A new report “from the coalface” of super fund investing has gone some way to quantifying the cost of shonky investment management, with members potentially losing out on hundreds of thousands of dollars.
Surging equity markets have driven the Future Fund’s return higher, but its prediction that inflation will be stickier than expected has been born out and it “remains conscious of the potential for significant deterioration”.
The $44 trillion problem markets aren’t ready for
According to the World Economic Forum, around 50 per cent of global gross domestic product – or $44 trillion of economic value generation – could be at risk from biodiversity loss, with agriculture, fisheries, forestry and food and beverage expected to be among the sectors hit hardest.
“Pollination, which plays a crucial role in maintaining the world’s agricultural food production system, is harmed by biodiversity loss,” writes Allspring sustainable investment strategist Anton Gorodniuk.
“It’s estimated that up to $600 billion of annual global food production relies on pollination from honeybees, native bees, and flies. As another example, a broad variety of plant and animal species are used by the pharmaceuticals industry to produce treatments for a range of conditions and diseases, including cancer.”
Reversing biodiversity loss – where it’s not already permanent, as is the case with species driven to extinction – could help mitigate the impacts of climate change, because natural, undeveloped land areas serve as a fantastic carbon sink. The US Environmental Protection Agency estimates that carbon absorption by managed forests and undeveloped land offset 12 per cent of US emissions in 2021.
“It seems clear that embracing the role biodiversity can play in mitigating climate change (rather than ignoring it) would likely make this battle much easier to win,” Gorodniuk writes.
But the amounts spent on biodiversity pale in comparison to those spent on clean energy. Around $140 billion was spent on biodiversity conservation in 2019, with the vast majority of it coming from the public sector. The International Energy Agency expects global investment in clean energy to reach $1.7 trillion by 2023.
“When it comes to financial instruments, the picture is similar,” Gorodniuk writes. “Out of about 12,000 corporate and sovereign sustainable fixed income instruments available on Bloomberg.com, more than 9,200 are financing renewable energy projects while only 2,300 include agriculture, forestry, or biodiversity as possible uses of proceeds.”
That big gap in interest comes from the fact that it’s harder to measure changes in biodiversity and “even more difficult” to assess the impacts of that change on financial performance. Investors are more advanced on climate risk analysis owing to the developed global regulatory environment, independent reporting standards and industry initiatives like the Task Force on Climate-Related Financial Disclosures.
“Another challenge in measuring biodiversity is the lack of standardized, company-specific metrics. Impacts on biodiversity are typically measured at the macro level—for example, acres of forest coverage or species count,” Gorodniuk writes. This makes it difficult to analyse idiosyncratic risk and impact, especially when investors want wide data coverage for their investable universe.”
Still, recognition of biodiversity’s importance is growing with the Taskforce on Nature-related Financial Disclosures, which was launched in 2020. The TNFD has since published 14 recommendations on how to integrate nature-related issues into decision-making, risk management, and disclosures.
“TNFD’s main objective is to promote the provision of clear, comparable, and consistent information by companies to investors and other providers of capital… we welcome the TNFD framework and believe it will yield decision-useful information for integrating biodiversity-related risks into investment analyses, portfolio construction, and new-product development.”
