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Smart Pension-AXA IM partnership highlights the importance of biodiversity risk

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Smart Pensions agreement with AXA IM highlights the mainstreaming of concern about the long term impact of biodiversity risk. As pension funds are the single largest institutional investor group with influence over economic investment flows, consideration of biodiversity risk as part of fiduciary duty could significantly influence corporate behaviour.

  • UK based workplace pension provider Smart Pension is partnering with AXA Investment Managers (IM) to focus on investing in biodiversity.
  • Partnering on AXA IM’s AXA WF ACT Biodiversity fund will be a key part of helping Smart Pensions reach its net zero target by 2040.
  • The urgency to invest in biodiversity conservation is driven not only by the over 50% of global economic value it generates, but also from its rapid decline due to land use change and overexploitation.

Smart Pension has set ambitious net zero targets, which it hopes will be met by its partnership with AXA IM, who has been proactive in developing sustainable frameworks like the taskforce on climate-related financial disclosures (TCFD).

AXA IM’s work with the taskforce on nature-related financial disclosures (TNFD) will serve to enhance its role as a partner to the pensions industry, which is being pressured to increase its investment in climate change and natural capital.

Smart Pension’s seeks to accelerate net zero target

Smart Pension, a UK workplace pension provider with £2 billion in assets under management, representing 70,000 UK employers, and almost 1 million UK savers, has placed a strong emphasis on sustainable investing.

It has set a net zero target for its portfolio by 2040, and targets decarbonisation over the use of credits in its strategy. It also seeks to reduce emissions by 50% by 2025, by aligning its investment in material sectors with its net zero pathway.

Smart Pension believes the industry has an important role to play in accelerating decarbonisation, and targets improving outcomes for savers as well as the environment in its investment approach.

Smart Pension’s partnership with AXA IM’s biodiversity fund follows calls for increased investment by pension funds in biodiversity conservation by climate action groups and NGOs like the Impact Investing Institute.

AXA IM driving biodiversity reporting framework via TNFD 

AXA IM has been active in raising awareness and driving an improvement in reporting and measuring biodiversity data since 2018, and is active in developing a framework for the same via its membership of the taskforce on nature-related financial disclosures (TNFD).

Recommendations in a report AXA co-drafted with the World Wildlife Fund (WWF) in 2019 led to the development  of TNFD, which strengthens its credentials in providing biodiversity investment options to its clients.

The AXA IM ACT Biodiversity fund targets long-term capital growth by investing in listed companies that provide goods and services to protect and support ecosystem preservation.

The strategy is aligned with four of the United Nations Sustainable Development Goals (UN SDGs) aimed at ecosystem preservation including clean water and sanitation, responsible consumption and production, life below water and life on land.

The TNFD released the second version of its beta framework for nature-related risk and opportunity management and disclosure in June, after receiving positive feedback from over 130 market participants globally on the first version, released in March.

AXA is participating in structuring TNFD’s third version of the framework which is expected in November. A fourth version is planned in February 2023, after which TNFD hopes to publish its recommendations by September 2023, which may inform future disclosure requirements.

Pension funds are a long way from fulfilling sustainability potential

Pension funds are the largest single institutional investor group capable of influencing economic workflows, yet according to research Mercer, only 10% of pension schemes have a standalone policy on sustainable investment.

Further, a study by InfluenceMap finds that a majority of European pension funds do not proactively and meaningfully engage with sustainability policy, while many are actually opposed to increased disclosure requirements brought by EU regulations.

A common complaint among most investors is the lack of good data and complexity of rules surrounding sustainable investing. The work of AXA IM and TNFD will help improve reporting and disclosure on biodiversity, but that is only expected by the end of 2023.

Moody’s has also launched a strategy for natural capital risk assessment in the fixed income and debt market, having identified almost $1.9 trillion in debt in sectors highly exposed to natural capital, which it believes could be financially material to those companies. 

A call to action by government officials and investment managers for the pensions industry to take action on investing in biodiversity was reiterated by the TNFD co-chair’s remarks at the PLSA ESG conference 2022 held in March.

He argued that pension funds need to look at climate and nature risk together as essential to achieving sustainability goals, with nature-based risks requiring quicker responses, with a more immediate and direct effect on pension investing than from climate change.

The long-term nature of pension investing would seem to make the pensions industry an ideal investor in biodiversity. The development of frameworks such that that of the TNFD, aided by the efforts of investment managers like AXA IM, could help standardise and accelerate the investment process.

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