Integrating Climate Change and Biodiversity Loss into Impact Portfolios

By Foo Yu Lin | 15 September 2021

The twin crises of climate change and biodiversity loss call for decisive and transformational changes in the way our societies, economies, and financial systems function today.

Climate change is increasingly making headlines, especially with the latest Intergovernmental Panel on Climate Change (IPCC) Sixth Assessment Report, which reaffirmed that human activity is a major contributor to climate change and we are increasingly experiencing its impacts. On the other hand, biodiversity and nature loss have garnered less -- but growing -- attention, despite the ongoing sixth mass extinction event and nature degradation we face today.

Figure 1: Overview of the climate and biodiversity crises

Yet, a recent IPCC-IPBES report has highlighted that tackling climate change requires us to also tackle nature loss. Climate change and biodiversity loss are intricately interlinked and reinforce one another: climatic changes drive biodiversity loss, while the decline of ecosystems and carbon sinks contribute further to climate change. There is a need to move beyond carbon offsets or narrowly-focused ‘tech fixes' like drawdown technologies, to look at nature-based solutions such as ecosystem restoration and protection that can help us reduce atmospheric carbon and support biodiversity.

Thus, impact investors should look at both topics as two sides of the same coin to invest in climate and nature-related opportunities, and assess the risks of climate change and biodiversity loss. Impact investing is key in helping us achieve the level of systemic change required, allowing us to pivot from the existing approach of minimizing negative impacts to funding companies that create positive impact, be it through climate-focused strategies or nature-based solutions.

How can impact investors include climate change & biodiversity in their portfolios?

It is imperative to note that risk management (i.e., exposure to climate and nature risks) and impact management (i.e., impact on climate and biodiversity) are essential but separate objectives (as explained in an earlier blog). Fundamental steps include identifying, measuring and assessing climate change and biodiversity-related risks and opportunities to incorporate into investment processes. Figure 2 summarizes some of the key frameworks and useful initiatives that provide guidance for investors navigating this space.

Figure 2 Mana’s mapping of some relevant frameworks and tools

Keystone building blocks to frame an investor’s approach/strategy – TCFD and TNFD

A principal guiding framework is the Task Force on Climate related Financial Disclosures (TCFD) Recommendations, which despite its name, is useful not only in guiding disclosures, but also in structuring (Figure 3) how investors understand the impact an organization has on the global climate, as well as acting as a tool for investors to identify climate risks. Moreover, the TCFD is the most recognized framework with around 1,700 organizational and governmental supporters globally, and has even become a part of the regulatory framework in some regions such as the EU, Singapore and Japan.

Figure 3 Four key pillars of the TCFD recommendations (Source: TCFD)

Another impact tool to help impact investors begin on their climate journey is the 2 Degrees Investing Initiative’s Climate Impact Management System, which builds on the Impact Management Project to assist FIs (and investors) to set up impact-based climate strategies.

Following in the footsteps of the TCFD is the Task Force on Nature-related Financial Disclosures (TNFD), which aims to help investors and companies act on nature-related risks, dependencies and impacts. The framework is estimated to be released in 2023 and will be structured similarly to the TCFD in terms of the 4 pillars. In the meantime, the ENCORE (Exploring Natural Capital Opportunities, Risks and Exposure) tool is an interesting resource, especially for those interested in understanding the impact of environmental change on the economy, and the natural capital underpinning societies.

Quantifying impact - metrics and indicators

The industry has largely focused on greenhouse gas and carbon emissions as the common metric for climate change as it is easily comparable across industries. Important standards include the Greenhouse Gas Protocol, and more recently the Partnership for Carbon Accounting Financials (PCAF) was launched to harmonize greenhouse gas (GHG) accounting methods. However, carbon metrics only provide one dimension of climate change, and there is a need to go beyond that to consider other sector-specific climate metrics, which the IRIS+ System now offers as one of its Joint Impact Indicators (for the climate mitigation aspect).

In contrast, although there have been increasing efforts for the economic valuation of nature in the form of natural capital by the Capitals Coalition's Natural Capital Protocol and Accounting for Nature’s framework, the metrics and indicators for nature and biodiversity loss are generally less developed. Investors are calling for metrics similar to carbon emissions for climate change, but a single metric is probably unfeasible given that nature and biodiversity is more multifaceted than climate.The WWF has recently published a report featuring emerging tools that measure biodiversity and SDG footprints. The IRIS+ metrics set for biodiversity is currently being developed, once again reflecting that valuing and measuring natural capital is a nascent but rising field.

Alignment to science-based targets and scenario analysis

Current gaps pointed out by experts include the lack of science-based targets and strategies adopted by investors, while CDP revealed that only slightly more than half of its respondents reported using scenario analysis. Both are challenging endeavors that require more resources. Yet, they are essential not only in providing more resilient and defined pathways but also in demonstrating concrete sustainability commitments as opposed to greenwashing.

Next steps to advance a net-zero, biodiversity-positive agenda?

Mana believes that it is important for investors to tackle the twin challenges of climate change and biodiversity loss together. Ultimately, both topics are linked to natural capital and our relationship with nature. Natural capital and ecosystem services valuation provide a key avenue for helping investors understand and incorporate the value of nature into their portfolios. For instance, they help to mitigate risks and ensure a more resilient portfolio, as well as identify opportunities for creating more positive social and environmental impacts.

If you are interested to learn more about the opportunities in natural capital or are looking to integrate climate and biodiversity impact frameworks into your portfolio, do connect with us. Please stay tuned for our next blog as Mana explores how ecosystem services and nature-based solutions are quantified, and the developments in natural capital accounting!

References:

• IPCC, 2010. Sixth Assessment Report. Link

• IPBES, 2021. Launch of IPBES-IPCC Co-Sponsored Workshop Report on Biodiversity and Climate Change. Link

• Eurekalert, 2021. Link

• WEF, 2021. New report shows why fighting climate change and nature loss must be interlinked. Link

• WWF, 2021. If science, politics and the real world connect, nature can be our climate hero. Link

• ESG Investor, 2021.New Paths for Investors on Biodiversity. Link

• 2 Degrees Investing. Impact Program. Link

• Global Canopy, 2020. Missing metrics: climate vs nature. Link

• Deloitte. What is the TCFD and why does it matter?. Link

• CDP. 3 common pitfalls of using scenario analysis – and how to avoid them. Link