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Jennifer Munnings

In 9fin’s latest ESG Educational, we explore the material risks and opportunities nature presents for investors.

This educational begins by highlighting the relationship between climate and nature and the resulting material risks associated with nature loss. We then outline upcoming regulations and discuss nature capital investment opportunities as a way to support nature-positive initiatives.

Nature loss, a thorn in the investor's side

Neglecting nature loss and biodiversity risks exposes companies to material losses as threats of nature degradation pose a $2.7trn annual GDP loss by 2030.

According to the World Economic Forum, over half of the world’s economic output, around $44trn, is moderately or highly dependent on nature and healthy ecosystems.

Investors have faced barriers to understanding the connectivity between nature and business due to the lack of transparency in supply chains, the absence of a single overarching climate-nature disclosure framework, the lack of a clear valuation methodology, and unstandardised biodiversity metrics.

Forest 500 is an organisation that conducts annual assessments of the 500 companies and financial institutions most linked to deforestation in their supply chain and investments. Its 2023 report found that of the 350 non-financial companies it assessed, 31% with the greatest influence and exposure to tropical deforestation risk throughout their supply chains don't have any deforestation commitments for the commodities they are exposed to.

The recent influx of nature-focused regulations and a heightened sense of urgency around sustainability issues has increased the pressure on companies and investors to consider nature risks as material. In particular, companies will need to assess if their practices are compliant with incoming regulations.

While the extent of a business' vulnerability to nature loss is dependent on geography and its key materials, sectors like food and beverages, construction, and agriculture (among others) are considered most exposed to nature loss risks.

There are four main nature-related risks which are detailed in the table below:

Source: Principles for Responsible Investment (PRI)

Peaks and valleys in LevFin’s companies’ nature risk exposure

The 9fin ESG team has produced QuickTakes on companies across the LevFin universe where nature poses a regulatory, physical, systemic, or transitional risk.

Nouryon: chemical manufacturer that operates several pulp mills in Brazil and uses palm oil as a key feedstock in its operations. Eucalyptus pulp mills have been criticised for contributing to deforestation and destroying habitats in Brazil and negatively impacting biodiversity. Palm oil has similarly been identified as a significant driver of deforestation Although Nouryon does not have direct contact with palm mills or plantations it does not have an anti-deforestation policy in line with good practice. Only 7% (4) of its sites hold RSPO Mass Balance (MB) certification. MB however, has been criticised by environmental groups for failing to ensure complete traceability and transparency, because it mixes certified and uncertified palm oil. As a result, it is likely to be impacted by the incoming EU Deforestation Free Products regulation. (Read more about Nouryon in our ESG QuickTake here)

Upfield: food products manufacturer whose products rely on palm oil (71-80% of revenue dependent), timber (91-99% of revenue dependent), and soy (41-50% revenue dependent). In 2021, the group said that 53% of its palm oil, 92% of soy, and 100% of timber were verified as deforestation-free however, certification does not guarantee the ability to trace and confirm products’ origins. As a result, its products may be impacted by the proposed EU Deforestation Free Products regulation. (Read more about Upfield in our ESG QuickTake here)

Pasubio: in its ESG statement in the OM states that “leather is by its nature a sustainable … product” which is potentially misleading. According to a 2020 EarthSight report, Pasubio purchased more leather from areas involving illegal destruction of Paraguayan forest than any other company. However, 9fin notes Luca Pretto, CEO of Pasubio previously responded to the EarthSight report in the press here. Passubio received negative coverage (1, 2). (Read more about Pasubio in our ESG QuickTake here)

Carnival: between 2016 and 2019, Princess Cruises (a Carnival subsidiary) was fined for illegally dumping oil in the sea and placed on probation; it was later fined for violating probation six times, including for dumping plastic waste. In 2017, Princess was forced to pay $40m for illegally dumping oil-contaminated waste and falsifying logs to hide its actions. The incidents in question took place between 2005-2013. After the 2017 fine, Princess was placed on a five-year probation but was then fined another $20m for six violations of probation. (Read more about Carnival in our ESG QuickTake here)

EU Sustainable Finance Disclosure Regulation (SFDR) Level 2 came into effect in January 2023 and requires companies to disclose ‘activities that negatively affect biodiversity sensitive areas’ as one of the 18 mandatory Principle Adverse Impacts (PAIs). Firms must demonstrate that their economic activity is not negatively affecting biodiversity-sensitive areas through environmental assessments, due diligence, and ongoing monitoring of any impacts.

Montreal-Kunming Global Biodiversity Framework (GBF) was agreed upon at COP 15 in 2022 and Targets 15 and 16 of the Framework commit governments to take legal, administrative, and policy measures to encourage financial institutions and businesses to monitor and disclose their biodiversity risk (read 9fin’s feature on COP 15 here). COP 15 closed with the global commitment to conserve 30% of the land and marine environment by 2030 and is considered a significant call to action by environmental groups for the private finance community.

EU Deforestation Free Products is a proposed due diligence law that requires companies to prove that their products are not linked to deforestation. Companies will have to track and disclose the origin of their products or face fines of up to four percent of their annual turnover. The proposed law covers palm oil, cattle, soy, coffee, cocoa, timber, and rubber. Products that are linked to deforestation will be blocked from being sold on the EU market. The law is expected to be ratified and come into effect in 2024.

Taskforce for Nature-Related Financial Disclosures (TNFD): will address barriers to investors by developing a global voluntary risk management and disclosure framework. The regime will include metrics and targets for companies to assess and manage nature-related dependencies, impacts, risks, and opportunities where material. The TNFD aims to support a shift in global financial flows away from nature negative outcomes and towards nature positive ones and the final version will be published in September 2023.

Science-Based Target Network (SBTN): is developing technical guidance for companies to set science-based targets that align with global nature conservation goals and mitigate negative impact. SBTN is designed to drive the corporate push toward a nature positive future and the technical guidance is expected to be completed in 2023. It currently provides a framework and guidance on nature related targets that companies can set.

ESG initiatives have primarily focused on climate change due to the availability of climate data and the robust regulatory environment. The Carbon Disclosure Project (CDP) found that in 2022, around 90% of financial services companies’ disclosures assessed climate risks but less than half (46%) of companies assessed their deforestation risk.

The 2023 Forest 500 study found that only 2% of the companies it assessed with net zero and 1.5Cº aligned commitments are on track to meet their commitments due to insufficient progress on deforestation targets.

A climate-centred ESG approach overlooks the intrinsic relationship between climate change and nature. Climate is just one of nine planetary boundaries that are critical for maintaining Earth’s stability and six of the nine planetary boundaries have already been crossed. Biodiversity loss, climate change, and the resulting extreme weather events are now considered among the most severe global risks for the next decade by the World Economic Forum.

Limiting warming to 1.5°C is dependent upon maintaining a healthy ecosystem as oceans, forests, and soil are the world’s largest and most effective carbon sinks.

Nature presents treemendous opportunities for investors

The UN Environment Programme (UNEP) reported that the funding gap for biodiversity is between $598-824bn per year by 2030, a gap that governments alone cannot fill.

Sustainable investing through sustainable bonds and loans provides a mechanism for closing the funding gap by directing capital towards projects that directly benefit nature.

In 2021, sustainable bonds surpassed $1trn in cumulative issuance. Green bonds issuance was $500 bn and there was $717 bn in sustainability-linked syndicated loans.

European High Yield posted €34bn of green and sustainability-linked bonds in 2021 accounting for nearly 25% of total issuance. Ardagh Metal Packaging issued the largest ever green-labelled HY bond in 2021, a $2.8bn deal. Read more about Ardagh Metal Packaging in our ESG QuickTake here)

However, in the same year, renewable energy represented the majority (35%) of green use of proceeds investments with water and land representing only 6% and 5% respectively.

Although the increase in green issuance signals high yield’s growing appetite for channelling funding to environmental causes, the scale of nature-focused investments needs to dramatically increase to achieve COP15’s conservation target.

Notably, 126 financial institutions like private banks, asset managers, and pensions funds with €18.8 tn in AUM have signed the Finance for Biodiversity pledge committing to protecting and restoring biodiversity through their activities and investments.

Through the Glasgow Financial Alliance for Net Zero (GFANZ), over 500 firms with over $140 tn in assets pledged to commit to science-based net zero targets. However, support for GFANZ wavered as its members continued to fund fossil fuel expansion and several organisations threatened to withdraw membership over concerns surrounding the net zero criteria.

Despite the initial widespread support for GFANZ, investors are unwilling to take the action needed to fully commit to its targets. The Finance for Biodiversity pledge could face the same challenges.

According to the Principles for Responsible Investment, and highlighted by the limited number of nature-related disclosures to the CDP, many companies do not yet understand their material nature-associated risks and impacts.

As regulation tightens and guidance improves, analysis and disclosure of risks are likely to increase. Investors will face pressure to account for these risks as well as allocate the capital that they’ve pledged.

In preparation for the increased scrutiny companies and investors will face regarding their nature impact, they should seek to achieve a comprehensive understanding of their nature related risks throughout their supply chain and portfolios. This will determine their compliance with upcoming regulations and their alignment with global nature goals. In addition, companies should establish interim targets through the Science Based Targets Network (SBTN) to manage their negative impact and work towards a positive one.

For what it’s Earth — Nature risks and opportunities

Nature loss, a thorn in the investor's side

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