VyraNews #18: Why Training Senior Leaders on Sustainability is So Painful Copy

VyraNews #2: How Investors Assess Biodiversity Risks and Opportunities

Vyra Newsletter

Sep 27, 2023

Welcome Back/Hello Newcomer,

Did you know that 75% per cent of all bank loans in the Eurozone alone are to companies that are highly dependent on at least one ecosystem service?

Companies globally depend on ecosystem services to continue producing their goods and providing their services.

If nature degradation continues at the rapid rate that it is currently, companies will suffer, banks’ credit portfolios will become riskier and securing future investment becomes more and more difficult.

The financial and future implications are very clear. With that being said, let us dive deeper into a different perspective…

The perspective of an investor and how exactly companies are being assessed when it comes to biodiversity.

So, what are the frameworks and tools being used by investors?

Find out in this interview with Eoin Fahy, Head of Responsible Investing at KBI Global Investors Ltd.
Listen or watch this 1 hour podcast 

Additional Resources ⚙️

TNFD Data Catalyst Programme (document)Investor Data Providers:MSCI ESG Research (website)Morningstar Sustainalytics (website)Biodiversity Self-Assessment Frameworks:TNFD Getting Started (document)Encore (website)SBTN Assessment Tool (worksheet)Biodiversity Training Programme (brochure)

Q&A with Eoin Fahy

Your questions, answered.

Q1/ How can one engage / inspire suppliers on biodiversity, how to identify the right biodiversity projects with them, how to track, how to set appropriate targets etc?

My perspective is that of an investment manager and thus is somewhat limited when it comes to a detailed implementation query like this. But for example it would be reasonable to ask suppliers firstly whether they have taken any measures to measure and/or manage their dependencies on biodiversity and their impact on biodiversity? If yes, what are the steps that they have taken to date and how do they plan to develop them further over the next (say) two to three years? More specific questions might include questions such as whether their products are in any way associated with deforestation (and if so, how is that assured/verified), who has responsibility for biodiversity at management level and at board level, and whether the supplier has set any targets? Most suppliers will at this stage probably have quite weak answers to these questions, so I would - for now anyway - start by asking questions rather than imposing mandates or restrictions on suppliers - unless the supplier is taking no action of course in which case you could consider what actions to take.

Q2/ How do we get board approval for a net-zero plan when the spend to remove carbon is so eye watering-ly high? We are a public company with relatively low emissions but spend will still be extremely high to remove enough carbon to get to net-zero.

I am surprised at the assertion that the spend to remove carbon is eye watering-ly high. It is my view that this is not the case for most companies and in many cases, indeed, a focus on reducing energy use/increasing energy efficiency can actually produce net savings rather than net cost. We also know that electricity produced from renewable sources is, generally speaking, about the same cost as electricity produced from fossil fuels (while acknowledging that of course this can vary by country, fuel source and over time). However, even if the cost is high, I would suggest that in practice there is little choice at this stage. There is an overwhelming scientific consensus that carbon emissions have to be reduced sharply to avoid a planetary disaster and that will (and to some extent already has) found its way into policy and regulatory frameworks around the world. Fossil fuels will surely become ever more expensive and "ethically" more difficult to justify to stakeholders - and companies that take action on this earlier rather than later will be best placed. In my view, reducing carbon emissions is thus a sound financial decision in most cases, and a sound business decision in virtually all cases.

Q3/ Is the TCFD going to be mandatory as the TNFD is past a certain threshold?

Some countries have already made TCFD mandatory and I think it is already becoming essential "in practice" for large listed companies. I expect many more countries to make it mandatory in future and it's also important to also note the role of accounting bodies which have oversight over accounting and financial reporting standards worldwide - they too seem likely to make TCFD mandatory for larger companies, it seems to me.

TNFD is likely to follow the same path I believe, though a few years behind of course as it is far newer.

Q4/ Is a company required to publish TNFD for each resource? Such as water, soil, wood/forests..

TNFD is not (yet) mandatory for any company so the word "require" is perhaps incorrect. But on the bigger point the ‘N’ in "TNFD" relates to Nature, of course, and so TNFD asks organisations to report on their dependencies, impacts and opportunities with regard to Nature in general. Each company/organisation would have to arrive at its own determination as to which items would be material given the nature of the company. Though it strikes me that it is hard to think of any business anywhere where forests and water are irrelevant (few businesses don't use paper or consume water).

Q5/ Why does there seem to be so few biologists/ecologists employed within companies? What is the barrier in place for this particular challenge?

I would suggest that it is not necessary to be a biologist to begin to assess a company's dependencies, impact and opportunities with regard to Nature. Perhaps very large companies will need to employ biologists and/or ecologists but I doubt it is necessary, or practical, for most companies. The TNFD has provided a wealth of resources that will allow most small or medium size companies to carry out its own assessment. Don't let the perfect get in the way of the possible!

Q6/ How have your exclusion policies been affected over time? I imagine they should be updated constantly in regards to standards and frameworks?

Our exclusion policies do change over time, reflecting a number of factors. Firstly, this reflects in part the need to facilitate a (quick) phaseout - rather than a sudden switch-off - of fossil fuels in general and coal in particular, meaning that we tighten our criteria over time in terms of the % of revenue we "allow" to come from coal, for example. Also we need to have regard for new trends and technologies, as well as changing preferences of society. Thus we recently moved to place some restrictions on "unconventional" oil and gas sources, such as tar sands and oil and gas from the Arctic region. We also moved to exclude tobacco companies given the damage to public health caused by that sector. These are just a few examples of course, the point is that these exclusions do vary over time, and usually to become more restrictive.

Q7/ How do you make sure that investments are yielding indeed the “green” benefit? Do they (and if yes how) go by measuring, certifying, reporting, publishing those benefits based on EU Taxonomy, IFRS/ISSB, etc, and more importantly based on a past baseline showing the true delta?

This is one of the most important issues that our industry faces. The EU's new(ish) "Sustainable Finance Disclosure Regulations" now require investment managers to disclose a range of additional sustainability indicators (too detailed to go into here) related to the investments, which helps in this regard. You mention the Taxonomy which is well intentioned but at this stage is largely unworkable and used by very few investment managers as not enough information is available from investee companies to allow investment managers to measure alignment with the Taxonomy - though this may very well change over time. In our firm, we tend to focus on the alignment of our Natural Resource portfolios with the achievement of the United Nations Sustainable Development Goals - we look in detail at investee company revenues and make a judgement on whether the activities that are generating those revenues are helping to achieve those goals, or hurting the achievement of those goals. It is imperfect but we think it is nonetheless a very useful tool.

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