You would be forgiven for thinking that protecting biodiversity will be the next priority for ESG professionals in private markets. Speaking at COP15 in 2022, GFANZ co-chair and UN Special Envoy on Climate Action and Finance Mark Carney said: “As net zero commitments move from targets to action, private finance must ensure that their transition plans include clear policies on deforestation and protecting nature and restoring biodiversity.”
Indeed, many private markets firms, both large and mid-market, are making it a priority to measure and report on their activities’ impact on biodiversity. EQT considers biodiversity “a really interesting emerging sustainability topic for us” and has contributed to PESMIT’s biodiversity agenda for private equity, the firm’s global head of sustainable transformation Bahare Haghshenas told New Private Markets last month in our Agenda 2024 series. Permira, meanwhile, is “at an early stage in terms of taking a fund or portfolio-level approach to biodiversity risks,” its head of ESG Adinah Shackleton said.
Nevertheless, biodiversity is not at the forefront of every asset owner’s mind. A Mercer survey of institutional asset owners found just 16 percent have a dedicated biodiversity policy or make explicit reference to biodiversity in their investment objectives or policies.
Biodiversity and decarbonisation are inextricably linked. Climate change is the third biggest cause of biodiversity loss, and is taking an ever-larger share of the responsibility, PESMIT reports. And biodiverse habitats such as rainforests and oceans are natural carbon sinks that are critical to global decarbonisation efforts. Depleting their biodiversity will inhibit their carbon sink capacity.
The first step to tackling to biodiversity loss – as with climate change – is to measure it. There are several frameworks that investors and managers have been coalescing around to disclose and compare their impacts on nature and biodiversity: last year, the Global Reporting Initiative, for example, updated its biodiversity standard, while the Sustainable Markets Initiative released a framework specifically for private equity.
The most prominent, by far, is the Taskforce on Nature-related Financial Disclosures, which announced two weeks ago that it had secured over 300 voluntary adopters to its framework, including Schroders, the second and seventh Swedish national pension funds, Brunel Pensions Partnership, Lazard Asset Management, PAI Partners and real assets managers Mirova and Meridiam.
But the business of measuring biodiversity impacts is far more involved than measuring carbon emissions. With the TNFD’s first reporting cycle planned for this year, we do not yet have a sense of the time and resources its adopters need to set aside to complete their TNFD reports. The TNFD’s recommendations, released in September last year, run to 154 pages. There are myriad different things to measure: for example, water use volume, wastewater discharge volume, use of high-risk natural commodities. Adopters of the TNFD must select their own biodiversity loss metrics and write explanations for their choices; they must set targets for each metric and report on their progress each year.
Such disclosures are critical for managers to monitor and improve on their sustainability endeavours, and for investors to hold them accountable for this. But these disclosures should be a means to that end, not the end in itself.
ESG professionals at private fund management firms are already stretched thin by due diligence questionnaires from LPs, and mandatory and voluntary reporting initiatives (for example, EDCI, PRI and TCFD). “We’re going to need to hire people in our firms to respond to surveys. [Getting into] the granularity of that sort of detail at portfolio companies… is a full-time job,” the head of ESG at a mid-market buyout firm said last year.
Meanwhile, the climate crisis rages on. “Carbon reduction and net zero is in no way under control. It’s not time to turn our attention to biodiversity or elsewhere just yet,” Pamela Thomas, US real estate managing director at CPP, said in November last year.
In the battle to protect life on earth as we know it, there is finally consensus among investors on both why and how they should play a role in combatting climate change. The same Mercer survey showed that climate change and net zero targets were acknowledged in the investment objectives or policies of 87 and 71 percent of large asset owners, respectively. Introducing broadly applicable biodiversity disclosure requirements should be hugely valuable. The question is whether it will distract management teams and investors from the urgent business of decarbonisation.