Investors Utilize Biodiversity Data for Financial Decisions Making
In the rapidly evolving world of sustainable finance, UK pension funds are leading the charge in integrating nature-related risks and opportunities into their portfolio management strategies. This shift reflects a growing recognition of the significant financial risks posed by nature degradation and the potential for nature-positive investments to protect portfolios from escalating material risks.
One such pioneer is Aviva Investors, who have been conducting location-based assessments of biodiversity sensitivity for real estate acquisitions. Meanwhile, Phoenix Group, a major UK life insurer, uses the ENCORE tool to assess risks in its portfolios, helping to identify coalescence of material risks in listed equity and credit portfolios.
This trend towards nature-focused investing is marked by several key developments. There is an increasing commitment to climate and nature investing, with around 40% of UK pension schemes having dedicated climate allocations, and 60% considering climate risk a core fiduciary responsibility. Pension funds are moving from isolating climate strategies in specific asset buckets to integrating them systematically throughout their investments.
However, challenges persist. Data inconsistencies and lack of scale make it difficult to measure and integrate nature risks consistently across portfolios. Smaller pension schemes can struggle with the capacity and expertise needed to implement robust nature-related risk management and stewardship practices. Political volatility and differences in ESG regulation across geographies also complicate asset managers’ ability to maintain consistent nature-related risk integration strategies.
Asset managers are addressing these issues by strengthening stewardship and engagement, enhancing reporting and disclosures, embedding nature in fiduciary management, and leveraging emerging regulatory tools. For instance, Phoenix Group introduced a nature-focused business plan in 2022 and piloted TNFD LEAP reporting in 2023.
Despite these challenges, UK pension funds and their asset managers show strong ongoing commitments to integrating nature-related risks and opportunities, supported by evolving governance frameworks, better stewardship, and regulatory advancements. However, the division among investors regarding the return profile of natural capital strategies and the low familiarity with TNFD reporting standards among UK pension funds indicate that there is still a way to go before nature-positive investing becomes the norm.
As research institutions and data providers start to develop Nature Value at Risk metrics, borrowing methods from climate, and as more UK pension funds adopt net-zero targets, it is clear that the second wave of nature-positive investing is upon us. The potential financial impact of nature loss is significant, and UK pension funds are poised to play a crucial role in mitigating these risks and promoting sustainable development.
Science has become an integral part of environmental-science, as UK pension funds and their asset managers now incorporate nature-related risks and opportunities into their investment strategies. Financing and investing in nature-positive initiatives, like those using the ENCORE tool, could protect portfolios from escalating material risks presented by climate-change and nature degradation. However, challenges persist, such as data inconsistencies, political volatility, and a lack of understanding about TNFD reporting standards among UK pension funds, pointing towards the need for continued research and advancements in these areas.
