COP15 and biodiversity: what does it mean for pension schemes?
The COP15 UN Biodiversity Conference concluded on 19 December, with 188 governments setting a series of targets to achieve by 2030. The Kunming-Montreal Global Biodiversity Framework was passed at the summit, which included the “30x30 pledge” – an agreement to safeguard 30% of land and water by 2030 to halt and prevent biodiversity loss. See here our Sustainable Futures blog post on the outcome of the COP15 summit, which includes more details of the Kunming-Montreal Global Biodiversity Framework.
The “30x30 pledge” has been considered by some, including Canada’s Environment Minister, as comparable in significance to the Paris Agreement on climate change due to the interdependence of the nature crisis and the climate crisis. This post discusses the increasing importance of biodiversity as an ESG factor and what it means for pension schemes, especially in light of the COP15 summit.
Why is biodiversity important?
The World Economic Forum has ranked biodiversity loss as the third most severe risk facing the planet over the next 10 years. With half of the world’s GDP (approx. $44tn) reportedly deriving from nature, it makes economic sense to protect biodiversity to also protect businesses. Pension schemes should therefore consider biodiversity alongside climate change when it comes to ESG factors.
Biodiversity as an important ESG factor is not a novel idea. Awareness of the importance of biodiversity has increased in recent years with some schemes, mostly in the UK and Europe, starting to make headway into investment that supports the protection of nature. Some UK and European schemes have started to measure biodiversity risks and new biodiversity-related policy regimes have emerged, such as the Taskforce for Nature-related Financial Disclosures (“TNFD”) framework.
At the dedicated “finance day” of COP15, financial institutions, including pension schemes, were urged to see climate change and biodiversity loss as a single issue and stop investment into activities contributing to global warming and loss of nature.
What are the consequences of COP15 for pension schemes?
We are likely to see the importance of biodiversity increase over the next 5-10 years in a similar manner to the rise of climate change awareness and importance. However, it is important to note that the rise of biodiversity awareness will not follow the exact same path as climate change, due to the fact that biodiversity is more complex to measure than climate change because nature has different characteristics across the globe. Pension schemes are likely to see the development of nature-positive targets, similar to net-zero carbon targets, but on a smaller, more focused and long-term scale. This is likely to be paired in due course with an increase in governance and reporting requirements, as we have seen with the new mandatory TCFD requirements.
There is also likely to be an increased volume of data available for schemes to make more informed investment decisions in respect of biodiversity-related projects and portfolios. Trustees will need to engage with asset managers and advisors to interpret this new data and make sure that their strategy is aligned with the trustee board’s investment strategy.
Green bonds with a focus on biodiversity are likely to continue to grow in popularity for pension schemes’ portfolios as they can potentially be used as both a source of income and for liability matching, whilst also supporting a range of sustainable biodiversity projects to help protect the planet and contribute to nature-related targets. Recent examples of these bonds include the issue of sovereign bonds focused on biodiversity protection by Uruguay and Chile, and the Smart Pension Master Trust’s investment in the Mirova Global Green Bond Fund.