No, this isn’t clickbait; there’s a point to the headline I promise to get to.
Tortoises are a part of Earth’s natural capital, that is the stock of renewable and non-renewable natural resources (plants, animals, air, water, soils, minerals) that combine to yield benefits to people. It shouldn’t come as a surprise to hear that our natural capital is depleting at an alarming rate.
In 2019, a report from the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (‘IPBES’)1 stated that one million species were facing extinction. This is primarily because, to keep eight billion humans fed, clothed, housed, and addicted to Instagram, we’ve had to transform most of the Earth’s surface.
Deforestation, land degradation, and biodiversity loss are the primary nature-related risks facing the global economy; and given that more than half the world’s GDP is moderately or highly dependent on nature, these risks aren’t something long-term capital allocators can afford to ignore.
We’ve worked with several long-term capital allocators, from pensions to endowments, to align their portfolios with nature-positive net zero.
Nature loss and biodiversity: the topic du jour
It could be argued that this blindspot in systemic risk to portfolios hasn’t slowed investors down to date. So why has nature loss and biodiversity become the topic du jour and one I’m asked about most in 2023 by capital allocators? I think there are three drivers working in tandem:
- Nature loss feels tangible and personal
Witnessing substantial tree loss, animal decline, new plant diseases, and increased pollution before our very eyes makes this rapidly deteriorating situation very personal.
This, magnified by the increasingly alarming scientific evidence around species loss, helpfully packaged into wildly popular nature programmes, has led to institutional investors receiving questions from members, savers and citizens about what actions they’re taking to help mitigate these risks.
- Riding on the coattails of net zero
This buzzword, label, and battle cry has become a phenomenal success in bringing global awareness to the goals of the Paris Agreement (achieving net neutrality of greenhouse gas emissions by 2050), with everyone from regulators and civil society to asset managers and pension funds committing to reduce their emissions.
Climate change is one of the main drivers of biodiversity loss as environmental changes disrupt natural habitats and species in the biosphere. In return, the fall in our stock of natural capital greatly limits the role that nature can play in helping to mitigate the climate crisis.2
- Climate risk frameworks have done the pathfinding on standards, disclosures, and regulations
The climate movement took over a decade to get its ducks in a row, with taskforces, engagement groups, and committees taking years to establish.
Conversly, the nature movement has managed to create near-identical institutions and groupings for collective action in record time3. These new bodies are set to deliver final frameworks or kick-off their engagement programmes in 2023.
What does this mean in practice for asset allocators?
At Redington, we work with clients (pension trustees, foundations and endowments, local authorities, and other long-term capital allocators) who want to do the right thing whilst adhering to their fiduciary duties. A common limiting factor our clients face is diminishing governance budgets, that is the allotted time they have to make decisions regarding strategic asset allocation, fund performance, manager reviews, compliance, sustainability and much more. To navigate this, we must ensure our advice is not only based on sound data, but that our suggestions are comprehensible and implementable.
When it comes to nature and biodiversity loss, we broaden the lens of net zero discussions to include the concept of planetary boundaries.4 This encourages asset owners to tackle climate risk and biodiversity together – looking for environmental solutions rather than purely climate-related ones. Through this lens, water risk, the circular economy, plastics, and nature-based solutions form part of the same continuum as climate change.
Measuring and managing climate risk is a way to halt the flow of emissions into the four realms of nature (air, freshwater, oceans, and land), while investing in boosting afforestation, reforestation, and restoration (‘ARR’), and eventually carbon dioxide removals (‘CDR’), helps maintain the Earth’s stock of carbon. Investors are beginning to understand that action is needed on both sides of the net-zero equation.
Having worked with several clients who share the view that all action on net zero needs to be nature positive, my colleagues and I went into the market to source the best nature-positive investment opportunities for our clients to invest in. This process took us about 18 months, and we’ve learnt a lot along the way, which we’ll tell you about in part two of this series.
Meanwhile, back to those tortoises
Last month, Ecuador, using the services of Credit Suisse (and at a time of turbulence for both parties), announced a successful record-setting deal designed to reduce its debt burden and free up millions of dollars to fund marine conservation around the Galápagos Islands5 – an archipelago of unique biodiversity, famous for inspiring Darwin’s theory of evolution. The arrangement, known as a debt-for-nature deal, is a bit like refinancing a mortgage, only for government bonds. The $656 million Galápagos Marine Bond is now the biggest debt-for-nature swap in history. An example of how the right kind of financial intervention can make life infinitely better, at least for some lucky tortoises.
3This includes the Kunming-Montreal agreement (protecting 30% of the globe by 2030), Partnership for Biodiversity Accounting Financials (‘PBAF’), Taskforce on Nature-related Financial Disclosures (‘TNFD’), Science Based Targets for Nature (‘SBTN’), and Nature Action 100.