Carl Moxley, Group Climate Director, Legal & General

Below is an insight into what can be expected from Carl’s session at Risk Evolve 2024.

The views and opinions expressed in this article are those of the thought leader as an individual, and are not attributed to CeFPro or any particular organization.

1. How can organizations effectively integrate nature risk and biodiversity into their operations?

• Use globally coordinated frameworks
  • Organizations now have the option to commit to key nature-related frameworks that help integrate and disclosure their nature-related risks and opportunities, impact and dependencies.

• The Taskforce for Nature-related Financial Disclosures (TNFD) has been instrumental in leading this, setting the global baseline and the groundwork for regulators to adopt through specific standard setters like the IFRS International Sustainability Standards Board (ISSB)
• There is a significant amount of additional guidance from TNFD on getting started, sector specifics.
• Follow and leverage process that may be familiar to process they used for climate change i.e. through adoption of TCFD (TCFD was introduced in 2017, it has been a slow uptake but there have been lots of learnings that organizations can leverage when applying themselves to better understanding and taking action on their exposure to nature risks):

• Governance – Establishing board oversight and management’s role in management nature-related risks.
• Strategy – Describing nature-related dependencies, impacts, risks and opportunities on the organization’s business model, strategy and financial planning
• Risk and Impact Management – Describe the process used by the organization to identify, assess, prioritise and monitor nature-related dependencies, impacts, risk and opportunities

• Develop and obtain relevant skills and expertise
  • Understanding the detail within an organization’s nature-related impacts, dependencies, risks and opportunities requires specific expertise that is not often readily available.

2. What are some of the risks associated with the assessment process for nature-related risks? 

• Key considerations and challenges:
• Quality of data:
  • As present, there is a lack of high-quality nature-related data across markets. This is partly down to: 1) the lack of regulation mandating nature-related disclosures across markets; 2) the breadth of value chains; 3) lack of understanding of how nature-related risks, impacts and dependencies are manifested in their direct and indirect operations.

• We are pushing for clear, consistent, and standardised disclosures.
• Third-party verification. This is yet to be touched on given the above challenges, however, will become important.
• Location & Value chain:
• • Much of the risk exposure may be within an organization’s value chain. Supply chain traceability and transparency is therefore a hurdle to overcome. This means engaging with value chain and policymakers/regulators to progress disclosure.

• Location specificity. A key area for Nature is location. The risks, impacts and dependencies will be unique to different areas and therefore require lots of geolocational knowledge and assessment.
• The Breadth and complexity:
  • Natural systems and ecosystems are complex. Taking action to understand and mitigate nature-related risks requires a broad and comprehensive approach. Organizations must navigate this complexity to fully understand what their biggest impacts and dependencies are, but not be so weighed down by it so as to prevent immediate action. There will be some areas that they may be more familiar with e.g. water.

3. How can financial institutions effectively navigate the evolving regulatory framework concerning nature risk and biodiversity?

• This is a systemic market risk, and we should treat it as such
• It’s on the regulatory horizon, and already in some Sustainable Finance regulation:
• Move now. Organizations have an option to lean into understanding and managing their nature-related risks and opportunities, impact and dependencies. It is clearly on the regulatory horizon. In fact, in Europe you can already see this through integration in SFDR and CRSD. The option to start early is there for some, however, the window is shrinking.
• International baseline will be through the integration in the IFRS ISSB standards (through their next work programme).
• Transition planning. Integrate relevant nature considerations into climate transition plans. Acknowledging the interdependencies between nature and climate change, we also expect companies to address their impacts and dependencies on nature within their climate strategies and be cognisant of the potentially conflicting ambitions between the two in their approach to net-zero.
• Depending on the type of financial institution there is the option to engage. For example:
• Through stewardship. Our investment manager – LGIM – is engaging with both corporates and policymakers to encourage adoption of TNFD
• As a universal investor, LGIM recognises the systemic risks presented by nares degradation that our investments are exposed. We therefore advocate for policy decisions that reflect this and move companies to better understand and act on their exposure to Nature risks.

4. Are there any strategies or best practice examples to ensure alignment of nature and biodiversity with sustainability mandate?

• No clear consensus but some guidance is now developing.
  • Nascent landscape of nature-related risk strategies: there is currently no clear consensus on best practice for the integration of nature-related risks into strategy and into individual investment mandates.

• There is, however, a growing pool of literature on the first steps and recommended approach to assessing and considering nature-related risks. Resources such as the ‘Conceptual Framework on Nature-related Risks’ by the NGFS, or the Cambridge Institute for Sustainability Leadership’s ‘Handbook for Nature-related Financial Risks’ set out the key concepts and dimensions for understanding nature-related risks, as well as steps for identifying and then integrating these into the investment process.
• Other resources, such as the Finance for Biodiversity initiatives ‘Guide on Biodiversity Measurement’, provide an overview of emerging data providers, their datasets and potential application for investment integration and product development.

5.) How is biodiversity integrated into investment and lending practices, and what role do sustainable finance instruments and products play in mitigating nature risk?

• As mentioned, there is a regulatory aspect here that can put nature at the core of sustainable finance products. Indeed, nature is already being integrated into some market-specific sustainable finance regulation. For example, in Europe the SFDR does include several indicators that relate to Nature.

• There are options to move ahead of regulation and adopt voluntary guidance and frameworks, for example the TNFD, SBTN.
• The first step for any firm is to assess its biodiversity impacts and dependencies. There have been a number of resources and organizations that have developed frameworks and disclosure recommendations to support firms in assessing their biodiversity exposure.
• Investment through a variety of asset classes is required to support the USD 0.7-1tn (Paulson Institute estimate) needed per year to achieve nature related goals. Below are some examples of investment tools that can be used to plug this gap.
• Public equities: Development of strategies that identify the impacts, dependencies, risk and/or opportunities related to biodiversity. For example, AXA World Funds Biodiversity Fund which leverages Iceberg Data Lab’s Biodiversity Footprint tool to positively/negatively screen companies. There are a small number of funds in the market at this moment.
• Debt for nature swaps (DFN): Since the 1980s, DFN swaps have been used as debt reduction instruments in exchange for environmental restoration and conservation funding.
• Green and blue bonds for nature: This tool is used for raising capital to meet funding needs for sustainable outcomes. New frameworks have been released to standardise guidance for issuers in determining which projects are eligible and aligned to environmental principles (for example, ICMA’s Practitioner’s Guide for blue bonds).
• Biodiversity credits and offsets: Credits and offsets allow for net neutral or positive impact through biodiversity restoration and remediation when development projects will have a negative impact on nature. The voluntary and secondary market for such credits is still in development, although there are mandatory schemes present in many countries (for example, within the UK’s biodiversity net gain requirements).