While climate risk has increasingly been at the top of the agenda for trustees in recent years, biodiversity and nature risk has occasionally been overlooked, despite the serious financial implications stemming from these issues. The World Economic Forum's Global Risk Report 2023 cited "biodiversity loss and ecosystem collapse" as the fourth most significant global risk over the next ten years. In light of this, pension regulators are focusing their attention on biodiversity risk management. A guide recently produced by the Pensions Management Institute ("PMI") and the Zoological Society of London explains the impact of biodiversity on pension schemes and offers advice on how to create effective policies to help manage these financial risks.
What is the risk?
Biodiversity is essential to support the different species and ecosystems which make life possible. Due to factors such as global warming, deforestation, changes to land use, and the exploitation of natural resources, there is an accelerating loss of biodiversity throughout the world, meaning a degradation of ecosystems, species extinction and reduced diversity among species. The result of these changes can have severe consequences for financial markets, supply chains and corporate profitability and this will impact pension schemes with vested interests in these fields.
Trustees have a duty to protect pension scheme assets and, due to the impact that biodiversity has on the value and sustainability of scheme assets, the PMI guide identifies four primary risks that pension schemes should consider in relation to biodiversity.
- Physical Risks: The value of assets may decline as a result of ecological risks affecting corporate operations, potentially leading to profit reductions, supply chain disruptions and business continuity challenges.
- Breach of Legal Frameworks and New Regulations: Companies may face regulatory limitations or penalties due to their negative impact on biodiversity, including reputation risk and potential damages because of 'greenwashing'.
- Transition risk as economies move to conserve and restore biodiversity: This risk involves potential losses from holding companies subject to sanctions or owning stranded assets in biodiversity-sensitive sectors.
- Systemic risk: This relates to the risk of wider market-related events triggered by biodiversity loss, potentially affecting industries reliant on nature and leading to possible bond defaults for countries highly dependent on natural resources.
Considerations for Trustees
As it is clear that Trustees will have an ongoing duty towards biodiversity and nature risks in order to ensure the maintenance and protection of scheme assets, the report has also helpfully provided actionable steps for Trustees to consider adopting. These include:
- Building knowledge: Undertake training to ensure a thorough understanding of biodiversity and nature-related risks and stay updated on new frameworks and initiatives, such as the TCFD (see below).
- Develop a biodiversity policy: A clear policy outlining how the scheme intends to manage biodiversity risks and opportunities. An example could be to introduce a "net-zero" deforestation policy and actively engage with asset managers to understand the extent to which the scheme funds are invested in contributors to deforestation.
- Understand scheme risks: Identify the specific risks associated with the scheme by using existing information sources and engage with asset managers to assess the impact of these risks on investments.
- Engage with asset managers: Collaborate with asset managers to comprehend their biodiversity-related risk assessments, engagement strategies with invested companies and capital allocation to nature-positive initiatives.
- Ongoing monitoring and reporting: Establish a reporting programme to monitor progress and communicate your approach to scheme members.
- Stay informed: Keep abreast of new regulations and frameworks, such as the TCFD and the European Union's Sustainable Finance Disclosure Regulation, to ensure compliance with evolving standards.
Overall, the report emphasises that biodiversity and nature risks should no longer be secondary concerns for pension schemes and Trustees and it provides a useful roadmap to navigate and protect against these risks. By taking proactive steps and integrating biodiversity considerations into decision-making, Trustees can fulfil their fiduciary duties and contribute to a more sustainable and resilient financial future.
In order to ensure Trustees and sponsoring employers have a full understanding of Environmental, Social and Governance ("ESG") requirements for pension schemes, we have launched the Pension Schemes ESG Tool, which can be accessed here .
We are well placed to advise on all aspects of ESG in relation to pension schemes. If you would like to explore this topic further, please contact Kate Granville Smith.
"Pension funds necessarily take a long-term view and future biodiversity loss will have a significant impact on their financial returns. Instead of passing the responsibility of these issues on to their asset managers, pension funds must start to understand and take ownership over the risks and impacts of their portfolios, and put clear policies and actions in place to protect both the environment and their investments."
James Pilkington, Senior Sustainable Finance Specialist, Zoological Society of London (Saving for our future | The Zoological Society of London (zsl.org))
Originally published by 20 October, 2023
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.