Insights

Chris Dodwell, Lisa Beauvilain, IMPAX Asset Management

This article was first published in Environmental Finance.

Why does Impax see biodiversity loss as a crucial issue for investors?

Chris Dodwell: As a specialist investor in the transition to a more sustainable economy, Impax has been taking biodiversity into account in our investment approach for many years. But its importance has risen with growing awareness of the impacts and dependencies of economic activities on nature. For example, 13 of the 18 sectors that comprise the FTSE100 Index of UK company shares are associated with production processes with high or very high material dependence on nature.¹ One-third of global crop production depends on animal pollinators and three-quarters of crops are partially dependent on them.² Roughly 60% of medicines are based on natural organisms.³

A big part of the problem is that, as the Dasgupta Review of the Economics of Biodiversity for the UK government observed, nature and its processes are in large measure silent and invisible. This makes is it hard to assess how dependent our economic prosperity is on nature’s services, as well as how to trace our impacts on the natural world. We also recognise that, in comparison with the climate emergency, we are waking up late to the challenges that nature faces.

We have seen a significant increase in policy activity over the last year or so, as reflected in the Taskforce for Nature-related Financial Disclosure (TNFD), the nature-related pledges made at COP26 in 2021 recognising the linkages with climate action and interest in the COP15 UN biodiversity summit, held in December 2022.

All this means that nature is one of the top three themes that Impax is focusing on from both an advocacy and engagement perspective, as recognised in our updated policy on nature, biodiversity and deforestation.

How does Impax integrate biodiversity and nature into its investment process?

Lisa Beauvilain: The starting point of our analysis is what we call the Impax Sustainability Lens. We use it to assess how roughly 160 sub-sectors are exposed to particular sustainability issues, in this case their impacts and dependencies on nature and biodiversity. We use the Lens as a sectoral materiality map, helping inform our proprietary company-specific ESG analysis.

The whole discipline of biodiversity risk analysis is quite new, and data or metrics are still very scarce. So, if it has been determined that biodiversity is a material risk to a company, we’ll look at whether the company has processes in place to analyse exposures to biodiversity hotspots, for example and whether there are processes in place to manage and mitigate these exposures. We then give the company a score on its preparedness. We are engaging with exposed companies, focusing on several topics. These include whether companies have governance and oversight policies in place; how much transparency they have over their supply chains; and the extent that they measure and report the location-specific nature of their exposure, as well as plans for mitigating these risks and exposures.

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We see a lot of merit in the TNFD’s ‘LEAP’ approach, which encourages companies to locate, evaluate, assess and prepare or report on the biodiversity risks they face. It’s very well aligned with our approach.

Are there any investable solutions available which can prevent biodiversity loss?

Lisa: We’ve been investing in environmental solutions at Impax for more than 20 years, and a lot of those themes help to reduce pressures on biodiversity. We cannot solve climate change without solving biodiversity challenges, and vice versa, hence the linkages between their solutions are strongly aligned. We find it useful to think about addressing nature loss through the IPBES framework, which sets out the five most significant direct drivers of biodiversity loss: land-use change; overexploitation of organisms; climate change; pollution; and invasive non-native species.⁴

“We cannot solve climate change without solving biodiversity challenges, and vice versa, hence the linkages between their solutions are strongly aligned.” Lisa Beauvilain

For land-use change, solutions around food waste reduction, plant-based proteins, alternative feeds to soy, resource efficiency and circularity are all extremely relevant to addressing deforestation. On overexploitation, we could point towards sustainable aquaculture, although you must be extremely selective in identifying companies that are truly sustainable. Alternative animal feeds can also be a good solution here.

On climate change, obviously there is considerable overlap with our environmental and climate solutions, with sub-sectors like renewable energy or energy efficiency. When it comes to pollution, one of the biggest solutions concerns water treatment, but we also view testing as incredibly important – you have to begin with testing to understand where pollution is taking place. Plastic pollution is a big issue for marine biodiversity, though you have to be mindful about trade-offs. Reducing single-use plastic can mean you use more virgin fibres instead, potentially further accelerating deforestation.

Roughly 90% of global trade is conducted through shipping and it is responsible for enormous problems with invasive species, such as zebra mussels, in many regions of the world. Companies providing ballast water treatment provide an important example of an investible solution, however.

Chris: We are acutely aware that almost all of the investible solutions identified to date focus on reducing pressure on biodiversity. While this is a crucial first step, there are comparatively few examples where we can commercially invest in the restoration of nature.

So, we’ve been working with Imperial College London to find case studies where companies are investing in activities that restore nature in order to reduce risks and generate commercial benefits, such as supply chain resilience, cost reductions, revenue creation and commercial advantage. While it is difficult to find cases where biodiversity is the main investment driver, investing in things like climate mitigation and clean water can, and often do, bring substantial benefits to the preservation of natural biodiversity, and in a few cases help restore it. By shining a light on these examples, we hope to identify actions that industry and governments can take to facilitate nature-positive investments.

Which biodiversity-focused policy initiatives is Impax supporting?

Chris: Addressing biodiversity loss is intrinsically difficult due to limitations in our understanding of nature, the number of drivers of biodiversity loss and the lack of common definitions and metrics. To unpack these challenges, we decided to focus our initial efforts on deforestation, not least because of the clear links to climate action.

So, ahead of COP26 in 2021, we decided to join the Finance Sector Commitment to Eliminate Commodity-Driven Deforestation. Over the last year, we have been working with more than 30 signatories to share lessons learned on exposure to deforestation risk and effective investment policies, as well as kicking off joint engagement with companies on how to address deforestation within their supply chains.

“We have been working… to share lessons learned on exposure to deforestation risk… as well as kicking off joint engagement with companies on how to address deforestation within their supply chains.” Chris Dodwell

We also joined the Natural Capital Investment Alliance, which is focused on the ‘nature-positive’ element of the challenge. The Alliance has identified the policy frameworks necessary to encourage nature-positive investment, again starting with deforestation. In addition to the disclosure of nature-related financial risks, these frameworks should include national and sectoral policies in forest-rich countries; action by consumer countries, such as the new deforestation legislation in the EU; and the development of financial incentives to support standing forests, whether through carbon markets, intergovernmental payments or, interestingly, supply chains for premium, deforestation-free products.

But we also need to recognise that efforts to tackle other aspects of biodiversity loss are at a much earlier stage. A good starting point would be to break the challenge down into specific ‘biodiversity imperatives’ and develop clearer theories of change which set out more explicitly the role of public and private sector actors.

To what extent has the outcome from COP15 helped provide policy certainty?

Chris: There were five things we were hoping to get out of COP15. The first is a meaningful ‘apex target’ that would resonate with the general public, corporates and investors – something like halting and reversing biodiversity loss by 2030.

The second is a clear mechanism for translating that back into national policy action – the equivalent of the NDC [Nationally Determined Contributions] process that exists within the UN climate convention, where countries are required to set out how they are going to contribute to the global goals within their own borders and by supporting others.

Third, as signatories to the Make it Mandatory campaign, we have been calling for the inclusion of a requirement for companies and financial institutions to disclose their impacts and dependencies on nature.

Fourth, we wanted recognition of the need to align financial flows – both public and private – with the goals of the Convention on Biological Diversity – the equivalent to Article 2(1)(c) of the Paris Agreement, which has put the actions of both development banks and private investors in the spotlight.

Finally, we were hoping to see a call for reform and redirection of environmentally harmful subsidies. We were very pleased to see progress on all of the above in the Kunming-Montreal Global Biodiversity Framework. Although we welcome COP15 as a starting point, there is much work to be done in both implementing the framework and addressing important gaps in our approach to tackling this crucial challenge.

¹ EY, 2021: Waking up to nature – the biodiversity imperative in financial services

² Our World in Data, 2021: How much of the world’s food production is dependent on pollinators?

³ Sunil Mathur and Clare Hoskins, 2017. Drug development: Lessons from nature (Review)

⁴ Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES)