La Française: Commentary on natural capital

December 9, 2022

By Deepshikha Singh and Guy Wilkinson

The International Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) was established a decade ago in recognition that “the Biodiversity crisis is probably a greater threat than global climate change to the stability and prosperous future of humankind on Earth”. The latest reports by the organization indicate how nature loss has accelerated exponentially during the last 5 decades and how human activity through our use of ecosystem services and climate change are major drivers of it.

More than half of the world’s economic output – US$44tn of economic value generation (World Economic Forum) – is moderately or highly dependent on nature. Abundant Biodiversity is necessary for many components of life, including the provision of food, energy, water and health. On the other hand, we are facing a global Biodiversity funding gap of more than $800mn per annum, and the financial industry can play a key role through capital allocation and stewardship.

2022 is a landmark year for blended nature-climate action. The 2022 UN Climate Change Conference - COP27 - closed in November with world leaders calling for a ‘Paris moment’ for nature. What is needed now, according to leaders and experts, is a concerted effort by governments and corporations to tackle both climate change and Biodiversity loss simultaneously.

The second edition of UN Biodiversity Conference (COP15) is scheduled to take place from December 7th to 19th in Montreal, Canada - after being postponed for more than 2 years now – hopefully, giving greater clarity on a global framework for managing Biodiversity loss. The European and French regulations surrounding SFDR and Taxonomy require us to monitor and report on our naturerelated risks and impacts.

In addition, asset managers around the world are increasingly being asked about nature- related risks and opportunities by their clients. With global Biodiversity in decline, we, as investors, need to reconsider traditional economics and factor in the burgeoning concept of Natural Capital, in our investment processes and strategies.

This paper intends to demonstrate our understanding of Natural Capital and Biodiversity risks (and opportunities), the reasons why we believe tackling nature risks are both a financial and legal imperative, and our approach towards doing so. It is work in progress and we hope to provide more tangible and detailed progress reports on this topic in due course.

Developing a Natural Capital strategy has been a priority at La Française Asset Management (AM) over the course of 2022. We recognise the planetary emergency we are living in, and aside from reporting requirements, we realise the financial risks and opportunities that changing policy developments (like EU Biodiversity Strategy 2030) and higher scrutiny surrounding nature and the finance sector (like the Dasgupta Review) bring forth.

We see two main kinds of investment opportunities across our issuer universe – ‘Transitioners’ with high dependencies and/or high negative impacts on nature but financial ability and strategic willingness to mitigate these, and ‘Enablers’ with solutions that can have a positive impact on nature on their own or by helping other firms to manage/reduce their risks.

We introduce our proprietary ‘Natural Capital Triangle’ which captures the multi-faceted dimension of our strategy on Natural Capital – connecting Dependencies to Ecosystems, Negative Impacts to Drivers and Positive Impacts to UN SDGs. We align these concepts with our overarching sustainable investment research approach which includes quantitative assessment, qualitative assessment and stewardship.

One of the biggest challenges in creating this strategy has been the unavailability of global standards surrounding both assessment frameworks and data/metrics to be used. We have addressed this challenge by applying a multi-layered approach, using multiple datasets like ENCORE and CDP, as well as incorporating draft TNFD recommendations to our qualitative assessment methodology.

Finally, stewardship is an important pillar of our sustainability approach. We are active members of the TNFD Forum, Finance for Biodiversity Foundation and the FAIRR initiative. We are also members of the Nature Action 100 – a collaborative engagement group for nature -, which will be launched during December 2022. These associations give us a platform to influence both companies and policy makers in addressing the nature crisis through knowledge exchange and collaborative actions.

Natural Capital’s time in the spotlight during COP15 represents the perfect opportunity for the investment community to drive change for our clients, our investee companies, and the planet. For nature, as for climate, we need to put our best foot forward and leave no stone unturned. As Churchill famously said after WWII, during the formation of the United Nations: “Never let a good crisis go to waste!”