize and set your targets.|
|15:53||CF: As companies struggle with addressing their data gaps, investors will have to be mindful of greenwashing.|
|15:58||SA: What we do see in relation to biodiversity is that some companies kind of address the low hanging fruits first, and not necessarily the most material impacts. So, you see companies disclosing that they have done a great initiative for biodiversity because they have been out planting trees. Or they have been not mowing their land for the past month. Which and have, good to okay benefits for biodiversity. But planting trees could also have a negative impact.|
|16:30||CF: Preventing greenwashing means investors will have to be strategic in the way they engage companies. They have to of not only the companies they invest in, but their whole value chain.|
|16:40||SA: I think there is two key points to be made there. One is that, you as an investor, you are focused on the financial risk associated with these impacts on biodiversity. And those financial risks are not going to be only for those companies that have a direct impact on biodiversity.|
So, when companies are going to have to disclose on the impacts of biodiversity, that includes their whole value chain. So that can also introduce reputational risk to that company that is further down the supply chain. That don't necessarily have the direct impacts. The second reason for why you want to engage with not only those companies that have a direct impact is that by focusing on the whole value chain, you're actually taking multiple parts of the value chain into effect to address the issue.
One example is that we're speaking with a commodity producer and trader and they mentioned to us that they are currently experiencing an increased focus from their financiers to actually address biodiversity loss as well. So, when we as an engagement provider are engaging with both the financiers, and also the customers of those companies that have direct impacts on biodiversity, we're actually using multiple ways of influencing that company indirectly.
|17:58||CF: All companies will eventually be required to disclose their impact on biodiversity. But it begs the question: is it really possible to address all of the complex issues around biodiversity through these frameworks and regulations? Possibly, but we’ll have to work fast, and work together.|
|18:14||GS: Incorporating local stakeholders in, you know, including local communities or indigenous people when you're tackling biodiversity is fundamental. Otherwise it's game over as well. So, the only solution is to do this all together. It's nature positive, it's net zero and a just transition. It's all got to come together. We can't just address them separately. There's not time for that and it wouldn't make sense to do so.|
|18:52||CF: That’s it for this episode of ESG in Conversation. If you’d like more information about investor engagement on biodiversity, head over to resource center at sustainalytics.com or reach out to our biodiversity engagement team.|
If you have any questions, or suggestions for topics you’d like to learn more about, email us at [email protected].
Thanks to Gayaneh, Sune, and Dr. Butler for joining me today and providing their insights.
1. World Wildlife Fund. 2022. Living Planet Report 2022 Building a Nature-Positive Society. https://wwfint.awsassets.panda.org/downloads/embargo_13_10_2022_lpr_2022_full_report_single_page_1.pdf
2. International Union for the Conservation of Nature. “The IUCN Red List of Threatened Species.” Accessed on May 16, 2023. https://www.iucnredlist.org
What’s Happening in Sustainable Finance: Green Bond Standards on the Horizon and Much More
In this month’s round up of sustainable finance deals and developments, we look at what the EU Green Bond Standard could mean for the market, innovations in use of proceeds, and the ongoing diversification of industries tapping the market.
What’s Happening in Sustainable Finance: GSSS Market Rebounds, Sovereign Sustainable Debt, and Much More
Get caught up on developments in the global sustainable finance market. This month, we discuss market performance for the first part of the year, continuing scrutiny of SLBs, and the growing group of sovereigns exploring sustainable debt opportunities.