Awareness of biodiversity risks is increasing among UK pension funds with a significant majority, 62 per cent, having yet to invest in any natural capital assets, according to research.
The research, conducted by Pensions for Purpose and commissioned by Gresham House, emphasises the potential for asset owners and managers to strengthen portfolios and support biodiversity by integrating nature preservation and restoration into their investment strategies.
Pensions for Purpose is urging asset owners and managers to begin investing in the preservation and enhancement of natural capital.
The report, titled “Natural Capital & Biodiversity – Where Are UK Asset Owners on Their Journey?,” reveals that although some UK asset owners are considering biodiversity and nature-related risks in their investment decisions, only 38 per cent of those surveyed have invested in natural capital solutions. Opinions on such investments vary due to the concept’s relative novelty.
Given the World Economic Forum’s projection that $2.7 trillion will be required annually until 2030 to effectively address nature crises and transition socio-economic systems, natural capital plays a vital role.
But to tackle global challenges like climate change, nature loss, and resource depletion, the investment industry must expand its focus beyond traditional natural capital sectors and explore ways to preserve and restore finite natural resources and their associated benefits.
According to the Sustainable Policy Institute, 35 per cent-54 per cent of financial institutions’ assets heavily rely on ecosystem services supported by biodiversity. Surprisingly, 80 per cent of asset owners surveyed do not distinguish biodiversity risks separately from climate risks. Data challenges and limited internal resources dedicated to biodiversity loss impede their efforts to prioritize it as they do for climate change.
The report also indicates that 54 per cent of asset owners now perceive biodiversity and nature loss as an environmental, social, and governance (ESG) risk and an engagement theme for underlying investments. While direct investment in natural capital remains a nascent market, asset owners can manage their exposure by engaging with companies on biodiversity and nature loss or by investing in natural capital solutions.
Furthermore, the research highlights a division among pension funds regarding their responsibility to invest in natural capital. While 38 per cent believe it falls within their purview, an equal percentage disagree, leaving the remaining respondents undecided. Some funds focus on their investment portfolios’ responsibility and role, while others take a more proactive stance, considering the broader implications of securing a better world for their members’ retirement.
Pension for Purpose chair and founder Karen Shackleton says: “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.”
Institutional Business at Gresham House managing director Heather Fleming says: “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.”