Pension schemes have a role to play in addressing food shortages caused by biodiversity risk.
While much of the attention for sustainable investing has centred around reducing pension funds’ carbon footprint in recent years, interest in biodiversity has been increasing – and food and agriculture play a critical role in safeguarding the world’s biodiversity.
Biodiversity for food and agriculture is a key part of the UN’s Sustainable Development Goals, including its second goal of ending hunger, achieving food security, improving nutrition and promoting sustainable agriculture.
In a landmark study by the UN’s Food and Agricultural Organization in 2019, ‘The state of the world’s biodiversity for food and agriculture’ report found that many key components of biodiversity for food and agriculture at genetic, species and ecosystem levels are in decline.
Whether trustees will make an active choice to put as much emphasis on biodiversity as they have begun to do on climate change remains to be seen
Tracy Walsh, Womble Bond Dickinson
Although the use of management practices and approaches favourable to the sustainable use and conservation of biodiversity for food and agriculture is increasing, it remains difficult to measure.
Ultimately, the report found that biodiversity in food and agriculture was impacted by major global trends, such as climate change, international markets and demography.
Tracy Walsh, UK partner at international law firm Womble Bond Dickinson, says there is often very little mention of biodiversity among pension funds’ environmental, social and governance goals.
“Whether trustees will make an active choice to put as much emphasis on biodiversity as they have begun to do on climate change remains to be seen,” she notes.
“In practice, the ability of trustees to scrutinise the performance of what are huge pooled funds, and then to justify instructing their fund managers to focus on any or a greater proportion of biodiversity-focused investments, will first depend on better and more consistent biodiversity impact reporting by investee companies.”
This issue is gaining greater recognition in the investment industry, with Walsh pointing to the Finance for Biodiversity Pledge, which now has 111 signatories from across 20 countries, including eight of the largest asset managers in the UK, and with more than €16tn (£13.8tn) in total assets.
“They have committed to collaborating, engaging, assessing their biodiversity impact, setting targets, and reporting on biodiversity matters by 2024, and it is hoped that this will trickle down to the industry as a whole in time,” she adds.
A big opportunity
For asset managers, food and agriculture are huge addressable markets. Indeed, according to the Taskforce on Nature Markets’ Global Nature Markets Landscaping Study, food demand is expected to increase by 56 per cent in 2050, when compared with 2010 levels, as the global population continues to rise.
And there are considerable benefits for investors that incorporate biodiversity along with their other ESG targets.
A note from Bank of America Global Research, published in October, found that companies with a net zero target – which are also working towards improving their biodiversity impact – trade at a 12 per cent premium compared with those doing neither.
Cardano Actiam senior responsible investment officer Arjan Ruijs works with companies to reduce their impact on biodiversity loss and to help them prepare for potential challenges to food production.
He says: “Biodiversity-related risks are one of the many global challenges facing the companies in which we invest, and as a result are a key consideration in our sustainable investment framework.
“There are many risks associated with biodiversity, particularly in the current climate. This may be related to reduced yields due to loss of soil fertility, decreased pollination, scarcity of water or polluted water or soils due to heavy use of plant protection chemicals with adverse impacts on biodiversity.
“It may also relate to increased prices or disruptions in supply chains of food processing or food retail companies caused by problems in primary agricultural production.”
A real diversifier
Richard Jacobs, managing director for private markets at Dutch asset manager Van Lanschot Kempen and manager of the Kempen Sustainable Development Goal Farmland Fund, says very few institutional investors hold agricultural land within their portfolios compared with real estate or infrastructure.
“Institutions hold a tiny percentage of farmland, but we believe it’s going to grow,” he notes.
“You often find pension funds and institutional investors are looking to diversify. For instance, they often hold large positions in real estate and want to have some real assets with different return and risk drivers.
Biodiversity: What can pension schemes do?
Investors are increasingly focusing on how companies interact with and care for natural ecosystems, and pension schemes can contribute meaningfully to these efforts, experts say.
“With higher interest rates and potentially a recession coming, farmland may hold different characteristics as it is less sensitive to economic conditions and is anti-inflation.
“Increasingly, I hear of pension funds investing in farmland for impact reasons. Typically, these top-tier investors have already made inroads into timber for carbon capture and climate control issues, but they are now learning that farmland has similar characteristics,” Jacobs continues.
“Nothing will live without an increase in biodiversity, and that is a real issue for the farming and food industries in the longer term.”
