• At least 62% of UK pension funds are not invested in natural capital^[1] solutions despite growing awareness of biodiversity risks.

• Most asset owners asked agreed addressing biodiversity risk is at least as crucial as tackling climate change.

• Investing in natural capital solutions can help asset owners manage the systemic financial risk of biodiversity loss.

• There is a real opportunity for assets owners and managers to positively impact on biodiversity levels and nature restoration while delivering strong returns.

6 June 2023 (London): A new report reveals that while awareness of biodiversity risks among UK pension funds is growing, at least 62% are not invested in any natural capital assets. The research, developed by Pensions for Purpose and commissioned by Gresham House, highlights the opportunity for asset owners and managers to enable more resilient portfolios and bolster biodiversity by integrating nature preservation and restoration into their investment strategies.

Pensions for Purpose is calling on asset owners and managers to start investing to preserve and enhance natural capital.

Findings from the report - Natural capital & biodiversity – where are UK asset owners on their journey? – show that some UK asset owners are incorporating biodiversity and nature-related risks into their investment decision-making, but only 38% of those interviewed have invested in natural capital solutions, and opinions on doing so are varied due to the concept's nascency.

With the World Economic Forum forecasting that $2.7 trillion is needed annually until 2030 to scale the transition of socio-economic systems to address nature crises, natural capital is vital. However, to tackle global challenges such as climate change, nature loss and resource depletion, the investment industry must look beyond traditional natural capital areas and consider how finite natural resources and benefits can be preserved and restored.

Karen Shackleton, Chair and Founder of Pension for Purpose said: “The investments of the past based on natural capital exploitation are no longer viable: the cost of depleting our resources has become too high, both environmentally and financially. Investors must therefore seek sustainable alternatives that preserve and enhance our planet's natural capital. Addressing biodiversity loss is essential for preserving ecosystems and is a smart investment decision, enabling more resilient portfolios amid growing public awareness and future regulation.”

The research shows that most asset owners interviewed agree that addressing biodiversity risk is at least as crucial as tackling climate change, with some considering it an even more significant threat. However, challenges with data and availability of investment products makes it difficult to understand and address biodiversity loss through direct investment.

Currently, 35%-54% of financial institutions’ assets are highly or very highly dependent on ecosystem services supported by biodiversity, according to the Sustainable Policy Institute. Despite this, 80% of asset owners interviewed do not view biodiversity risks separately from climate risks, primarily due to the data challenges mentioned and limited internal resource to focus on biodiversity loss as they do for climate change.

The report also found that 54% of asset owners interviewed now see biodiversity and nature loss as an ESG risk and a theme with which to engage underlying investments. Direct investing in natural capital remains a new market but, as biodiversity loss is a financially material systemic risk, asset owners can manage their exposure by engaging with companies on biodiversity and nature loss or by investing in natural capital solutions.

The research also highlights a divide among pension funds when it comes to their responsibility to invest in natural capital. While 38% believe it falls within their remit, an equal percentage believe it does not, with the remaining respondents undecided. Some funds focus on the responsibility and role of their own investment portfolio, while others adopt a more active stance, considering the future of investment and the wider implications of securing a better world for their members' retirement.

Heather Fleming, Managing Director of Institutional Business at Gresham House said: “Investments that avoid or reduce biodiversity loss and the depletion of global natural capital will be central to investment portfolios of the future, as investors realise the opportunity and the financial imperative to reverse nature loss.

“Nature has been treated as a free economic good for too long. With the WEF suggesting a nature positive transition could generate $10 trillion annually and 395 million new jobs, building nature back better can drive attractive financial returns and planetary impact.”

Asset owners interviewed for the research are seeking returns ranging from 5-8% and are willing to show flexibility on returns if the assets can offset their own carbon emissions.

The report also found pension funds approach natural capital investment in three ways: as part of their infrastructure bucket, within their real assets or property allocations, or as a fixed income-type instrument. However, there generally remains a lack of supply for investible solutions that meet investors’ risk, return and impact profile. Investible solutions do exist, particularly in natural capital assets such as sustainable forestry and biodiversity habitat banks.

Cameron Turner, Research Analyst for Pensions for Purpose said: “To encourage systemic change, we believe monetary value must be attributed to nature. Natural capital is finite, and our economy depends upon it with almost no price attribution save for cost of exploitation. Unless we place real monetary worth on nature, we will not incentivise behaviour that supports its protection and restoration.”

This was a limited study and more research is needed to draw firm conclusions. Read the Executive Summary and obtain access to the report here.

ENDS

Notes to editors

About the research

Biodiversity loss, an existential threat to humanity, has led to an average 69% drop in wildlife populations since 1970. International agreements like the Kunming-Montreal Global Biodiversity Framework and the UN High Seas Treaty aim to address this issue. Over half of global GDP depends on nature and its ecosystem services, causing the financial sector to increasingly consider natural capital in investments. There is a real opportunity for assets owners and managers to positively impact on biodiversity levels and nature restoration while delivering strong returns.

About Pensions for Purpose

Pensions for Purpose exists as a bridge between asset managers, pension funds and their professional advisers, to encourage the flow of capital towards impact investment.

Impact investments align with the environment and society. Pensions for Purpose seeks to empower pension funds through our online member platform, from which we deliver training, afternoon teas and events, member forums and a unique curated Knowledge Centre.

About Gresham House

Gresham House is a specialist alternative asset management group, dedicated to sustainable investments across a range of strategies, with expertise across forestry, sustainable infrastructure, housing, renewable energy and battery storage, public and private equity.

Our origins stretch back to 1857, while our focus is on the future and the long term. Quoted on the London Stock Exchange (GHE:LN) we actively manage £8.0 billion of assets on behalf of institutions, family offices, charities and endowments, private individuals, and their advisers.

As a signatory to the UN-supported Principles for Responsible Investment, we are committed to operating responsibly and sustainably. We believe taking the long view in delivering sustainable investment solutions will continue to be a growing factor in the strength of our market positioning. www.greshamhouse.com

About the research participants

There were a total of 22 participants surveyed, but some were conducted on an anonymous basis and are not named here:

Asset owners (13): Brunel Pension Partnership, Church Commissioners, Coal Pension Fund, Environment Agency Pension Fund, Esmée Fairbairn Foundation, London CIV, Nest Pensions, Pension Protection Fund, Railpen, Smart Pension Master Trust, Tesco Pension Fund, TfL Pension Fund. Worcestershire Pension Fund

Investment consultants (5): Aon, Barnett Waddingham, Hymans Robertson, ISIO, Mercer

Other stakeholders (2): Middlesex University, TNFD

Contact:

Pensions for Purpose:

Daniel Jason / Shreya Juyal at Material Impact Marketing Communications
E: [email protected] / [email protected]
T:  +44 (0)7484 609097 / +44 (0) 7424 739066 

Gresham House:

Abbie Anderson / Alex Robertson at Greenhouse Communications
E: [email protected]
T: +44 (0) 7944 157 798

[1] Natural capital is a term for the habitats and ecosystems that provide social, environmental, and economic benefits to humans.

Please click on the button below to read the Executive Summary and gain access to the full report.

This research was covered in:
Business Green
Carbon Pulse
Corporate Adviser
EDIE
Environmental Finance
ESG Investor
IFA Magazine
Impact Investor
IPE Real Assets
NewStartMag
Pensions & Investments 
Pensions Age
Professional Pensions

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