By Cecilia Fryklöf, Head of Active Ownership at Nordea Asset Management
Biodiversity loss is a systemic risk and one of the biggest global challenges of our time. Nature is being eroded at rates unprecedented in human history and we are facing the irreversible loss of plant and animal species, habitats, and vital crops.
Research by the World Economic Forum (WEF) has found about $44trn of economic value generation – more than half of the world’s total GDP – is moderately or highly dependent on nature and its services. At the same time, WEF estimates nature-positive transitions could generate up to $10trn in annual business value and create 395 million jobs by 2030.
In response to the risk of biodiversity loss, a number of initiatives are underway at an international level. Following a four-year consultation and negotiation process, the historic Kunming-Montreal Global Biodiversity Framework was agreed at the end of 2022, which sets ambitious goals and targets to help the world tackle the biodiversity crisis. Similarly, the European Commission adopted an EU Biodiversity Strategy for 2030, as part of the European Green Deal.
Monitoring and managing risks
For investors, particularly those with holdings across a vast number of sectors and geographies, biodiversity loss can pose significant financial risks. By understanding the potential impact of biodiversity loss on different sectors, investors can make informed decisions and mitigate the risks associated with declining biodiversity, as well as identify potential opportunities.
At Nordea Asset Management, biodiversity has been one of our ESG focus areas for many years, and potential negative effects on biodiversity are considered during our investment process. We also amplified our assessment of biodiversity-related impacts following the introduction of the Sustainable Finance Disclosure Regulation (SFDR). One of the indicators investors are required to disclose under the SFDR surrounds activities negatively affecting biodiversity-sensitive areas.
To meet this requirement, our internally developed monitoring system identifies issuers that may require further analysis in the management of biodiversity impact, as well as to assess potential active ownership actions. While this assessment can trigger the exclusion of an entity, the most likely scenario involves engagement. One of the pillars of our sustainability process is to undertake engagement activities in order to encourage corporations or governments to improve environmental, social and governance practices.
The importance of engagement
For example, last year we launched engagement activities with the aquaculture industry to push for the establishment and implementation of roadmaps to support biodiversity performance, as well as set science-based targets for climate and nature. These corporate targets will take direct aim at the drivers and pressures fuelling nature loss, offering a pathway for measurable corporate action and ensuring companies are taking enough of the right actions, in the right place at the right time. Our initial efforts have involved engagement with 11 investee companies in the aquaculture industry.
In 2022, we launched an engagement process with manufacturers, as well as industrial and consumer-facing users, of PFAS chemicals. PFAS, often referred to as ‘forever chemicals’, are not biodegradable and persist in nature, humans and animals. Research has already shown that PFAS chemicals are toxic for humans, but studies are still needed to clarify the long-term consequences for biodiversity. Human-made PFAS chemicals have been detected in water, soil, animals, and plants around the world. We initially targeted 18 companies from various industries for engagement.
As for engagement at a sovereign level, we are a founding and advisory member of the Investor Policy Dialogue on Deforestation (IPDD) initiative, which was established in 2020 as a collaborative endeavour aimed at initiating and coordinating a public policy dialogue on halting deforestation in selected countries – such as Brazil and Indonesia. During the engagement programme, which continues to this day, the working group has met with various government authorities and financial market regulators to promote good social and environmental governance, and to reduce financial risks arising from deforestation and land degradation.