SUSTAINABILITY IN FOCUS
Biodiversity as a Vital Component in ESG Analysis
The pioneering Dasgupta Review on the Economics of Biodiversity clearly highlights the immeasurable value of nature and the enormous economic consequences of its destruction. Likewise, this has an impact on investment outcomes, and as such, J. Safra Sarasin integrates various biodiversity factors into its overall investment process.
Biological diversity – the basics
Nature provides us and our economy with a vast range of essential ecosystem services, for instance water and air purification, pollination, flood and avalanche protection, carbon capture, and the supply of raw materials. When discussing nature, it is important to bear in mind, in simplified terms, the four main pillars that nature comprises: air, water, soil and biodiversity. Thereby, biodiversity is defined as the variety of living organisms within and between species and ecosystems. This also includes genetic diversity.
Biodiversity is the foundation of the nearly all ecosystem services provided primarily by living organisms. As in all complex systems, however, diversity is also essential for stability, by allowing and absorbing small shocks.
Biodiversity components and their interrelationship
Source: The Dasgupta Review, Interim Report, April 2020
Therefore, the current enormous loss of biodiversity not only massively reduces ecosystem services, but also undermines the stability of the entire ecosystem (and its subsystems). In this context, science also warns us of ‘tipping points’, which trigger chain reactions and make regeneration virtually impossible.
Connection between loss of biodiversity and economic impacts
On one hand, various economic activities are some of the main causes behind the destruction of biodiversity. On the other hand, many sectors and businesses are directly or indirectly affected by the consequences of biodiversity loss. Depending on the sector and nature of business activity, however, the dependency and impacts can be very different. From an industry perspective, the main drivers of biodiversity loss include agriculture, forest products, fisheries, food and textiles, mining, fossil fuels, and transportation (including infrastructure). The sectors most affected tend to be agriculture and forest products, fisheries, textiles and the food industry, as well as energy suppliers. But there are also a number of industries such as chemicals, pharmaceuticals, insurance, banking and asset management that both contribute to, and are negatively affected by, the loss of biodiversity.
Just as with climate change, the economic risks associated with biodiversity loss and natural capital can be classified into physical risks, litigation/regulatory and reputation risks, transition risks and systemic risks.
Biodiversity criteria in our investment process
For some time now, J. Safra Sarasin has integrated biodiversity risks into its investment process. This process is based on the definition of the sustainable investment universe and our proprietary data analysis.
The basis – defining the investment universe
The first step in our investment process is to specifically exclude controversial activities. Biodiversity considerations also come into play here. For example, excluded activities with a high impact on biodiversity include coal (mining and electricity generation), nuclear energy and genetic engineering in agriculture. Companies that clearly contravene the UN Global Compact are also excluded. Palm oil production, fracking and tar sands are other relevant criteria for exclusions that have significant consequences for biodiversity.
Relationship between the economy and loss of biodiversity
Source: Bank J. Safra Sarasin Ltd, March 2021
The second step in defining the investment universe involves an in-depth sustainability analysis based on J. Safra Sarasin’s proprietary Sustainability Matrix ®. This comprises a combination of a best-of-class (industries) and a best-in-class (companies) approach and assesses the ESG risks of industries and individual companies. Biodiversity aspects are included in the industry analysis through the aggregated ESG industry risk, the aggregated ESG controversy risk and the industries’ contributions to the Sustainable Development Goals (SDGs) and carbon footprint (Scope 1, 2 and 3). On a company level, we focus on the financially relevant ESG risks for enterprises. The analysis considers the following key themes that directly or indirectly represent biodiversity risks:
- Biological diversity and land use (relevant to 19 sectors)
- Toxic substances and waste (relevant to 35 sectors)
- Water scarcity (relevant to 30 sectors)
- Sourcing of raw materials (relevant to 24 sectors)
- Opportunities in clean tech (relevant to 25 sectors)
- CO2 emissions (relevant to 80 sectors)
- Carbon footprint of products (relevant to 25 sectors)
- Financing of activities with environmental impacts (relevant to 8 sectors)
- Packaging material and waste (relevant to 6 sectors)
When rating individual companies, continuous monitoring of global media news ensures potential controversies are also taken into account. For example, companies accused of environmental pollution in the press or other public reports will have their ecological score downgraded to reflect the negative consequences of the incident (environment factor).
Founder member of the Finance for Biodiversity Pledge
On the 25th of September 2020 we, along with 25 other financial institutions, launched the Finance for Biodiversity Pledge. With this pledge we commit to increasing and sharing our knowledge and expertise in biodiversity risks, establishing a dialogue with invested companies, setting goals and publishing transparent reports. We are also calling on global leaders to take action to preserve biodiversity.
Search for opportunities and portfolio optimisation
Biodiversity factors are not only important in defining the investment universe, but also in subsequent steps of the investment process. As with other themes, we believe that a focus on fundamental changes, such as biodiversity loss, not only highlights investment risks, but also opportunities. When analysing investments we therefore consciously keep a lookout for companies offering solutions to address long-term and transformational trends. These include combating the loss of biodiversity and restoring a balanced relationship with our natural environment. When analysing companies we also specifically reference – as with the SDGs – data points such as the percentage of “green” revenues, investments in research and development, and environment-related patents. In addition, we identify companies with excellent operating credentials that understand and demonstrate an ability to walk the fine line between generating profits, remaining competitive and minimising environmental impacts.
Furthermore, we diversify ESG risks such as those presented by the loss of biodiversity not only in relation to individual securities, but also at the portfolio level. On one hand this is achieved through in-depth ESG analysis of the portfolio through a monthly dashboard and monitoring. On the other hand, for many strategies, we set specific portfolio goals around climate or natural capital, such as targets for “green revenues”, SDG turnover and in the future, most likely biodiversity and natural capital goals as well.
Continuous monitoring and change of behaviour through engagement
Finally, factors such as biodiversity risks are continuously reviewed and subject to transparent reporting in our ESG and impact fund reports. Furthermore, we are active investors and want to provide even better support for our invested companies to help them reduce their ESG risks and create a positive impact. Biodiversity is firmly embedded in our voting policies and we are engaged in an active, direct and collaborative dialogue with companies.