A new report reveals that while awareness of biodiversity risks among UK pension funds is growing, at least 62% are not invested in any natural capital assets.
The research, developed by Pensions for Purpose and commissioned by Gresham House, highlights the opportunity for asset owners and managers to enable more resilient portfolios and bolster biodiversity by integrating nature preservation and restoration into their investment strategies.
Pensions for Purpose is calling on asset owners and managers to start investing to preserve and enhance natural capital.
Findings from the report – Natural capital & biodiversity – where are UK asset owners on their journey? – show that some UK asset owners are incorporating biodiversity and nature-related risks into their investment decision-making, but only 38% of those interviewed have invested in natural capital solutions, and opinions on doing so are varied due to the concept’s nascency.
With the World Economic Forum forecasting that $2.7 trillion is needed annually until 2030 to scale the transition of socio-economic systems to address nature crises, natural capital is vital. However, to tackle global challenges such as climate change, nature loss and resource depletion, the investment industry must look beyond traditional natural capital areas and consider how finite natural resources and benefits can be preserved and restored.
Karen Shackleton, Chair and Founder of Pension for Purpose said: “The investments of the past based on natural capital exploitation are no longer viable: the cost of depleting our resources has become too high, both environmentally and financially. Investors must therefore seek sustainable alternatives that preserve and enhance our planet’s natural capital. Addressing biodiversity loss is essential for preserving ecosystems and is a smart investment decision, enabling more resilient portfolios amid growing public awareness and future regulation.”
The research shows that most asset owners interviewed agree that addressing biodiversity risk is at least as crucial as tackling climate change, with some considering it an even more significant threat. However, challenges with data and availability of investment products makes it difficult to understand and address biodiversity loss through direct investment.
Currently, 35%-54% of financial institutions’ assets are highly or very highly dependent on ecosystem services supported by biodiversity, according to the Sustainable Policy Institute. Despite this, 80% of asset owners interviewed do not view biodiversity risks separately from climate risks, primarily due to the data challenges mentioned and limited internal resource to focus on biodiversity loss as they do for climate change.
The report also found that 54% of asset owners interviewed now see biodiversity and nature loss as an ESG risk and a theme with which to engage underlying investments. Direct investing in natural capital remains a new market but, as biodiversity loss is a financially material systemic risk, asset owners can manage their exposure by engaging with companies on biodiversity and nature loss or by investing in natural capital solutions.
The research also highlights a divide among pension funds when it comes to their responsibility to invest in natural capital. While 38% believe it falls within their remit, an equal percentage believe it does not, with the remaining respondents undecided. Some funds focus on the responsibility and role of their own investment portfolio, while others adopt a more active stance, considering the future of investment and the wider implications of securing a better world for their members’ retirement.
Heather Fleming, Managing Director of Institutional Business at Gresham House said: “Investments that avoid or reduce biodiversity loss and the depletion of global natural capital will be central to investment portfolios of the future, as investors realise the opportunity and the financial imperative to reverse nature loss.
“Nature has been treated as a free economic good for too long. With the WEF suggesting a nature positive transition could generate $10 trillion annually and 395 million new jobs, building nature back better can drive attractive financial returns and planetary impact.”
Asset owners interviewed for the research are seeking returns ranging from 5-8% and are willing to show flexibility on returns if the assets can offset their own carbon emissions.
The report also found pension funds approach natural capital investment in three ways: as part of their infrastructure bucket, within their real assets or property allocations, or as a fixed income-type instrument. However, there generally remains a lack of supply for investible solutions that meet investors’ risk, return and impact profile. Investible solutions do exist, particularly in natural capital assets such as sustainable forestry and biodiversity habitat banks.
Cameron Turner, Research Analyst for Pensions for Purpose said: “To encourage systemic change, we believe monetary value must be attributed to nature. Natural capital is finite, and our economy depends upon it with almost no price attribution save for cost of exploitation. Unless we place real monetary worth on nature, we will not incentivise behaviour that supports its protection and restoration.”
This was a limited study and more research is needed to draw firm conclusions. Read the report in full here.