Biodiversity has found its way to the top of the investors’ agenda. Here’s what responsible investing experts had to say about integrating biodiversity into the portfolio and the new initiatives that make evaluating its impact easier.
“Integrating sustainability into investing is crucial. It’s risk management and a way to discover new opportunities,” said Evli’s CEO Maunu Lehtimäki as he opened Evli’s ESG seminar at the beginning of May.
At the event, investors and experts discussed the most important responsible investment themes. Incorporating biodiversity into investing took center stage in the keynote presentations and the panel discussion.
Biodiversity is high on investor’s agenda
According to Karoliina Lindroos, the head of responsible investing at the Finnish pension insurance company Ilmarinen, investors are now prioritizing the prevention of biodiversity loss in addition to tackling climate change and other sustainability issues.
“Over the past years, human and productive capital has grown while natural capital has diminished. This is a systemic risk.”
Lindroos told integrating biodiversity into the portfolio is still challenging, as there is no universal way to measure it, like carbon dioxide for the climate. However, tools are available, and many are already familiar from climate investing.
In portfolio-level analysis, the investor can examine the risks, how company operations depend on biodiversity, and how they affect it. Internal due diligence helps to chart high-risk industries. The investor can also pick instruments that promote biodiversity and exclude certain companies or industries from the portfolio.
Global initiatives underway will make it easier to measure biodiversity and the impact of companies on it in the future. However, Lindroos stressed that assessing the entire supply chain is essential, as biodiversity is very local by nature.
“For biodiversity, the location is very relevant. Unlike in the climate, where in the overall economy it doesn’t matter where the emission or sequestering happens, in biodiversity it means a lot.”
Ilmarinen drafted a biodiversity roadmap in 2022. The roadmap aims to help the company understand more broadly and in detail how biodiversity is linked to its holdings. Lindroos said that the analysis has revealed that a third of the companies in Ilmarinen’s portfolio is dependent on biodiversity. Dependencies on water were especially common.
“Once we’ve looked at the overall landscape, we can start diving in.”
Sustainability is a key part of value creation
Annareetta Lumme-Timonen, Investment Director at Solidium, emphasized that value creation is essential to responsible investing. The holding company, owned by the State of Finland, has recently pivoted from a thematic ESG analysis to a modular analysis that puts value creation and capital markets at its center.
“We have now specific and highly focused viewpoints in our sustainability analysis. Looking at overarching themes and embracing sustainability as a whole on the company level was a massive operation, but it didn’t really give us anything that helped us forward in our work.”
Solidium's new analysis compares companies' performance with their peers and assesses the ambition of their climate goals. Lumme-Timonen said that one can already see the value-creating qualities of responsible investing, citing examples such as wood-based lignin and advancements in process technology.
Biodiversity is an essential part of Solidium’s new ESG analysis model. However, integrating biodiversity into investments is a complex challenge, as it involves systemic and context-specific factors.
On the portfolio level, biodiversity is integrated by setting goals and metrics, while company-level analysis forms a more comprehensive picture of risks and value-creation opportunities. Lumme-Timonen said that integrating biodiversity is still in its early stages in the new analysis model.
“First, we must see what conclusions we can draw and how biodiversity is linked to value creation in the long run. We’re on a path of learning, and this is an ever-changing field.”
In search of common direction and metrics
In the panel discussion that ended the seminar, the speakers focused on the need for shared metrics and regulation for biodiversity.
Janne Peljo, Chief Policy Advisor at the Confederation of Finnish Industries, pointed out that the results from the Montreal biodiversity summit were a milestone for biodiversity. The summit participants agreed on a goal to protect 30% of Earth’s areas and restore at least 30% of degraded ecosystems by 2030.
“We’ve now seen a kind of Paris agreement for nature, and the next step is to figure out what it means in practice. There’s a strong momentum; these are the real, right, and concrete goals.”
The decisions will be implemented in the European Union as part of the biodiversity strategy and nature restoration regulation. According to Peljo, these changes will affect both the real economy and capital markets.
The panelists raised a concern that initiatives can also lead to unwanted externalities; when the regulation is tightened in one place, the harmful impacts can move to another location. For local biodiversity, this can be significant. One way to tackle the problem is ecological compensation and a unified pricing model, both of which are still in their early stages.
All panelists agreed that the direction for integrating biodiversity into investing is right, and new tools and initiatives are welcome. However, they also hoped that investors and legislators still remember to focus on the bigger picture of sustainability and don’t hurry too much.
“In the big picture, it’s important that we have enough time to think about the overall optimization instead of rushing into something that seems like the easiest way. Time is limited, considering how fast biodiversity loss and climate change are advancing. Now is the time to do the right things, and fast”, Lindroos said.
Peljo encouraged the audience to remember three things in all sustainability activities: the big picture, cost efficiency, and competitive advantage.
“We must be able to systematically look at these challenges as well as climate change and biodiversity loss together. In addition, we must find the most cost-efficient ways, as we live in a world of limited resources. And third, we also need actions that enable companies to gain a competitive edge.”
