While Asian investors increasingly appreciate the importance of incorporating climate factors into their portfolios, the concept of Natural Capital – the impact of investment on nature and the impact of nature on investment – is perhaps less well understood. Fidelity International’s Paul Milon, Director Sustainable Investing, met with Tina Chang and Yuka Murata, Associate Directors Sustainable Investing, to discuss how they engage with companies on nature-related risk.
Key points
- Biodiversity loss is too significant to ignore, with more than half of global GDP dependent on nature.
- Losses have far-reaching implications for Asian society and economies.
- Encouraging corporate disclosure on nature impact is essential for investors to assess risks.
- Indirect exposure to nature loss is a pressing issue, particularly across China, India, and Japan.
- Engagement strategies are helping companies eliminate deforestation from supply chains.
With more than half of the world's GDP growth “moderately or highly dependent” on nature, the accelerating loss of the natural world has become an issue that is too big to be ignored1.
Since the 1970s, there has been a steep loss in biodiversity, and the wildlife population of Asia has declined by about 50 per cent2. Five main factors are driving this loss: changes in land and sea use, pollution, invasive species, direct exploitation, and climate change.
“...engagement is one of the best ways to understand how businesses manage their nature-related risk.”
The consequences of this loss represent a systemic risk with far-reaching implications for society, from rising temperatures and more frequent natural disasters to deforestation and a dramatic decline in the fish stocks on which millions of people depend.
Heightened carbon disclosure
Unlike climate change, for which human impact can be measured in standard uniform units of carbon dioxide (CO2) emissions, it is challenging to quantify damage to nature. As a result, significant data gaps exist.
“Nature, by definition, is very complex and location-specific,” says Murata. Regarding the Carbon Disclosure Project, 18,000 companies disclose on climate, while only 1,000 disclose on forests. Therefore, a crucial part of engagement is getting companies to reveal the information investors need to assess nature-related risks properly.
While the European Union (EU) has forged ahead in implementing frameworks and regulations covering corporate disclosure of nature risks, the landscape in Asia is also beginning to change.
“We need supportive public policies, such as commitments to curb deforestation in Indonesia and Malaysia,” explains Milon. “Then we need a common language to help understand and assess nature risk and bridge the nature-data gap.” As such, we now see the emergence of common disclosure frameworks, such as the Taskforce for Nature-related Financial Disclosures (TNFD).
Frameworks that help companies make science-based assessments of their impacts and dependencies and set targets based on those assessments are also emerging. For instance, a landmark collaborative engagement initiative with Nature Action 100 stresses investors’ commitment to drive greater corporate ambition on nature. “Covering close to US$27 trillion of assets, it conveys a clear message to companies to invest in nature-related expectations,” notes Milon.
Making a measurable impact
Asset managers have a clear and critical role to play in driving change across the region. As well as being a member of the TNFD since 2021 and a signatory to the Financial Sector Statement on Biodiversity, Fidelity International has developed a Nature Roadmap integrated into its already extensive corporate engagement strategy.
The Roadmap involves understanding and integrating nature-related risks across all client portfolios, then developing a range of investment solutions that target nature-related opportunities to help fill the estimated USD700 billion funding shortfall in biodiversity conservation.
As of 2024, Fidelity will roll out deforestation voting, which involves voting against corporate board members in high-risk sectors who do not meet deforestation-related expectations.
This approach has a measurable impact across the region, helping investors gauge the nature-related impacts of businesses and helping companies understand how to assess and mitigate those risks to avoid potential divestment.
“For example, we’ve had an ongoing conversation since 2019 with one of the largest dairy companies in China,” says Chang, “Our dialogue initially started with corporate governance and has steadily expanded to topics such as carbon neutrality.”
Once a company understands why investors are concerned or interested in sustainable progress, it is often open to feedback. “In early 2023, this dairy company became one of the first in China to commit to a zero-deforestation target across its supply chain by 2030,” continues Chang.
Critical company engagement
Similarly, ongoing engagement in recent years with palm oil and forestry producers in Indonesia, one of Asia’s major deforestation hotspots, has resulted in investee companies helping smallholding farmers understand the concept of sustainable farming and new agricultural technologies.
It’s also crucial for asset managers to help investors grasp the concept of imported risk. For instance, as buyers of a combined 18 per cent of Indonesian palm oil, companies in China and India incorporate deforestation risks in their supply chains. Even in Japan, which has one of the highest forest-to-land ratios among Organisation for Economic Co-operation and Development (OECD) countries, indirect exposure to nature loss is a pressing supply-chain issue.
“Among the 350 businesses listed in the Forest 500 – a list of influential companies and investors linked to tropical deforestation – there are 32 Japanese companies,” says Murata. The European Union (EU) has rolled out its deforestation-free products regulations, which means Japanese companies exporting to European markets must show sufficient proof that their goods are not linked to deforestation. “This is a financial materiality because it will affect top-line revenue.”
Engagement is having an impact in Japan, too. After less than a year of discussions with one of the country’s largest beverage manufacturers – and in response to Fidelity highlighting changing regulations and intensifying societal and investor demands – the company recently committed to responsible sourcing.
“In the last year, Fidelity had 200 engagements related to nature,” says Milon. “We fully believe that, as an investor and a large shareholder in many companies, engagement is one of the best ways to understand how businesses manage their nature-related risk.”
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