We’re laying the groundwork for deeper corporate engagement on the theme of biodiversity. In this article, we highlight some early results as we pursue this critical ESG concern.
With almost 200 countries now committed to preserving and restoring the planet’s biodiversity, it’s time to aggressively shift gears. Governments, public and private corporations and institutions ‒ including asset managers ‒ are called to move from intention to action.
The Kunming-Montreal Global Biodiversity Framework (GBF), adopted in December 2022 at COP15 in Montreal, includes four goals and 23 “action-oriented global targets.” At NEI we have been working to lay the foundation of our contribution to those goals and targets, with an emphasis on corporate dialogue and policy activity. Biodiversity was one of our four focus themes last year and will remain so for 2023 and likely, much longer. NEI attended COP15 as part of a delegation assembled by the Principles for Responsible Investment, and it was clear that a wide range of stakeholders, including many in the finance community, see the need to collaborate to foster action on nature.
“Biodiversity equals natural capital”
According to the UN Environment Programme, biodiversity is the multitude of living things that make up life on Earth, encompassing the roughly 8 million species on the planet ‒ from plants and animals to fungi and bacteria. The definition of nature is broader, as it encompasses the non-living features of our planet ‒ oceans and mountains ‒ as well as forces and processes, such as weather and tectonic shift.
The quote in the heading above is from an article published by the World Economic Forum during their annual meeting in January 2023. The concept of natural capital helps stakeholders recognize and internalize that there is utility in biodiversity and nature, and that utility has value ‒ which comes at a cost. The David Suzuki Foundation says, “nature is the foundation of our social and economic prosperity and can be managed as we do other forms of capital.” Managing capital is what institutional investors do every day ‒ in fact, it’s our reason for being. Surely, we can strive to ensure that management of natural capital is afforded the same level of care and diligence as management of other forms of capital.
A baseline for biodiversity
The objective of our corporate outreach to date has been to establish a baseline for ongoing dialogue with portfolio companies that rely heavily upon, or have a significant impact upon, the natural environment. Among other things, we are asking select companies across a range of sectors how they are assessing their impact, what their dependencies are, and what challenges they are facing. The answers will help us determine which companies are leading and which have a longer way to go. More importantly, the information we receive will enable us to set what we believe is a fair pace of action toward GBF targets.
We have also been encouraging more robust disclosure on nature, which will enable us to better assess company performance on an ongoing basis. While we acknowledge that the reporting standards are nascent (though evolving quickly), frameworks under development such as the Taskforce on Nature-related Financial Disclosures have been a feature of our discussions.
The process for identifying and managing the various and interconnected investment risks associated with biodiversity loss is still in its early stages. Our work to date suggests that commodity-driven deforestation may be one of the most significant near-term threats. Whether it is taking place in the Amazon or right here in Canada, unchecked deforestation and poorly managed forestry practices have the potential to alter the environment so drastically that many industries would suffer significantly, if not irreparably ‒ such as lumber, pulp & paper, food, textiles, power generation, pharmaceuticals ‒ to name a few of the more obvious dependent businesses.
To help drive progress in this area, in November 2021 NEI signed on to the Financial Sector Commitment Letter on Eliminating Commodity-Driven Deforestation. The group of over 30 institutions managing almost US$9 trillion, now called Finance Sector Deforestation Action, “focuses on using engagement and active ownership to encourage, support, and enable the transition away from high deforestation-risk agricultural commodity supply chains and towards sustainable production.” Collaborative engagements among FSDA members with key companies in our portfolio began last year (more on that below).
The challenge of traceability
For a company to be assured that it’s managing its environmental risks as it intends (or any major ESG factor such as human rights and inequality), it must be able to ‘see through’ its entire supply chain. This is termed traceability. Large multinational corporations with long histories have complex, interdependent supply chains, and knowing what’s moving up and down the chain is no small feat. But investors are demanding it, more so now than ever before, as evidenced by the rising frequency of the topic within our collaborative engagements. Traceability was a major point of discussion in two of our recent biodiversity conversations, details of which we share below.
Engagement case: Building supplies
A recent conversation with a large home improvement store highlighted the need for traceability in the lumber supply chain and the difficulties in establishing clear line of sight. NEI led a call with the retailer in December as part of our membership in Finance Sector Deforestation Action. It was revealing to learn that even among the largest of home improvement retailers, their influence over suppliers is not necessarily as strong as could be expected. The chain is fragmented, and gleaning information about the supply chain from their suppliers does not appear to be an easy task. We discussed the need for innovation in traceability and options for helping companies map risks to suppliers operating in primary forests; the retailer was open to collaboration and shared learnings on the development of ways to assess and understand the risks of deforestation.
And yet, despite the challenges, this retailer is making strides while shareholder proposals have been brought to a vote at one of its peers. At Home Depot’s last annual meeting in May, two-thirds of shareholders, including NEI, voted in favour of a proposal asking the company to report on its effort to reduce deforestation, noting the company’s policies “do not meaningfully address impacts on primary forests” (such as Canada’s boreal forest, a significant source of Home Depot’s supply).
As we closed off our discussion, the need for shared learnings on traceability was apparent. The company and the investor participants expressed a willingness to collaborate further to improve the state of supply chain transparency around deforestation.
Engagement case: Food manufacturing
We held a solo engagement call with a well-known food manufacturer in December, where we met with the Chief Sustainability Officer. The company has made important strides and is practiced at articulating the work it has been doing in different areas of biodiversity, such as deforestation, water management, and regenerative agriculture. As they look at the commodity inputs for their products, they focus on areas of high risk to the environment and human rights. For example, even though they use limited palm oil relative to other commodities (and to peers), it is a priority for traceability and risk management. They require palm oil suppliers to have third-party certification, and they are working with outside consultants on a similar program for their use of other commodities.
A key indicator for us of a company’s leadership in any area of ESG performance is measurement. Is the company quantifying its efforts, as well as the impact of those efforts? And further, is the company reporting the results? In this case, the food manufacturer is indeed demonstrating leadership. They are working with consultants to measure the impact of improvements they are developing with suppliers of food resources that currently use a lot of water and are a significant source of methane. They have stated that the plan is to scale these efforts up with more farmers.
The call ended with an acknowledgement that as they make progress on measuring impact and outcomes, understanding reporting needs are crucial for ensuring that they are most effective in translating these outcomes to useful disclosures for stakeholders.
Our 2022 dialogues with companies have given us some context for the range of action being undertaken by companies, and the challenges shared within and across industries. This will inform our ongoing expectations in 2023. Along with expanding and following up on our solo engagements, we expect collaborative activity to be a feature of our efforts this year. For example, Nature Action 100 ‒ an investor coalition launched at COP15 ‒ is expected to get underway shortly. We are members of similar collaborations in connection with climate change, such as Climate Action 100+ and Climate Engagement Canada, where we participate regularly, often leading specific engagements. We will be on the lookout for further activity from Nature Action 100 and other collaborative engagements to amplify shared investor expectations.
From a policy perspective, we intend to seek opportunities to weigh in on policy and standard setting discussion on biodiversity, and also to continue our efforts on core related themes such as climate, Indigenous-led nature solutions, and circularity.