Biodiversity Q&A

1. How do you approach biodiversity and nature related issues?

Our investment approach focusses on finding high-quality¹ companies that contribute to and benefit from sustainable development. We define development as sustainable if it advances human development while respecting ecological boundaries. Sustainable development cannot be achieved alongside biodiversity loss and the degradation of nature.

Since launching our first sustainable development focused investment fund in 2005, we have sought to understand the impact of our portfolio companies on nature. We have integrated that understanding into our investment process. We do not consider biodiversity as a separate theme, instead we focus on the activities of companies that reduce or prevent biodiversity loss. We consider the root causes of biodiversity loss such as climate and land use change, waste management, water and energy use, and poverty.

We incorporate biodiversity considerations into our investment approach by:

• Avoiding companies that have a significant negative impact on the environment
• Investing in companies that are working to reduce their environmental footprint
• Investing in companies that are actively providing solutions to biodiversity challenges
• Engaging with companies on disclosure and adopting best practices

2.  How do you incorporate biodiversity and nature into investment selection?

We assess companies to understand how their activities impact biodiversity and nature. We evaluate how they manage positive and negative impacts through their supply chains, products and services, and operations. We invest in companies that address the interrelated challenges of climate and land use change, waste management, water and energy use, and poverty. We expect the leaders of portfolio companies to take their environmental responsibilities seriously. How well a company’s management treats its stakeholders is central to our understanding of its quality. The environment is an important stakeholder.

Our approach favours companies that provide products and services that seek to do more with less. Companies in our portfolios often integrate circular economy² principles and support the efficient use of resources, including:

• reducing waste and improving waste management
• reducing deforestation and the loss of natural habits
• increasing the use of renewable and cleaner energy technologies
• reducing greenhouse gas emissions, water, air, and other pollution
• using technology to enable climate change adaptation and resilience

A good example of a company taking its environmental responsibilities seriously is Godrej. Godrej Group created the Soonabasi Pirojsha Godrej Marne Ecology Centre in 1985. This is a conservation area of mangrove forest in Vikhroli in Mumbai.³ The management of the mangrove ecosystem of Pirojshanagar focusses on research, conservation and awareness. The mangroves support the local fishing industry and provide a significant habitat for urban wildlife as well as sequestering around 60,000 equivalent tonnes of carbon dioxide each year.⁴

Our portfolio explorer provides more information about our portfolio companies. We highlight their sustainability contributions using the sustainable development goals, climate, and biodiversity solutions (Project Drawdown) and human development pillars.

In our climate change statement we commit to “allocate capital to high quality companies developing and implementing solutions to alleviate climate change and biodiversity loss”. In our position statement on harmful and controversial products and services we state that we expect “all companies we invest in to take their environmental stewardship responsibilities seriously in line with the Global Compact and other global standards. We do not invest in companies that wilfully or persistently neglect these responsibilities.” Avoiding companies that do not manage environmental risk effectively helps us to manage downside risk⁵ on behalf of our clients.

We do not exclude sectors when investing, instead we consider each company on a case-by-case basis. We recognise that biodiversity impacts are widespread and difficult to avoid. We look for companies that are working hard to reduce their impacts across the full value chain⁶. Where possible, we support companies that are making efforts to enhance and restore biodiversity for the future benefit of all stakeholders.

For example, when considering the impacts of food production on biodiversity, we aim to invest in companies that are taking active steps to reduce deforestation, biodiversity loss, water usage, and pollution. We recognise that these impacts are complex and include many stakeholders across intermediated supply chains. Smallholder farmers, for example, are particularly vulnerable. Consequently, we aim to find management teams that demonstrate a nuanced, patient, collaborative and integrated approach.

To understand these complex issues, we regularly commission research from experts. In recent years we have commissioned research on palm oil, coffee, soy, smallholder farmers, plastic pollution, industrial circularity, and water stress. You can find more information about our research tenders here.

3. How do you address biodiversity / nature in your approach to engagement and voting

We engage with companies and vote to reduce risk, increase returns, and create positive change across all issues relating to sustainability including biodiversity and nature. To learn more about complex issues that fall outside of our own expertise we typically commission independent specialist research. We use this research to learn more about sustainability challenges, and to inform our company selection and engagement on these issues. Independent research that is relevant from a biodiversity perspective includes:

1. Sustainable packaging
2. Palm oil
3. Soy
4. Smallholder farmers
5. Industrial circularity
6. Water stress in Indian companies

Engagement helps us to build our conviction in the quality of management and learn more about the sustainability risks and opportunities each company faces. We engage for information and for change. When we engage for change, we are seeking to reduce material risks and increase opportunities. In meetings with management, we aim to extract information by asking indirect questions. What a company says about its environmental liabilities provides valuable information about their approach to risk, time horizon and the integrity of management.

We have engaged directly with many companies over the years on biodiversity-related issues including palm oil, deforestation, plastic waste, smallholder farmers, the use of harmful chemicals, and water-related risks. One example is an engagement with an Indian company which planned to open a USD 500 million soda ash plant in the Lake Natron area on the Tanzanian-Kenyan border. If this plant had been built it would have destroyed a globally significant nesting area for the threatened lesser flamingos.

For some issues, we have taken a more strategic approach. These include:

Plastic waste generated by Indian consumer companies

In 2018 we hosted a forum on plastic waste in Mumbai. 11 Indian consumer goods companies came together to discuss the challenges. Launching a plastics pact in India was identified as an essential enabler of change. We funded the Waste and Resources Action Programme’s (WRAP) technical and operational costs to develop and launch the India Plastics Pact. WRAP is a UK-based global environmental non-governmental organisation. There is more information about the initiative available here.

Plastic Pellet Loss - In December 2018 we launched a collaborative engagement on the United Nations Principles for Responsible Investment platform focused on tackling plastic pellet loss in the supply chain. 44 investors with approximately USD 2.6 trillion in assets under management supported this initiative. We wrote to 41 companies encouraging them to make commitments to zero pellet loss, develop industry tools and standards to assess progress, and report on progress. More information about this initiative is available here.

Deforestation - We are signatories of CDP’s climate, forest, and water initiatives. We also signed the PRI’s joint investor statement on deforestation and forest fires in 2019. In 2021 we supported a bill put forward by the Fostering Overseas Rule of Law and Environmentally Sound Trade (FOREST), which would have prohibited agricultural commodities produced on illegally deforested land from entering the US market. It would also have provided investors with information on material financial and climate-related risks relating to deforestation. Unfortunately, this bill was not passed. More information is available here.

4. How do you prioritise biodiversity and nature issues for engagement?

We prioritise biodiversity and nature issues in the same way we prioritise other engagement topics. We identify the issues that are most materially significant in terms of risk and return for each company on a bottom-up⁷ basis. Where we see areas of commonality across companies we may look to engage with a number of companies on the same topic, examples include deforestation, plastic waste, smallholder famers, industrial circularity, and water risk.

5. What initiatives / partnerships relating to biodiversity and nature are you supporting?

We have a history of supporting various initiatives aimed at increasing awareness of sustainable investment practices. You can find a list of the initiatives we (Stewart Investors) support here. The most relevant initiatives, from a biodiversity perspective, are the India Plastics Pact, CDP, Centre for Science and Education in India, Farm Animal Investment Risk & Return (FAIRR), Net Zero Asset Managers Initiative and Project Drawdown. We also signed the PRI’s joint investor statement on deforestation and forest fires, supported the FOREST bill (see above for more details), and ChemSec’s Investor Initiative on Hazardous Chemicals.

In addition, at the firm-wide level, First Sentier Investors supports Climate Action 100+, Investor Group on Climate Change, Task Force on Climate Related Financial Disclosures (TCFD), Task Force on Nature Related Financial Disclosures (TNFD) and the Finance for Biodiversity Pledge.

6. How do you integrate social and environmental issues relating to biodiversity / nature?

We invest in companies that we believe are driving human development while respecting ecological boundaries. Consequently, we are interested in the interconnected nature of social and environmental issues.

A good example of our research, and subsequent engagement, involving the interdependence of social and environmental issues is our work on smallholder supply chains. This research was identified as a high priority following our engagements on deforestation in 2019. It provided us with a better understanding of the importance of smallholder farmers in the global supply chain, including how critical they are to solutions relating to biodiversity loss and climate change.

7. How do you measure biodiversity exposure / impact at the company / portfolio level?

We have access to various biodiversity-loss related metrics at a company level from external providers, including Sustainalytics and Net Purpose. For example, we look at greenhouse gas emissions as climate change is a significant driver of biodiversity loss. In addition, we monitor and report on water usage, recycling, and hazardous waste production. Data availability is sparse for many of the companies we hold in our portfolios. We do not create any aggregate biodiversity measures at the portfolio level as we do not believe they enhance our understanding of biodiversity risks and impacts.

In addition to biodiversity metrics, we receive updates from Reprisk. RepRisk provides news flow on environmental, social and governance (ESG) issues including impact on eco-systems and biodiversity, greenhouse gas emissions, pollution, resource and waste management. When a material ESG issue is identified, we engage constructively and collaboratively with company management to discuss potential solutions.

We believe that a qualitative assessment of risks and impacts is more useful than focussing on metrics. We build an understanding of company management by looking at company reports and history. How a company responds to engagement on biodiversity-related topics also helps us to assess quality and long-termism. We also commission independent research which assesses individual company performance on specific issues, for example smallholder farmers, soy, and palm oil.

8. How are you approaching TNFD?

At the firm-wide level, FSI is a member of the TNFD. Stewart Investors is an autonomous investment group within FSI and is covered by FSI’s membership. Stewart Investors supports initiatives which seek to improve company disclosures on nature-related dependencies, impacts, risks, and opportunities.

9. How does your approach to corporate sustainability integrate biodiversity / nature risk and opportunities?

FSI is committed to reducing the environmental impacts of its global business operations.

FSI became a globally certified B Corporation (B Corp) in 2022. You can find further information about FSI’s B Impact Score here.  As an autonomous investment team within FSI, SI is covered by this certification. The B Impact assessment includes a module on the environment which evaluates FSI’s overall environmental practices, as well as its impact on air, climate, water, land, and biodiversity. This includes the direct impact of FSI’s operations and its supply chain and distribution channels.

FSI is keen to improve its approach to the environment, including biodiversity. More recently, its Corporate Sustainability team has been assessing the impacts, dependencies, risks, and opportunities of its global offices, using the TNFD core global metrics.

FSI completed certification for the ISO 14001 Environmental Management System in our Edinburgh office and plans to roll this out across the other offices over time.

FSI’s 2023 corporate sustainability report includes an update on the progress made to improve FSI’s environmental impact (page 10 – 16). This includes case studies on building certifications on page 13, and on page 12, you can read about FSI’s carbon offset programme.