ClimateInvest Podcast: Federated Hermes and why biodiversity now matters for investors
In this episode of the Prestige ClimateInvest Podcast we talk to Eoin Murray, Chief Investment Officer for London operations of Federated Hermes, on why biodiversity has become a hot topic for institutional investors.
Federated Hermes is a global asset manager headquartered in Pittsburgh which also has operations in London.
Biodiversity has made it onto the radar of the financial community over the last two years with the completion of the Dasgupta Review on the Economics of Biodiversity, carried out for the UK government in 2021. This was followed by the Kunming Montreal Global Biodiversity Framework adopted this year which sets out an ambitious pathway for a world in harmony with nature by 2050 and includes the financial resources necessary for implementation. The final piece of the puzzle here is the Taskforce on Nature Related Financial Disclosures Report which was published on 18th September after a series of consultations[1].
All of this has focused the minds of institutional investors and the finance community at large on the issue of biodiversity, says Murray. While a lot of attention is paid to the climate crisis, this is less the case with biodiversity. Sadly here we are facing a huge crisis – intertwined with the climate crisis and deeply linked to social inequality.
According to a UN report, Scientists tell us that 75% of the earth’s surface and 66% of the marine environment have been altered by human activity, (or harmed, to be blunter)[2]. Together with climate issues, preserving biodiversity presents a huge challenge.
Research suggests over 50% of global GDP is highly or moderately dependent on nature[3]. Ecosystems services constitute everything from water quality to soil quality, pollination and all things that nature provides for us to be able to exist on this earth.
If we take it down to the UK level, we know that there is a funding gap between what we pay today for ecosystem services and what we need to pay, which will be between GBP 45 – GBP 90 billion over the next ten years, or GBP 5.6 billion per year[4].
This is helping to drive the sudden interest in all things nature.
We are dealing with a systems problem here and all stakeholders need to play their part, down to financial investors. The sectors that have an important role to play are materials, food beverage and tobacco, capital goods and commercial professional services but if we drill deeper, every business sector is affected in some way. This is no longer a niche issue; it is a global cross-sectoral problem.
What are the options for investors? While negative screening is a perfectly valid approach (such as when large pension funds exclude the biggest polluters from their portfolio), this may not be enough or the best strategy. To make real world change the key approach is engagement with corporate entities – not divesting nor excluding but using the position of being a stakeholder (shareholder or bond holder) to influence corporate entities to change strategies.
An equally good approach is positive screening, that is holding a portfolio of leaders in certain areas in companies particularly strong in avoiding damage to nature.
A further tactic that can make a lot of on-the-ground difference in nature is direct holdings in nature restoration projects in the UK in particular.
Looking at the bigger picture there is a balance to be struck in how investments are made (and into which sectors) and what is needed for green transition and for nations to come out of poverty.
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[1] FINAL-18-09-23-TNFD-final-recommendations-release.pdf
[2] https://www.un.org/sustainabledevelopment/blog/2019/05/nature-decline-unprecedented-report/
[3] (IPBES Report (2019), EOS, Our Commitment to Nature (2021), WWF and ZSL, Living Planet Report (2020), Seven ESG Trends to Watch in 2021 | S&P Global (spglobal.com)
[4] Source: Green Finance Institute Report https://www.greenfinanceinstitute.co.uk/news-and-insights/finance-gap-for-uk-nature-report/