Mounting evidence of the financially material impact of biodiversity is raising concern among many stakeholders, including investors and consumers, and prompting changes in the regulatory and legal environment. Understanding the impact of biodiversity loss on asset prices, corporate value, and, by extension, investment outcomes is nascent, and lack of reliable data remains a hurdle to measurable action. Nonetheless, Wellington’s ESG Research Team believes market participants need to consider and account for the costs of biodiversity loss and the benefits associated with ecosystem preservation. 

Our team aims to integrate biodiversity into our research and stewardship approach, just as we do with climate change. And, as with climate change, we prefer engagement as the primary means of helping companies and issuers understand the related risks and opportunities. We consider how companies address material biodiversity risks in our proxy votes as well, and we will continue to evolve our approach to this complex subject. Here we share recent examples of our efforts to assess companies’ risk exposure to biodiversity and better understand their plans mitigate it. 

Our biodiversity stewardship approach

Underpinning the ESG Research Team’s approach to biodiversity stewardship is our ongoing collaboration with Woodwell Climate Research Center. The scientific data and insights we gain through our work with Woodwell is the starting point for understanding the relevance of biodiversity for the client portfolios we manage. As for engagements, our team believes in prioritizing conversations with companies that, in our view, have material exposure to biodiversity-related financial risks, such as those with heavy operational or supply-chain reliance on ecosystem services. We primarily use engagement to influence change and preserve long-term value, as we believe this is the most constructive way to enhance value and reduce risk in client portfolios. We believe active managers can enhance engagements by leveraging insights from fundamental industry research teams, climate science partners, and ESG experts. When engaging on land and water use (two key drivers of biodiversity loss) investors can also access several frameworks such as Global Canopy’s Deforestation-Free Finance Sector Roadmap and Ceres’ Investor Water Toolkit. 

Voting and engagement examples

• Our team engaged with a large home-improvement retailer on deforestation in its supply chain to address practices that are lagging those of its peers. We encouraged the company to move toward best practices for disclosure and certification of forestry products. In conjunction, at its 2022 annual general meeting, we supported a deforestation-focused shareholder proposal, which garnered 55% support. The company has since committed to reporting its activities to CDP Forests.  
• We have engaged several times with a multinational consumer products company on increasing the pace and scale of effort to eliminate deforestation. We also expressed these views by supporting a 2020 shareholder deforestation proposal, which received 67% support. As part of our ongoing dialogue, we seek evidence of the company’s continuous improvement in its supply chains for pulp and palm oil, two critical production inputs. To date, the company has increased disclosures, made stronger commitments to FSC certification, and is more receptive to shareholder feedback.  
• Following concerning headlines related to the damaging, unsustainable practices of a palm oil supplier, we engaged with another large consumer company around its direct and indirect exposure to the supplier. We wanted to identify the company’s alternative sourcing capabilities and understand whether it had pursued those avenues. Through our engagement, we became more comfortable with how this company manages end-to-end supply-chain risks around controversial commodities, although this is something we continue to monitor.  
• We spoke with a forestry expert from a consumer goods company with materials-sourcing exposure to Canadian boreal forests. We developed a better understanding of the company’s pulp-procurement process and encouraged stronger policy alignment with industry best practices, as well as increased transparency around key performance indicators. 
• Following multiple conversations with a leading agriculture company, we are encouraged to see it incorporate biodiversity preservation into its business strategy. The company increasingly views ecosystem stewardship as a competitive advantage and has been steadily increasing its investments in supply-chain traceability. Concurrent with our engagements, the company has accelerated its commitment to “No Deforestation.” 
• We engaged with a leading tire manufacturer to gain insight on its supply-chain management, with specific focus on responsible procurement of natural rubber. The supply chain for rubber is opaque and fragmented, making it difficult to scrutinize. This company is deploying various risk-assessment tools to mitigate deforestation. It has developed an app-based risk-mapping system, for example, which cross-checks supplier responses using satellite imagery from nongovernmental organizations. The company also has partnerships with local research organizations that can inform it of potential deforestation activity. The company admits that the tire industry must increase the speed at which it is addressing problems in the natural-rubber supply chain. We will continue to engage on this issue and monitor progress toward targets to mitigate the volume of procured natural rubber. 
• We engaged with climate ministry representatives of a highly biodiverse developing country. Our goal was to learn more about their water- and forest- conservation efforts and to discuss biodiversity-linked financial instruments that can help the country protect its natural areas. The representatives described the country’s reliance on nature for economic prosperity and highlighted conservation actions taken thus far, including the designation of nature reserves. We inquired about balancing conservation efforts with broader societal needs and discussed potential collaboration with international donors and multinational development banks. We also highlighted increasing market interest in biodiversity bonds. The representatives found our feedback useful and are working toward structuring biodiversity-linked instruments that could potentially attract private sector investment.

Sample biodiversity engagement questions

Awareness, governance, and strategy

• How do you assess your biodiversity-related risks?
• Who from your board is responsible for overseeing risks related to biodiversity?
• How do you factor biodiversity considerations into your operational decisions?
• Where does biodiversity fit within your current climate ambitions? What key performance indicators are most relevant to your business?

Policies, planning, and operations

• What policies and procedures do you have in place to manage biodiversity risks?
• How are you factoring biodiversity risk or the loss of natural assets into your capex plans?
• How are you incentivizing your product design or sourcing and procurement teams to consider and mitigate biodiversity risks?
• Which of your sites and suppliers face material risks posed by biodiversity loss?
• Who are your main biodiversity stakeholders, and how are you partnering with them?
• How do you work with local communities potentially affected by biodiversity loss? 

Closing thoughts

Regulators and governing bodies, including the European Commission, have begun to enact polices aimed at conservation and preventing ecosystem degradation. There are currently several bills moving through the US Congress that address biodiversity loss. At the same time, concerns from consumers and investors about the potential negative social and economic outcomes of biodiversity loss are mounting. Wellington’s ESG Research Team believes that companies and issuers, and the entities that invest in them, can no longer ignore the financial implications of biodiversity loss. We will continue to rely on engagement as our primary method of stewardship on biodiversity awareness and risk mitigation.