Biodiversity is a very important area of engagement for us at EPFM, and an area of increasing interest for investors. Experts believe that we are in the midst of the Earth’s sixth mass extinction event -some 75 per cent of terrestrial and 66 per cent of marine environments have already been severely altered by human activity and one million species face extinction – many within decades. The WWF also estimate that Biodiversity loss and ecosystem damage could cost the global economy $10tn by 2050 through impacts from smaller crop yields and fish catches to greater exposure to floods and other natural disasters. In fact, many experts believe that Biodiversity loss is one of the greatest risks facing society today, and is not only affecting business financially, but is accelerating towards dangerous tipping points with serious consequences for health, food security and our climate. The links between pandemics and biodiversity loss are also increasingly clear, which, as this year has starkly shown, are immediate and globally catastrophic, socially and financially.
Unfortunately, Share Action found in their research earlier this year that “the asset management sector’s approach to biodiversity is critically underdeveloped”. The bulk of asset managers make no reference to ecosystem protection, natural capital or biodiversity in their policies, whilst less than half request better disclosure of the impacts of company value chains on biodiversity or discuss corporate strategy on biodiversity, and less than a third engage with portfolio companies on certifications guaranteeing minimum sustainability standards in the sourcing of palm oil and other soft commodities. Only around half of the surveyed asset managers report biodiversity-related risks or opportunities to their investments and even fewer managers identify any positive and negative impacts of their investments on biodiversity. https://shareaction.org/research-resources/point-of-no-returns/point-of-no-returns-part-iv-biodiversity/
Whilst we acknowledge there is still much work to be done in terms of engagement frameworks, metrics and how investors can leverage their influence on Australian corporates around biodiversity, what is certain is that it is becoming increasingly clear that investments with supply chains linked to deforestation present both clear investment risks and important opportunities to address biodiversity loss and SDG, and that biodiversity needs to be better addressed by investors and corporates alike.
As part of our ongoing educational program and continual refinement of our EPORA process, the Ethical Partners team have recently been investigating the devastating impact of deforestation in particular on climate change and biodiversity.
Deforestation is increasing at alarming rates, with the tropics incurring a loss of trees equivalent to 30 football fields every minute (WWF 2020). The release of carbon stored in all parts of the plant, from the soil and roots to its leaves, as well as the actual felling and burning of trees, all contribute to green-house gas emissions. Additionally, the carbon absorption that would have otherwise occurred ceases and we are losing our global carbon ‘sinks’ (such as the Amazon) on a devastating scale.
Damningly, the research also shows clearly that extreme levels of forest loss in countries such as Brazil and Indonesia, but also in Australia, are overwhelmingly commodity driven – to harvest beef and leather, palm oil, maize, rice, soybeans, timber, rubber, cocoa and coffee. Australia has become a global player, ranking in the top 10 of global deforesters and hold the worst rate of mammal extinction worldwide (WWF 2020). This is largely due to land clearing and deforestation in Queensland driven by agriculture and beef production, which over the last 20 years, has resulted in the Koala population halving across QLD.
These rapidly increasing rates of deforestation and land clearing are a direct, and powerful contributor to the loss of biodiversity. Forests provide homes to 80% of land species and their destruction is accelerating extinction ‘at a rate 1,000 to 10,000 times beyond natural levels’ (Global Forest Watch 2020).
It is also important to note however, that deforestation is not the only cause of biodiversity loss. Biodiversity is in fact a multifaceted problem and needs to be addressed from many angles. At EPFM, we believe there are is a myriad of intersections between addressing biodiversity and our ongoing engagements and advocacy on climate change, sustainable agriculture, water, waste and pollution, plastics, animal welfare, chemical usage, food waste, sustainable buildings and developments, antibiotic resistance, ocean health and overfishing, and land rehabilitation.
It is also important to note that the impact of deforestation also pervades social issues regarding land rights and human rights violations, which correlates with our belief at EPFM that social and environmental issues very often go hand in hand, intersect, compound and exacerbate their impacts. We further believe that this complex myriad of these issues then poses increasingly significant and material financial risk for both investors and companies and is one that renders companies vulnerable across multiple sectors.
It is also crucially important to note that in order to successfully implement and adapt to the necessary changes essential to maintain global warming temperatures to below 1.5 degrees Celsius and reach the net-zero targets being adopted globally that we must address deforestation. In fact, research has shown that stopping deforestation could decrease GHG emissions by enough to meet to one third of the short-term requirements of the Paris Climate Agreement. Clearly, any meaningful discussion of net-zero targets must include a company’s biodiversity impacts.
Encouragingly, there is an increasing commitment across industries to transition to commodity supply chains that are deforestation-free. New corporate commitments are emerging, as international pressure accelerates. Accompanying this change are regulatory and legal changes. Germany is introducing a bill, that from 2021, will no longer enable companies to hide behind opacity in their supply chains, by requiring mandatory deforestation and human rights due diligence for companies importing specific minerals and resources. Additionally, a new bill in the United Kingdom will prohibit the sourcing of raw materials from illegally deforested land by companies operating in the UK.
It is likely that this emphasis on reducing opacity in commodity supply chains through legal frameworks in Europe will likely have a ripple effect. New technology is also creating an expectation of increased transparency, as well as an important tool for corporates to be able to use to help them track their deforestation footprints. New mobile phone tracking systems or satellite images are already being used by some companies, such as Unilever, to track risk, such as linkage between palm oil and destruction of rainforest on illegally deforested land.
Encouragingly, there is also an increasing number of financial sector and investor initiatives around deforestation, such as the UN PRI and Ceres initiative on sustainable forests, Unep FI and WWF’s work to develop a Task Force on Nature-related Financial Disclosures, Robeco addressing biodiversity in their 2020 engagement and AXA Investment Managers, BNP Paribas Asset Management, Sycomore Asset Management, and Mirova developing a tool to measure how investment impact biodiversity. Additionally, investors such as Nordea Asset Management have excluded Brazilian beef producer JBS from investment over deforestation risk, whilst 29 Financial institutions representing $3.7 tn have also written to the Brazilian government to address their failure to curb environmental destruction.
As mentioned above, at EPFM, we view the issue of biodiversity as encompassing a wide range of topics such as climate change, carbon emissions, land use, sustainable farming and agriculture, pesticides and fertilisers, water, carbon emissions and social, indigenous and human rights issues, like inequality, poverty and living wages, land rights and FPIC, on which we have already been engaging with companies on a continuous basis.
Additionally, whilst best practice on supply chain risk management in this area is still emerging, we are also screening for, and discussing with, our portfolio companies around how they are investigating biodiversity loss, how they are identifying their impacts in this space, both negative, and their opportunities for proactive positive impacts.
We engage with and expect our portfolio companies to be continually improving how they are disclosing and being transparent about their footprints in the area of biodiversity specifically, as well as the interrelated areas above. We also talk about integrating their environmental and social supply chain analysis wherever possible, to improve efficiency and address their deep interconnections, as also mentioned above. We talk about the material, supply chain, financial, legal, regulatory and supply chain risks of deforestation and biodiversity loss. We encourage our companies to adhere to certifications such as RSPO or the FSC wherever possible, but also to acknowledge the fallibility of these certifications, and to go beyond mere compliance to a meaningful supply chain analysis and creating positive change.
An area that EPFM has been increasingly encouraging companies to consider is to simplify, limit or consolidate their supplier relationships, to allow better analysis and engagement with their suppliers, an approach that we are also encouraging in terms of Modern Slavery supply chain analysis, and an initiative recently undertaken by Mars to help improve their deforestation footprint.
We also continually look for developments in best practice, successful case studies, and improved frameworks on addressing corporate biodiversity impacts. We are also working on improving our own reporting, investment policies, and analysis on the risks of, engagement on, and portfolio impact on Biodiversity.
Finally, we are also collaborating with other investors in order to work to identify and implement improved metrics that combines these issues in a holistic manner and are setting up ongoing dialogues with our portfolio companies that are leading in this emerging area, to learn alongside them how we can best call for other corporates to improve their practice.
Importantly, we note that we at EPFM, along with the rest of the asset management community, still have a lot to learn in this area, but we would very much agree with the IPBES Chair, Sir Robert Watson, that if we can enable “‘transformative change’, nature can still be conserved, restored and used sustainably – this is also key to meeting most other global goals” – and we at EPFM commit to using our shareholder voice to calling for this transformative change wherever possible.
During December 2020 the Fund returned 2.11% versus the S&P/ASX 300 Accumulation Index of 1.32%, outperforming the market by 0.79% (after fees). Overweight positions in Renewable Energy and Transition Commodities and an underweight position in Healthcare contributed to relative performance while an overweight position in Food Products and an underweight position in Information Technology detracted from relative performance.
Ethical Partners has made a submission to to the inquiry on the Climate Change Bill. In our view it is clear that we desperately need whole of government support around the important elements of this bill.
During October 2020 the Fund returned 2.85% versus the S&P/ASX 300 Accumulation Index of 1.89%, outperforming the market by 0.96% (after fees). Overweight positions in Insurance stocks and an underweight position in Metals & Mining contributed to relative performance while overweight positions in Consumer Staples and Media & Entertainment detracted from relative performance.
We speak with Anthony Mellowes, CEO, SCA Property Group (ASX: SCP) about recent strong sales figures from its centres, improved rent collection and its focus on sustainability. The Ethical Partners Australian Share Fund holds an overweight position in SCP.