Biodiversity and the importance of stewardship

Biodiversity and the importance of stewardship

Like many other environmental and social risks, biodiversity risks and impacts can be hard to assess as they are either hidden from the outside or occur deep in company supply chains. This is why our investment approach focuses on finding companies that we believe are managed by ethical stewards with a long-term approach to managing their business. 

These are leaders who are willing to transform their business to set it up for sustainable (i.e. patient and continued) growth while considering the needs of a wide range of stakeholders including employees, customers, investors and the planet.  In turn, as investors we take our own responsibilities towards stewardship very seriously. We engage with companies, and vote proxies, with the goal of reducing risk, increasing returns and creating positive change across all issues of sustainability including biodiversity.

Over the years we have engaged with many companies on biodiversity-related issues, including palm oil (and palm oil substitutes), deforestation, plastic waste, the use of harmful chemicals and water related risks. As well as bottom-up company engagement on biodiversity-related risks and opportunities we have engaged more strategically on a number of biodiversity related topics including plastic pellet loss and reducing plastic waste in India.

Due to the cross-cutting and dependent nature of the factors contributing to biodiversity loss, there will always be complex issues that fall outside of our own area of expertise. To learn more about these, we commission independent, specialist research through the use of research tenders. Early tenders in the area of biodiversity investigated the topics of sustainable palm oil and soy. More recently we have commissioned research into smallholder farmers

Plastic waste generated by Indian consumer companies

In 2018, we were growing increasingly concerned at the problem of plastic waste in India. We invested in a number of consumer companies that were providing much needed basic goods at affordable prices, but were also a large part of the pollution problem.  We decided to host a forum in Mumbai and 11 Indian consumer goods companies came together to discuss the challenge of plastic waste. The briefing and output papers from that forum are available here.

Coming out of the discussion that day was the realisation that a Plastics Pact for India was an essential requirement for change. We engaged with NGO WRAP who had experience in setting up pacts in other regions. We funded their technical and operational costs to develop and launch an India Plastics Pact which has helped portfolio companies work towards becoming plastic neutral or even plastic positive. There is more information about the initiative here and here.

We continue to investigate further developments for this initiative.  In particular, the problem of non-recyclable multi-layered plastic packaging such as those found in sachets and films.  We believe this is a natural extension of the Indian Plastics Pact and has the potential for a real and tangible environmental benefit in India and beyond.

Deforestation

The production of palm oil has been a big driver of deforestation across South East Asia.  It is also a key ingredient for many consumer goods companies, being found in half of the products on supermarket shelves, and is a major source of income for local communities and rural economies1.

We have engaged with our consumer goods companies for many years on this issue.  While large developed market companies such as Unilever were able to make progress, we found it harder to engage with emerging market companies.  That started to change after the 2017 forest fires in Indonesia impacted on the quality of life across Indonesia, Malaysia and Singapore.

We also joined the Principles for Responsible Investment  (PRI’s) joint Investor statement on deforestation and forest fires in the Amazon and supported a bill put forward by the Fostering Overseas Rule of Law and Environmentally Sound Trade (FOREST) which would provide investors with important information on material financial and climate-related risks to companies potentially linked to deforestation.

Deforestation is not just a biodiversity and human health risk, it is also a business risk.  The potential for regulatory and community changes threaten companies with weak supply chains through sudden cost increases, unavailability of key product inputs and delays.  Reputational harm through consumer boycotts also creates a risk.  In our view, companies that choose to strengthen their supply chains will minimise those risks and be better placed over the long run to deliver improved shareholder value.

We have never owned livestock, big agricultural or trading companies due to concerns about the quality of their franchise and management, as well as sustainability headwinds.  However, the complexity of soft commodity (commodities that are grown, rather than mined) supply chains make it almost impossible for global food companies to avoid deforestation altogether.

Soy is another commodity that is heavily linked to deforestation, particularly in the Amazon.  We commissioned research into soy to better understand the issues face and to shape our engagement with companies.  As a result we wrote to targeted companies in 2019 to understand their exposure and potential influence on deforestation.  We asked them to show greater ambition on deforestation, to engage with the large companies that dominate trading in soft commodities and to review their memberships to industry groups to ensure alignment on these issues.

Vitasoy

Vitasoy is a Hong Kong listed maker of over 300 plant based products such as soya and nut milks, tofu and teas and juices. Their drinks offer sustainable nutrition and healthy alternatives to sugar-laden carbonated drinks, with their core ingredient, soy beans, being high in protein and cholesterol-free2.

Growing soy beans is significantly less water and resource intensive than meat or dairy production which reduces the burden on natural resources and biodiversity loss. However, as with any large scale plantation crop, it is also linked to deforestation in certain regions and much of the soy grown is genetically modified.

We have engaged with the company on deforestation and they continue to improve their sourcing policies, traceability and standards for contract farmers. They are also committed to sourcing soy beans that are not genetically modified with many products formulated from organic soybeans.

Smallholder farmers

As part of our engagement with companies on deforestation at the time of the Brazilian wildfires in 2019, we noticed that many of the companies talked about the challenges of dealing with smallholder farmers as part of their supply chain. So we commissioned expert research to better understand the issues that smallholder farmers faced and how important they were to the supply chains of global companies.

The results were dramatic.  Smaller holder farmers are a massive cohort consisting of close to 500 million people.  They are meaningful suppliers of commodities, such as 40% of palm oil and 70-80% of the world’s coffee and cocoa.  And this is in turn significant for larger companies, considering for example that coffee generates 27% of Nestle’s revenue3.

The research showed that smallholder farmers are a nexus point for many sustainability challenges that feed into biodiversity challenges as well as those relating to human rights, unfair market practises, labour rights and the consequences of poverty and lack of education. It also shows they are critical in providing solutions to many sustainability issues such as biodiversity and climate change.  We continue to engage with companies using the insights gained from this research.

Unilever

Smallholders are not the only farmers which impact on biodiversity.  Unilever are an example of how to work with larger scale farmers in the developing world to make a difference.  Unilever sells Colman’s mustard, famous for its pungent flavour, which in turn comes from the mustard seeds that are grown in eastern England.  In 2007, the English mustard industry nearly died when a poor harvest led to many farmers moving on to grow other crops.

Fortunately there was a small band of determined farmers who formed the English Mustard Growers4 cooperative with the backing of Unilever.  These farmers have adopted the Unilever Sustainable Agricultural code of practice to improve soil fertility, increase biodiversity and use pesticides in a responsible way.  As a result, their harvests have improved and the cooperative has gone from strength to strength.

They have not been the only ones to benefit as they’ve also been working closely with the British Beekeepers Association.  Mustard plants are particularly good for bees because they are harvested late, which gives the bees an extra two months of pollen.  As the whole system of food production relies on bees, Unilever’s efforts have not only secured their mustard seed supply chain, but also contributed to the wider issue of sustainable food production.

These examples show the wide range of impacts that companies can have on preventing biodiversity loss and protecting the natural world, both through their operations and their products and services.  They also show the importance of well-researched and targeted engagement on the key contributors to biodiversity loss caused by human activity.  In our two decades of managing dedicated sustainable investment funds we have meet and researched a large numbers of companies and invested in a much smaller number of them.  Biodiversity is a key piece of the sustainability and investment puzzle: it has always informed how we select companies and engage with them once we are invested, and it always will.

Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of First Sentier Investors’ portfolios at a certain point in time, and the holdings may change over time.

Biodiversity and our approach to it

Biodiversity is the term commonly used to refer to the variety of living species on Earth, including plants, animals, bacteria and fungi. It is not a marketable good or product, nor a service; it is the living web that connects the tangible and intangible elements of healthy ecosystems.

Biodiversity and how we select companies

Our investment approach favours companies that provide products and services that meet basic needs, solve difficult problems and seek to do more with less. A result of our investment philosophy means that we avoid companies that have a significant negative impact on the natural environment.

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