The Dasgupta Review clearly linked economic success to biodiversity. Large investors are starting to respond to the risks and opportunities of this relationship.
Following its March publication, the Dasgupta Review was rightly lauded as the first detailed description of how all economic activity both depends on and affects nature. But even though it took a sizeable multidisciplinary team over a year to produce and ran to more than 600 pages, it is really only the first step in a long journey – experts acknowledge that there’s a lot more work to do.
One group who will play a big role is institutional investors. They are instrumental in setting the cost of capital – and so essentially, the cost of implementing various strategies – for large organisations, and can persuade senior managers to make decisions that either destroy or sustain nature.
So far, investors have been making what sounds like a positive response. Sonya Likhtman, Engager, Equity Ownership Services at Federated Hermes, an asset manager, says, “We welcomed the Dasgupta Review’s important insights and strong articulation of humanity’s unsustainable relationship with nature.”
Michael Ridley, Senior Responsible Investing Specialist at HSBC, called the Dasgupta Review “a call to arms for the asset management industry,” in a recent Financial Times piece. But while it might spur interest and action, the Review wasn’t written specifically for professional investors.
Sophie Robinson-Tillett, Editor of Responsible Investor magazine, says “There wasn’t a lot in it that was actionable by investors. The momentum that’s driving ESG action has been policy intervention and the Dasgupta Review served to let investors know that this is next on the agenda.”
She says that “there hasn’t been a lot done in the UK on nature in terms of investment decisions.” And goes on to point out that “French and Dutch investors are doing more on nature than UK investors, and those jurisdictions didn’t have a report” in any way comparable. to Dasgupta.
Change is coming
Despite this, though, the sector is now braced for change. “There is the quiet threat of regulatory risk when a government comes out with something like this,” says Robinson-Tillett talking about the review. And nobody doubts that it has provided a much needed detailed technical underpinning of the link between biodiversity and economic success.
“There is increasing recognition that companies across a range of sectors depend on healthy and productive ecosystems, but there is a long way to go to reverse the unprecedented decline of nature,” says Likhtman, talking about her interactions with management teams. Federated Hermes “expects boards and management teams to establish strong governance for biodiversity,” says Likhtman. “This means working to understand the company’s key risks, dependencies and impacts in relation to biodiversity and taking responsibility for ensuring that the company’s operations and supply chain make a positive contribution to nature.”
The firm is “calling on companies to commit to having a net-positive impact on biodiversity throughout their operations and supply chains by 2030 at the latest.”
Elsewhere an industry is growing around ‘green investment’. Pollination, a firm set up to take advantage of this trend claims on its website that “momentum is building and money is moving – more than US$2.8 trillion of climate finance has been invested in past five years – but to mitigate the biggest risks and unlock the greatest opportunity, we have to move faster.”
And Thomas Viegas, an adviser to the Dasgupta Review and now back working at the Bank of England told us in March, “Long-standing barriers in the private market, whether that be tangible returns, readily available projects, or robust data to really scale up private investments, may become available when we effective regulation incentives. Indeed, mechanisms suggested by the Review – blended finance, pooled funds, green bonds, or broader sustainable investing – can all help us engage sustainably with nature.”
Getting the data right - and that means more than numbers
So, for now, investors are working out the viability of creating climate- and nature-related investment products and, alongside that, how to encourage management teams to mitigate and reverse nature loss. One important starting point for both these endeavours is to understand what activities can be measured to understand comparable progress towards these goals.
Robinson-Tillett says, “Investors need to start by getting the data right. They’ve learnt those lessons from climate. They’re going to need to work out the pricing; there needs to be a clearer idea of how to factor in a price for externalities.
All investors will have to understand “what costs are being created by the natural assets” companies use, she says.
Many commentators point to the recent launch of the Taskforce on Nature-related Financial Disclosures – purposely named to pick up on the huge success that the Task Force on Climate-related Financial Disclosures has had in establishing a global standard for assessing climate-related financial risks – as being a big step in the right direction.
But those involved in this space also understand that not everything in nature can be given a price. Indeed, Professor Dasgupta is keen to point this out, saying that, although accountants and financial professionals should think of all of nature as an asset, “some of these objects will not be given a price because we don't have a price – it's zero.”
He says that simply “recognising that you're actually making use of it in quantitative terms, is a big improvement because you recognise what you're doing to the system.”
Likhtman echoes this in how she says Federated Hermes work with their management teams. “Understanding companies’ approach to biodiversity requires both qualitative and quantitative analysis.
“Companies must reduce their contribution to the five main drivers of biodiversity loss, as identified by the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Service (IPBES) – changes in land use and sea use, direct exploitation of organisms, climate change, pollution, and invasive alien species. This will require a range of activities depending on the sector,”
And Robinson-Tillett agrees that while data and measurement is paramount, that doesn’t have to mean numbers. She points to a number of initiatives that investors have worked on that describe “the damage that companies do without trying to quantify it.” Once you’ve worked that out, she says, you can determine who has the best practices for reducing and mitigating that damage. And, from there, you can “start to measure what different peers are doing, and see what works best.”
There’s a lot to take in for management teams, investors, policymakers, accountants and a whole host of other experts working through this topic. But, safe to say, the Dasgupta Review moved the debate along and it’s clear many others are now ready and willing to take up the baton. Where the journey ends, however, is still far from certain.
The Economics of Biodiversity
In 2019, the UK was the first major government to commission a review into the economics of declining biodiversity. We speak to the team behind the Dasgupta Review, to find out what it means for business and the profession.