Corner Office Views | Q1 2022

Investors Pledge to Tackle Biodiversity Loss

Asset managers need to develop more comprehensive approaches to address biodiversity risks

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Key Points

  • Awareness of biodiversity loss is growing, but there is still a lack of clarity on how to address these risks within investment portfolios.
  • 65% of the asset managers and 58% of the European institutional investors surveyed by Cerulli do not address biodiversity risks.
  • Managers should develop more comprehensive sectoral policies to mitigate material biodiversity risks by covering the most sensitive sectors, such as agriculture, forestry, mining, and fisheries.

Authored by

Justina Deveikyte, CAIA

Justina Deveikyte, CAIA

Director

Bio →

Justina Deveikyte, CAIA

Justina Deveikyte, CAIA

Director

Justina joined Cerulli Associates in February 2014 and heads the European Institutional Asset Management research practice. In her role, she is responsible for all research activities relating to institutional investors, the firm’s analysis of alternative investments, the newly created environmental, social, governance (ESG) section, and all data-science-based activities. She also contributes to multiple strategic consulting engagements and The Cerulli Edge series.

Justina is the lead author of several Cerulli reports, covering insurance, retirement, ESG, and alternative investments. Throughout her career, she has successfully developed partnerships with industry associations and has presented at several conferences and events across the Europe.

Prior to joining Cerulli, Justina was a Financial Manager and Global Analyst at Global Food Consulting; she previously has provided professional advice on banking products, including unit-linked insurance and third-pillar pension products at SEB Bank Group.

Full biography here.

Managers’ approaches to address biodiversity risks

Although discussions on biodiversity accelerated in 2021, Cerulli’s research indicates that the asset management industry and institutional investors in Europe are still a long way off mainstreaming and systematically integrating biodiversity-related risks and impacts into their investment decision-making. A large proportion (65%) of the asset managers surveyed by Cerulli do not address biodiversity risks, either within their wider responsible investment policy or via a standalone policy on biodiversity. Only 35% of respondents address biodiversity risks; however, even those that have a clear approach to biodiversity in their policies typically lack specific commitments. Most of the survey respondents limit their commitments to having a policy that excludes investing in companies with activities that negatively affect biodiversity-sensitive areas and having an engagement policy on commodity-related deforestation. However, this is likely to change given that near half (47%) of the asset managers Cerulli surveyed anticipate developing a biodiversity policy within the next 12 months.

Asset Managers: Biodiversity Targets Adopted and Activities Practiced Currently and in the Next 24 Months, 2021

Source: Cerulli Associates


Only 31% of the asset managers Cerulli surveyed apply biodiversity-related exclusion criteria to their investment universe and 27% impose restriction criteria related to deforestation and biodiversity in sectors considered sensitive. However, upgrading sectoral policies on the preservation of biodiversity so as to include more detail on the sustainable sourcing of palm oil, agriculture, mining, and fisheries sector will be a major focus over the next 24 months. In fact, 41% of the asset managers Cerulli surveyed anticipate upgrading their sectoral policies within the next 24 months.

Asset Managers: Approaches to Address Biodiversity Loss Currently and in the Next 24 Months, 2021

Source: Cerulli Associates

Institutional investors' approaches to address biodiversity risks

In contrast to the asset management industry, a slightly larger proportion of European institutional investors have a dedicated biodiversity policy or have integrated biodiversity into their responsible investment policy. Some 42% already have a policy on biodiversity versus 35% of asset managers. However, similarly to asset managers, most of institutional investors still have not developed a comprehensive approach to identifying and disclosing biodiversity risks and impacts. Commitment to zero deforestation by a specific date is also more common among institutional investors than asset managers. Nearly half (47%) of the institutional investors we surveyed have committed to zero deforestation, whereas only 18% of surveyed asset managers have made such a commitment.

Cerulli’s research also indicates that the largest institutional investors in markets such as France, the Netherlands, and the Nordics continue to advance their focus on biodiversity faster than in the lagging markets. Institutional investors in leading markets are increasingly asking asset managers to avoid investing in companies involved in activities that cause significant adverse impacts, such as biodiversity loss or deforestation. In fact, 50% of the Nordic institutional investors we surveyed have committed to zero deforestation by a specific date and around 43% have adopted additional exclusionary criteria relating to protected areas and areas of global biodiversity importance, such as tropical rainforests in Brazil, Malaysia, and Indonesia.

Finance for Biodiversity Pledge

As financial institutions’ focus on biodiversity continues to grow, an increasing number of assets managers are considering signing the Finance for Biodiversity Pledge. At the time of writing, 84 financial institutions in 18 countries had signed up, representing combined assets of more €12.6 trillion (US$14.9 trillion) in assets. Currently, the list of signatories is dominated by French, Dutch, and Nordic asset managers. However, our research shows that the list will expand rapidly over the next 12 to 24 months and institutional investors will become more active than asset managers in signing the pledge. More than half (57%) of the European institutional investors surveyed by Cerulli anticipate signing up in the next 24 months vs 6% of asset managers. In addition, an increasing number of the leading asset managers as well as institutional investors are signing up to a French initiative called Act4Nature and committing to the Business for Nature pledge.

Asset Owners: Biodiversity Targets Adopted and Activities Practiced Currently and in the Next 24 Months, 2021

Source: Cerulli Associates

ESG-advanced markets

Although biodiversity discussions are on the rise across Europe, many investors still lack clear commitments to halt biodiversity loss. Only around one-third of the Italian, Swiss, and German institutional investors surveyed by Cerulli have either qualitative or quantitative biodiversity-related targets formulated within their responsible investment policy. However, in ESG-advanced markets such as France and the Netherlands, it is a more common practice; 45% of French institutions have a biodiversity loss target formulated within their responsible investment policy. This is the highest proportion in Europe after the Netherlands. However, it is not a surprise given the new reporting requirements imposed on French institutional investors. As of 2022, institutional investors in France will be required to measure their alignment against the objectives of the CBD and analyze the contribution of their portfolios in reducing the main pressures and impacts on biodiversity.

Asset managers that do not have a policy on biodiversity should consider developing one in the next 12 months. To start with, they should develop more comprehensive sectoral policies to mitigate material biodiversity risks by covering the most sensitive sectors, such as agriculture, forestry, mining, and fisheries. Also, engagement on biodiversity-related issues should be integrated into their wider responsible investment approach.

Engagement on biodiversity-related issues should be integrated into managers’ wider responsible investment approach.

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