Download working paper from here.
Investor approaches to biodiversity bring resource risks to companies
With the world facing a biodiversity and nature crisis, there are numerous calls for investors to encourage the companies in which they invest to address the issue, to mititgate their negative impacts and to regenerate where possible.
And investors are acting through an ever increasing number of initiatives and programmes.
... much investor activity in the space involves the development of highly-structured data frameworks that ultimately companies will be asked to populate.
There are - to our way of thinking - four problems with this approach:
- [a] Only the specialist investment strategy of 'quants' investment can actually use big datasets for investment decision-making (... and there are very few sustainable 'quants investors)
- Active and passive investors don't really have the systems for processing big datasets
- [b] Biodiversity is - by definition - diverse
- ... so one-size-fits-all top-down solutions are wholly inappropriate to the problem at hand
- [c] Investor exposure to the particular problems of nature and biodiversity is substantially limited
- By virtue of ownership patterns within the relevant sectors, investors have much more direct exposure to other sustainability issues
Our interest today lies in the fourth problem:
- d] Demand for framework-compatible data on companies' nature and biodiversity impact will prove impossibly resource-intensive for companies to collect - particularly given the limited investment and environmental impact that is likely to ensue
- ... unless companies start communicating pro-actively to investors on a company-by-company basis on their nature and biodiversity exposures
We assessed the investor presentations of 69 companies with exposure to food and fibre value chains to understand how they are communicating directly to investors on their exposure to and management of biodiversity and nature-related to risks.
We wanted to find out whether these communications were fundamental and substantive enough for companies to be able to argue credibly that investors should consider these issues on a bottom-up, company-by-company basis. (If not, it is likely that investors will pursue their top-down, data demanding approaches).
Are companies communicating pro-actively to investors on their nature and biodiversity exposures?
In their presentations to investors ('mainstream' or specialist sustainability), do companies:
- Mention biodiversity and nature issues at all?
- If so, which ones?
- Articulate the connection between these issues and the business operations of the company?
- If so, how?
- Do companies declare tangible objectives for reducing their negative impact and enhancing their positive impact on nature and biodiversity?
- If so, are these objectives quantified?
- Do companies articulate the impact of biodiversity on the key value drivers of their business?
- If so, how?
Commodity, materiality, partnership & justice
Although we find that disappointingly few companies (in the sectors that are most exposed to these issues) are communicating proactively to investors on these issues, we found some interesting examples of best practice which point us towards the relevance of:
- Focussing on the soft commodities that are most relevant to each company's specific value drivers
- Using a materiality matrix to contextualise nature and biodiversity issues alongside the other issues that companies face
- Communicating the nature and extent of supply chain partnerships
- Ensuring that the welfare of agricultural suppliers is hard-wired into any nature- or biodiversity-focused initiatives
Actions companies can take
Any companies that understand how the issues of nature and biodiversity are important to their business but are worried that:
- they are nuanced and value-chain specific - in a way that makes them unsuited to top-down metrics
- such a top-down framework of data will be too resource-intensive to populate
- review our working paper to identify ways of communicating effectively on these issues within investors
- ensure that these topics are covered in their direct presentations to investors in 2022
More generally, companies that want to improve the efficiency of their communications on sustainability with investors can review www.sustainable-ir.com for best practice case studies and support.