Sort the wheat from the chaff – why thorough biodiversity impact research is crucial
- A variety of multi-sector opportunities exists within the biodiversity universe
- Diligent analysis can help improve the likelihood that investors’ capital achieves real, positive impact
- Some of the most innovative and necessary solutions to mitigate loss are found within intense land use industries, such as agriculture
Awareness of the importance of biodiversity, the scale of its loss, and the action needed to preserve the future of our planet is growing. More investors around the globe – alongside governments, regulators, and corporates – are realising how efforts to halt and mitigate its loss are as crucial as tackling climate change when it comes to safeguarding future, sustainable growth. While this growing realisation is both necessary and positive for driving the flow of capital into sustainable investments, it is also important for those investors to choose wisely if they aim to achieve the most efficient and impactful use of their assets.
Seeing the wood for the trees
Active investment managers that utilise leading research capabilities and carry out diligent fundamental research, such as AXA IM, can help investors to maximise the potential of their asset allocations. We seek to identify companies and industries where real, measurable, and sustainable impact is achievable through innovation. Part of this includes identifying some of the most significant drivers of biodiversity loss, such as land use, and looking for investable solutions to the issues which have historically been caused by this activity. By investing in companies which have the potential to mitigate the impact of inherently intense, but necessary, land use - such as impact caused by the need to feed a growing global population via agriculture - we can also help to bring about the efficiencies, innovations and best practises needed to minimise how much this large-scale imperative for food production impacts the planet.
In doing so, we also identify those opportunities which may appear to be biodiversity-positive on the surface, but upon closer inspection (utilising our own impact analysis and environmental, social and governance (ESG) research and data from both internal and external data providers), a close examination of everything from the supply chains, operations and related environmental factors can reveal that these initially interesting companies may, in fact, not provide the level of truly positive action necessary to earn a place in an impact portfolio.
One example of this need for greater nuance and caution, particularly when it comes to quantifying the real positive impact that can be achieved by companies, can be seen from our research into UK water utilities. We recognise that lots of good work has been undertaken within the industry in terms of reinvesting in the network and upgrading infrastructure, but the sustainability profile of these companies is still challenging - particularly around persistent issues with sewage leaking into rivers, which is harmful for species health and abundance. It's also disadvantageous for human health, causing potential contamination to bathers as well as risking contaminating water used for both drinking and agricultural purposes, introducing potential contaminants throughout the food chain. UK water utilities have a mixed track record on pollution; this is partly because the infrastructure is quite old, and partly due to logistical and financial limitations upon their ability to renovate these aged facilities as quickly as they would like. Additionally, climate change is causing more intense rainfall events, which can impose further pressure and overwhelm this outdated infrastructure. Because these companies still maintain challenging positions for biodiversity impact investors in terms of their relationship with the environment, we consider them not wholly attractive at present, but will continue to monitor the situation.
There’s always a bigger fish
On the surface, the intense land use and accompanying species loss caused by agriculture may cause some investors to be sceptical of investing in related companies when seeking to promote biodiversity, such as those found within the agritech space. Yet the sophisticated, precision farming technology pioneered by firms such as leading farming technology provider Deere has the potential to help materially reduce the impact that our global need for calories causes on the environment, whilst positively contributing to global food security. Technology which minimises the use of fertilsers and pesticides both improves the efficiency of food production, whilst also significantly reducing unnecessary contaminants from leaching into the environment and water tables. This potential for material global impact, in our opinion, compares favourably when viewed alongside the environmental credentials of aquaculture firms which are sometimes lauded as a more sustainable alternative to traditional farming methods, such as MOWI. The world’s leading seafood company is described in generally favourable terms by the World Benchmarking Alliance, who have placed it in second place amongst the Seafood Stewardship Index. Yet, a significant number of risks are still to be addressed by the company, in part due to issues uniquely applicable to seafood farming. In terms of its biodiversity profile, while the company is admirably transparent around reporting its environmental footprint in detail, ‘significant scope’ for improvement remains. Similarly, the proportion of live fish which escape the confines of its farm have historically been high, which has worrying implications for interbreeding or dominance of invasive species introduced into local ecosystems - risking doing more harm than good. This said, aquaculture has the potential to alleviate the pressure on land use for agriculture, which itself can drive biodiversity loss, thus highlighting the potential of sustainable aquaculture.
When seeking to invest in companies that are positively contributing towards biodiversity, it is crucial for investors to maximise their efforts to critically examine all risks and opportunities across a company’s operations and supply chains. At AXA IM, we employ sophisticated impact assessments and comprehensive, fundamental research alongside active engagement and external data providers; this allows us to hone our focus on encouraging promising opportunities, use our position as an investor to incentivise positive change, and to champion those companies that are most likely to have the strongest positive effect on the preservation of natural capital whilst, of course, contributing to financial returns and the long term investment goals of our clients.
Companies shown are for illustrative purposes only as of 06/07/2023. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalised recommendation to buy or sell securities.
No assurance can be given that our equity strategies will be successful. Investors can lose some or all of their capital invested. Our strategies are subject to risks including, but not limited to: equity; emerging markets; global investments; investments in small and micro capitalisation universe; investments in specific sectors or asset classes specific risks, liquidity risk, credit risk, counterparty risk, legal risk, valuation risk, operational risk and risks related to the underlying assets.