Investors Utilizing Biodiversity Data for Financial Decisions
UK Pension Funds and Asset Managers Embrace Nature-Focused Risk Management
In a significant shift towards sustainable investing, UK pension funds and asset managers are increasingly integrating nature-related risks and opportunities into their portfolio management strategies. This evolution is driven by a growing awareness of the impact of nature on financial stability, although the area remains relatively nascent compared to climate risk.
Strategies for Nature-Focused Investing
Pension scheme trustees are actively promoting education and board-level engagement on nature risks, extending governance frameworks initially developed for climate risk to encompass broader nature-related impacts. They are also beginning to engage with nature-related issues through training, risk assessments in dialogue with asset managers, and incorporating nature into trustee investment policies and beliefs documents.
Asset managers, meanwhile, are raising sustainable investing standards. Nearly all have ESG policies and sustainability teams, striving to meet evolving UK regulatory expectations, including stewardship codes and net zero commitments, while managing ongoing climate and nature risk disclosure challenges.
Scenario Planning and Stress Testing
Pension schemes are incorporating geopolitical and environmental risks into scenario analysis to enhance resilience. They are adjusting asset allocations to reduce exposures and increase investments in less exposed sectors like domestic infrastructure and green energy.
Challenges Ahead
Despite these proactive steps, challenges remain. The UK government and regulators acknowledge that nature-related policy is less mature than for climate, making regulatory expectations and frameworks less clear and evolving over a longer horizon.
Complexity in quantifying nature risk is another challenge, as nature-related impacts are more diverse, spatially varied, and difficult to measure consistently across portfolios. There are also concerns over the robustness and transparency of nature and climate reporting, limiting comparability and informed decision-making.
Industry Leaders Pioneer the Way
Phoenix Group, for instance, issues an annual due diligence questionnaire with a substantial sustainability section, updated to specifically probe tropical deforestation and water security. More than 60% of UK pension funds have adopted net zero targets, and Aviva Investors have done location-based assessments of biodiversity sensitivity for real estate acquisitions.
Aviva recently published its second transition plan, starting to take an integrated approach and including approaches to nature, adaptation, and just transition issues. Chris Hart serves as the nature investment strategy lead at Phoenix Group, while Eline Reintjes is the Climate & Nature investment strategy manager for Aviva's Insurance, Wealth and Retirement business.
Future of Nature-Focused Investing
The industry is still in the early stages of financial valuation or measurement of nature-related risks, but research institutions and data providers are looking at Nature Value at Risk metrics based on methods borrowed from climate. The ENCORE tool is used by Phoenix Group to assess risks in portfolios.
As the industry continues to evolve, complexities will arise, particularly around the increased availability of relevant data, such as how to ingest multiple different data sources, especially asset-specific data. Only 17% of UK pension funds express familiarity with the TNFD reporting standards.
Despite these challenges, the future of nature-focused investing looks promising. More than half of global GDP is either highly or moderately dependent on nature. Agriculture sees the greatest impact on asset values from nature-related risks. Phoenix Group introduced a nature-focused business plan in 2022 and piloted TNFD LEAP reporting in 2023.
In conclusion, UK pension funds and asset managers are proactively expanding ESG efforts to cover nature-related risks by embedding them into governance, risk management, and investment processes, supported by growing regulatory encouragement. However, challenges remain around the early stage of policy development, technical complexities in risk measurement, and improving disclosure standards.
- In an effort to better reflect the interconnectedness of financial stability and environmental factors, environmental science may play a key role in helping UK pension funds and asset managers assess and manage nature-related risks, such as climate-change and its impact on biodiversity.
- As UK pension funds and asset managers continue to integrate nature-focused considerations into their investment strategies, they may increasingly turned to the finance sector for opportunities to invest in industries with a lower environmental footprint, such as green energy or sustainable agriculture, thereby contributing to efforts towards mitigating climate-change and promoting environmental preservation.
