Midway through the COP15 biodiversity summit in Montreal, Canada, where the world’s policymakers are setting the future direction on nature, focus is turning today to the role of finance for a nature-positive world.
Natural capital plays a vital role in our economy and society with over half of global GDP, $44 trillion, dependent on nature and its services. Preserving and restoring nature can make a powerful contribution in efforts to mitigate climate change.
So what does Andy Howard, our Global Head of Sustainable Investment, who is in Montreal for the summit this week, have to say about challenges, hopes and opportunities in this space?
How is Schroders approaching natural capital?
“The reality is stark: nature risk is fast becoming an integral factor to investment risk and returns. That’s why we released our first company-wide Plan for Nature in late 2022, drawing together our action to date and setting a future direction for the action we are taking to tackle the causes and implications of nature loss. A wide gulf remains between the social value of ecosystem services and their market value. We expect that gap to continue to close, creating financial risks and investment opportunities. Incumbent businesses dependent on dwindling natural capital will come under increasing pressure. New asset class opportunities are emerging to capture growing demand for nature positive impacts.
“At Schroders we have focused on three areas in our own approach to biodiversity and nature. First, to understand the exposures, risks and impacts for the companies and assets we invest in. Second, to use our voice and influence to engage with management teams – particularly among the most directly exposed companies – to push for more information on the steps they are taking and to encourage more action. And thirdly, to develop natural capital investment solutions that can help channel capital into assets that can create nature benefits.
“Earlier this year, we published an Engagement Blueprint covering our engagement priorities and expectations as firm. That has six key areas of focus, of which biodiversity is one.
“Over the last three years we have undertaken more than 200 engagements on the topic and are actively working on expanding that outreach.”
“We invested in Natcap Research, which has developed and is rolling out a world class framework to assess biodiversity at an asset level, and working with the team there has been very important.
“At Schroders, we also announced our investment to establish a natural capital focused asset manager in Singapore, in a joint venture with Conservation International, as well as work in other regions across the wider Schroder Group to develop similar investment solutions.”
- Watch: What is natural capital?
What challenges does it face in doing so?
“On the first of those points – analysis – we have developed models and tools to help us identify the companies and industries where risks are biggest and the companies doing least in those areas. We’ve leant on a growing body of work that has built up over the last few years, but it’s a work in progress.
“Certainly, we are starting to see more disclosures and more information on which to base decisions, but there is a long way to go. The data today is far from perfect. But that doesn’t mean we shouldn’t use the information we have to make the best assessments we can, even if we recognise that the quality of that analysis will improve in the future.
“A key purpose of our industry is to connect capital to the areas of greatest social and economic need. Nature is a very clear examples of ways we can, through innovation and by developing an effectively new asset class, connect that capital to that challenge.
“The challenges and opportunities a growing focus on biodiversity will create are going to stretch across the industry. This is not just about exciting new products, but also how we manage all of the investments we manage – the analysis we apply, the influence we bear and the innovation we can bring as an industry.
“We’re at the start of a longer journey but it’s a journey that looks both critical and inevitable.”
Hopes for COP15?
“Greenwashing headlines have underlined the importance of transparency; and the antidote is honesty, transparency and consistency. That’s why, for example, ahead of COP15, we've signed Business for Nature's Make it Mandatory campaign, calling on mandatory disclosure for all large businesses and financial institutions of nature-related impacts and dependencies from 2030.
“Right now, the value placed on nature and the services and benefits it provides is tiny relative to its real value, and that is creating too little incentive to act, relative to the action we need to see.
“We have spent years focused on climate risks, and those risks are very significant.
“But they are symptomatic of a bigger challenge that is often missed – the mathematical unsustainability of growth that for decades has relied on consuming finite natural resources.
“The costs of that growth are becoming clearer. It’s still in its early stages, but our job is to look forward.
“Despite all the rhetoric only 11% of the carbon output of quoted companies has a validated Science Based Target.
“Today just 3% of global climate finance goes on natural climate solutions, yet it can provide 30% of the climate action needed.
“So the climate threat and opportunity for investors is very significant and very urgent.
“Although climate may be where the assessment of nature’s importance starts, it will not be where it ends. It’s hard to overstate the value of natural capital and biodiversity. The evidence clearly underlines the importance of nature to economies, societies, industries and therefore investments.”
- See our Plan for Nature to understand our whole-business approach to managing nature-related impacts and exposures, from research and analysis and engaging with companies, to developing nature-based investment solutions.
In case you missed it
And in case you missed it, here is a recap of other recent news and views from Schroders.
“You don’t have a choice whether your investments are exposed to nature or not.” As nature is destroyed and species are being wiped out, the world is racing to find solutions. This Schroders TV episode looks at how investors can unpick the blurred lines of solutions like carbon capture and carbon avoidance, all while avoiding greenwashing.
As COP15 kicks off in Canada, Catherine Macaulay and Niall Smith join the pod to discuss why this COP could be a pivotal moment for nature.
The UN’s environment chief has set the scene ahead of the biodiversity summit in Canada, warning we are “at war with nature” and must “make peace”. There are five key areas of impact for investors to watch.
Markets are underestimating the fundamental role that the preservation of nature plays in the race to net zero, according to our Environmental Economist Irene Lauro.
As it matures and evolves across asset classes and geographies, Andy Howard, Global Head of Sustainable Investment, considers the future of ESG and impact.
We attach financial values to many assets. But why don’t we do the same with finite natural resources – which our economic activity and entire wellbeing depend upon?
Here’s a summary of what happened at COP27 in Egypt and what to look out for at COP15.
We explain some of the most important climate-related financial initiatives – including their focus and what they seek to achieve
See how our attention is zooming in on this aspect of biodiversity and natural resource constraints.
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The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.