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Erika van der Merwe (EM): Biodiversity loss has become a pressing issue for scientists, activists, policymakers – and for investors. And there’s agreement that measures to halt and reverse biodiversity loss are now critical. But is this enough to move key role players into action? And that includes the investment community, which is already dealing with macroeconomic worries, regulatory demands and many competing priorities in the realm of ESG.
Well, there's plenty to discuss on this topic, and all the more so in light of the UN Biodiversity Conference, which has just wrapped up proceedings in Montreal. I'm pleased to welcome Peter van der Werf, Senior Manager for Engagement at Robeco, and special guest Simon Zadek, who's Executive Director of NatureFinance. Welcome, gentlemen.
Simon Zadek (SZ): Thank you.
Peter van der Werf (PW): Great to be here.
EM: Peter, why is biodiversity preservation and restoration relevant from an investment perspective?
PW: That's a very good question, Erika. From our perspective, we clearly see biodiversity loss in a similar fashion to climate change, as a systemic risk to all of our investments that we need to address. And that's also the reason why we have enshrined it in our sustainability strategy in 2021, as one of the three topics, being climate change, biodiversity and human rights, which we want to incorporate across all of our investment strategies.
EM: Simon, how do you see that the opportunity here for investors, because, of course, there's this compliance aspect and bearing in mind what it all means for investors and future generations, but what is it that should excite investors about this topic?
SZ: Thanks. Yeah, I mean, it's worth starting off by saying 100% of GDP is indeed 100% dependent on nature. Everything that we produce; not simply food, which is perhaps the most obvious piece of the story. And so whether we're looking at buildings or high tech or whether we're looking at what we're wearing, nature feeds the economy at an essential rate. And so the question obviously starts with risk. Is nature and our dependency on nature going to create problems, stranded assets, if you like, for those coming from the climate side? And what are the upsides? Well, the new areas in which investments may open up as nature becomes, if you like, more countered in the way in which the global economy functions. Think of food in relation to nature, much as we think of energy in relation to climate. So we have an USD 8 trillion food system with massive use of nature, if you like, and dependency on nature. So nature as vulnerable. We begin thinking of, say, alternate protein or vertical farming as ways of decoupling from nature-related risk, using less of it, if you like, depending on it less. And we certainly see tech investment in those two areas. So ‘soulless’ agritech beginning to accelerate very quickly. But equally in other areas, new markets beginning to emerge. We know, for example, about carbon markets, carbon-offset markets. We're beginning to see a first generation of biodiversity credit markets beginning to emerge on the global stage.
EM: You've both just returned from Montreal, from COP15. Simon, these kinds of topics that you're talking about, the innovation around finance for biodiversity, was this a key aspect of those discussions?
SZ: So the biodiversity negotiations are like a doughnut. You've got the actual core negotiations, inter-governmental negotiations going on in the middle, if you like, and they're tough and they're text-based and then you've got what is effectively a sort of bazaar or a marketplace of many, many different actors from the public sector, from civil society, from the financial community, other parts of the corporate community, if you like, experimenting, describing different things that are happening in the particular nexus between biodiversity and economy. And so in that bazaar, if you like, we saw many, many actors talking about some of the new markets beginning to emerge as well as some of the risks that Peter has referred to. But actually even in the negotiations themselves, when we look at the draft text, there's already mention of, for example, biodiversity credit markets, new ways of investing in food systems and so on.
EM: Peter, your overall impressions from the experiences in Montreal, the discussions you saw?
PW: What I took back from Montreal was first of all, that this was the first time that the finance community really engaged with the Convention on Biological Diversity. I spoke to a colleague of ASN Bank here in the Netherlands who was at the previous COP, which was held in 2018 in Sharm el-Sheikh, and he said, ‘Well, we did a session there’. He said,
‘We had five people showing up about biodiversity, food printing and how they apply that.’
This time, there was a full finance day. We had the Finance for Biodiversity Foundation, which Robeco is part of, represented and actually participating in the negotiations with a couple of investors that represent that group. So overall, as Simon also mentioned, we very clearly saw there was a lot of engagement and there was a lot of opportunity to be part of that and also a lot of discussions with standard setters, with organizers, nations that are basically in the ecosystem of finance and how they are able to implement and integrate biodiversity considerations. The was a lot of very positive energy to see this topic advanced. So from my perspective, definitely a very good trip to participate in and represent Robeco.
SZ: Yeah, I would add into that, Peter, I absolutely agree. If we think a little bit on the risk side rather than only on the upside opportunity side, the Task Force on Nature-related Financial Disclosure, if you like, the close cousin to the Taskforce on Climate-related Financial Disclosure had a huge airing, I would say, at COP15, broadly embraced the work that it's doing, has recently come out with its third beta version, will come out with its final set of disclosure recommendations in September 2023 and the link across to the international sustainability standards board, which is, if you like, the sort of, dare I say, the official kind of global baseline that is emerging to inform sustainability related reporting. So TNFD, very much on the up, many people embracing it, the linkages across both to the ISSB but also to the central banking community writ broad. You know, the Dutch central bank was the first central bank in the world to undertake a biodiversity-related financial stability analysis. That's now been followed by a number of other central banks and now a broader association of more than 90 central banks are beginning to try and figure where biodiversity and more broadly nature fits into their mandate.
EM: It's very clear then that the standard setters, the regulators are involved. They're taking note, but there are also various other structures being set up. So Robeco is one of the parties to Nature Action 100, which you launched at COP15. What's it all about?
PW: Yeah, that was really a piece of work we had been building up towards COP15 over the last two years with a group of 11 launching investors. We had been working on a global collaborative engagement program similar to what Climate Action 100 has done in the climate space over the past five years. We've selected four organizations to invest in networks to build the secretariat, and together with them, we did what they call a soft launch at COP15. So we announced the partners, we announced the ambition of the program and we’ll be developing that into 2023. It was on Sunday morning, 8:30 am. I didn't expect too many people to show up, but we had a full room; standing in the back. People really with a lot of enthusiasm and interest to learn about the program. So from that perspective, yeah, we were definitely very happy with the way we were able to launch it at this global platform.
EM: And there was more. You really were quite busy. Robeco’s a signatory to Finance for Biodiversity. You mentioned it earlier. What was your position, your stance in the negotiations in Montreal?
PW: Yeah, So we had identified three areas where from a finance perspective, a year and a half ago we thought that the initial draft could be strengthened of the global biodiversity framework that was put out. So that was in terms of how Goal D refers to not only public financial flows but also private financial flows, basically aligning also the private investments from the capital markets into the framework. Similarly, in Target 14, we wanted to focus more on also private financial flows and then Target 15, which was really about reporting. So we have made a call together also with Business for Nature with 330 businesses and investors. As for mandatory reporting, I've been sitting in the negotiations on that text. It was very sort of tough and took a lot of patience for the parties to work through.
EM: Are you talking about the Business for Nature text?
PW: Yeah, so and that really goes in sort of the mandatory reporting bit, which I think for quite a few countries was difficult to accept the word ‘mandatory’ in there. But this is something that investors really have been pushing for because that would enable us to get much more, let's say, standardize and qualify data from the companies we invest in. And that would help us to ultimately report on a portfolio level. So these were sort of the three elements that we have really been advocating for. And when we were digesting the, what they call, the sort of non-paper, the sort of final draft from the Chinese government that came out yesterday during the day, Sunday. So that came out on Sunday. So the sort of final steps before they go to the final agreement, what they as a chair collected in terms of output, the word mandatory had disappeared from the text. So there were governments that really were not able to support that, but there were sufficient elements in there and that would enable individual national governments to then start applying how they look at reporting. So we were happy with that. And particularly, I think, the inclusion of private financial flows in terms of also the private sector to be included, that was really taken on.
SZ: In many ways, where the nature agenda has progressed over the last 18 months vis a vis, for example, disclosure and metrics, it's taken the climate community a decade to achieve, and that's not because the nature agenda is simpler. I think it's because we're building on some of the experience and using some of the same frameworks and approaches that the climate community has used. And I think the data piece becomes important. So many folks in the financial community kind of start and end their comments by going, ‘The data is not there, I can't measure it correctly… And until the data is there and robust and commonly agreed, it's going to be really difficult to take nature into account in a systematic way.’
And in many ways COP15 was a display of many, many initiatives in the data space, increasingly sophisticated use of artificial intelligence, machine learning, big data, satellite data, genetic testing on the ground. I think we're seeing a very, very rapid development of more than adequate sets of data for the investment community to begin to both measure risk, disclose on it in a more systematic way, understand upside opportunities more effectively.
EM: Peter, do you agree with what Simon’s saying regarding the availability of data? I mean, you are placed within teams who are needing to do this.
PW: Yeah, I had actually quite a few conversations with ESG data providers that were also presenting in Montreal to look specifically at deforestation data. We started a campaign earlier this year actually speaking to all of the ESG data providers, given that we had made at COP26 a deforestation commitment, which really tells us that we need to start disclosing the deforestation risk across all of our investment portfolios and how we take action towards 2025. Given that there is still a lack of, let's say, broadly available data on deforestation, we're really driving those discussions and I think yeah, Montreal really also provided a very good space to have in-depth conversations. To a certain degree we had a booth with a Finance for Biodiversity foundation where a lot of people sort of kept on meeting each other and bumped into each other and we had a lot of sort of spontaneous meetings, really diving into some of those difficult topics as we don't have the data yet, but what would you want us to collect? What are some of the things that you really need? What is your business case? So from that perspective, I'm positive on where that is developing. The challenge is that it's a lot of different data sets and different pieces of information that they need to put together and then build a product that investors can use across a full investment universe. I think that is typically the most difficult part. But I do feel that we're making a lot of progress.
SZ: Yeah. So I'm going to unpack biodiversity a little bit because of course not all biodiversity is exactly the same when it comes to data and when it comes to understanding the links to economic asset valuations and capital deployment. You know, so on the one hand, perhaps the easiest piece of the story to get one's head around is water. It gets a little bit more difficult, but there's a huge amount of work, as you say, in the area of forests, although as you know, that's a highly differentiated area. Once you begin to unpack the many different kinds of standing forests that exist across the world and what they provide. And perhaps if you go all the way to the other end of the spectrum, you've got deep sea. Yeah. And perhaps the sort of terrestrial part is easier than much of the ocean side of biodiversity. But of course, ocean side of biodiversity is hugely important as well. And so I found myself attending a number of sessions that were focused on the ocean side, particularly beyond the exclusive economic zone. So really kind of out there in the sea. And clearly there's a lot of work to do in connecting the dots between data that's relevant to the preservation of biodiversity in deep ocean, how that relates to economic assets and investor decisions. So I think there's a spectrum and I think some of the pieces are going to be a lot easier and there's a lot of work to do on some of the more complex, differentiated kind of common good areas such as the deep blue sea.
EM: Moving that on to the areas that need preservation and restoration and the resources that it requires, what I observe from the media coverage is that one of the biggest challenges during the discussions was to find agreement between developed and developing nations. And I understand there were some tough moments with some walkouts during the negotiations. Here's a comment recorded during the convention, I think it was in the earlier part of it, on what some of these challenges are:
Audio: Well, we hold most of the world's biodiversity, and a lot is being asked of us to take action for biodiversity as well as to monitor, report and review all these and be held accountable for our actions. But at the same time, there's no commensurate financial resources and this is what developing countries are calling for, for new and additional -- a substantial increase of financial resources, as well as the establishment of a new global biodiversity fund that will be more easily accessible.
EM: That's Lim Li Ching from Third World Network, speaking in an interview with Carbon Brief. Your observations on this, Peter?
PW: Yeah, there were indeed a lot of conversations around a global biodiversity fund and how that would also support biodiversity conservation. And while I really appreciate the need, the focus from developing nations and also the need for, for more overseas development aid (ODA) to be assigned to do this, my take is that in many cases sort of changing the rules for the larger private capital flows is more important than trying to find ways where public finance can ultimately be assigned from a global biodiversity fund perspective. So, yes, it is really important and it's often a critical piece and a very contentious piece of the negotiations between the equity -- between developing countries that have a lot of the natural assets and the developed markets that actually have already foregone a lot of the natural assets by bringing it into production. Here in the Netherlands, we have also gone through that process hundreds of years ago already by creating a very extensive agricultural system and therefore taking out our net natural assets in many cases. But I do think that this is an important element to focus on. But that's from our perspective, where we see it as an investor, we think that ultimately getting large global businesses to have a stronger focus on biodiversity in terms of their impacts, know where the footprint lies and also then be able to bend the curve and move to a nature-positive economy. I think that's where we can have the biggest impact.
EM: And then if I were to ask you on the likelihood of success overall in agreeing on a Global Biodiversity Framework, and one can't help, I remember, Peter, that some time ago you pointed me to the fact that back in 2010 at COP10, aims, objectives were set and not a single one of those were achieved. Now, looking at what's being aimed for here, what's the likelihood of success?
PW: Yeah, I would say that the awareness on the systemic risk that ultimately biodiversity loss poses and I think Simon also alluded to that, in terms of how much of GDP actually is dependent on natural capital, I think that awareness wasn't there 10 years ago or 12 years ago when the Aichi targets were set. And has basically also therefore not helped to then follow up to those commitments. So, yes, the sort of scientific understanding was there that led up to setting those targets, but not the realization, I think, within actors in the global economy. So from a private businesses perspective, I think it is now really on the agenda. And I do see indeed, executive boards really also embracing this. I spoke with one mining company, Rio Tinto, at the conference and they had set up a nature-based solutions team and had fully resourced it in April this year and were now really starting to from both a decarbonization perspective, but also from a biodiversity perspective, starting to look at the right investments and the right ways how they could build this. That would not have happened 10 years ago and therefore without the support of these types of global businesses, I think it is really difficult to reach those targets. So I'm more positive than, let's say, 12 years ago.
SZ: Yes. No, I think Peter's distinction between the call to mobilize funds to spend on biodiversity, which is largely a Global North to Global South public resource transfer and the need to align global financial flows with nature-positive outcomes, which is largely to do with the way private finance works. So financial and capital markets. I think we have to balance positives and negatives, I would guess, Peter. In some ways, the tragedies of the pandemic and now the food crisis associated with the Ukraine war will accelerate action on nature. So solutions born out of crisis and tragedy in a way. And at the same time, we're entering into a very difficult economic period where fiscal space is very short, where investors are very nervous, where risk appetite is relatively low, and that makes experimentation and large redeployments of capital perhaps more difficult, certainly over the next year or two. So I'm aligned very much with Peter's observation that our awareness of the place of nature in the global economy is vastly higher than it was 10, 12 years ago. And also aware that sort of a mixture of ‘bads’ are both accelerating action on nature and may constrain action on nature over the next two, three, four years.
PW: And maybe one piece to add there as well. One of my last sessions at COP15 was hosted by the United Arab Emirates, who will be hosting COP28 a year from now on climate. And one of the points that they made and they really asked all different actors to bring ideas out of COP15, which they could take forward to Dubai a year from now. And they mentioned that land use change as a factor in sort of deforestation within the climate change debate would be a very important topic that they want to bring there. So, I do see also more of a connection between what was previously a biodiversity COP process as a convention and then climate, which is now coming together. And this is also from our perspective, something that we in Robeco are really also advocating for, is that we don't have a climate strategy which is separate from biodiversity, that we bring these two together and that companies start to think in that manner as well. So nature as a broader set of risks and opportunities and that you bring those together. So I'm, also from that perspective, positive that we see those two come together. They are distinct processes and there are reasons why they won't be held at one single event. But I do think that that recognition is growing and that also, yeah, makes me positive.
SZ: Leadership counts, not only context and not only importance, as it turns out. And I think it's worth highlighting a couple of new actors on the block at a micro but hugely important level. We see Gabon sitting on a piece of the Congo. So a critical nature resource for us all, taking real leadership internationally in advancing proposed, actually market mechanisms, carbon credit markets, biodiversity credit markets, nature-linked sovereign debt instruments to secure support for what they see is not a reason for getting aid, but in a sense a service that they're providing in protecting Gabon, in protecting the Congo rainforest. And then I would call out Brazil. As we move towards a change in the administration, Lula has made it very clear as to his priority in protecting the Amazon, as his intention of taking a global leadership role in the nature space. But also, Peter, finally, really bringing it back to your critical observation. Their comments are how best to bring together the climate and nature agendas going forward.
EM: Let's bring it all to a close. We know our audience is interested in investing, finance. Peter, what does all of this mean for investors?
PW: Yeah, so for Robeco, this means that we have developed a biodiversity task force that is implementing a lot of the work that we have been discussing at COP15. So we're developing a biodiversity investment framework. We have indeed the global collaborative engagement via Nature Action 100 that we've launched. And from that perspective, we start to also then prepare biodiversity investment products. And we launched Biodiversity Equities a month ago. And I think all of these elements are ultimately building up to a way how we can make this work for our clients. How we've designed our Biodiversity Equities product is that we've really looked at the most major drivers of biodiversity loss, in terms of threats to biodiversity loss and have made what we think is quite a pure product. So we have not taken up companies that have a very strong link to climate change. While that is an important driver of biodiversity loss, we've really kept it to the most important ones in terms of having a pure impact on freshwater ecosystems, marine ecosystems, Simon mentioned, and also terrestrial ecosystems. And then with the focus on traceable products. So from that perspective, what we call the, the purity of the thematic exposure is really high. And I think that is something that we think, yeah, can really make a difference. How you're able to allocate capital to that strategy.
SZ: Get started, is, of course, the most important thing to say. Don't wait for the perfect data, don't wait for the perfect standards. Figure out what your nature dependencies are and associated risks. Figure out what the emerging markets are that provide upside investment opportunities. So I would simply go, don't wait for the perfect, just move with the good.
EM: Wonderful. Simon, Peter, thanks so much for your insights and welcome back.
PW: Yeah, thanks for having us.
And to listeners, thanks for being part of this conversation. If you've enjoyed the show, please rate the Robeco podcast on the platform from which you're listening and we'd love to hear from you. So please send us your comments, feedback and suggestions to the address podcast@Robeco.com. You'll find all of our podcasts on your favorite podcast platform as well as at Robeco website.
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