Northern Trust Asset Management (NTAM) has launched the World Natural Capital Paris-Aligned Index, which mimics a similarly themed equity index from MSCI.
- NTAM’s new fund combines a Paris-aligned approach to climate change with a tilt towards including companies that benefit from a nature-positive transition.
- The strategy intends to provide institutional investors with an investment option that addresses climate change and natural capital loss.
- The fund manager may be challenged to find companies that have a nature-positive strategy, as very few companies know how dependent their business is on natural capital.
US-based NTAM is one of the world’s leading investment managers, with over $1 trillion in assets under management. It is part of Northern Trust (NAS:NTRS), a private bank based in Chicago that is known for its Family Office services globally, including an expansion into Singapore to focus on wealth management in the Asia-Pacific region.
NTAM has strong ESG investing credentials
Contrary to the anti-ESG sentiment that is taking hold in the US, NTAM’s investing philosophy devises that “material environmental, social and governance factors are pre-financial indicators that can affect a company’s future financial viability and clients’ long-term risk-adjusted investment returns.”
NTAM has over 30 years of sustainable investing experience, which combines coverage of equities, fixed income and real assets across quantitative active and index investing, to provide investment instruments targeted both at institutions and retail investors. Its latest fund offering, the World Natural Capital Paris-Aligned Index fund (WNCPAI), is part of its sustainable index investment solutions.
What is the NTAM’s new climate and natural capital-based investment strategy?
The investment strategy of NTAM’s new WNCPAI fund is to combine companies that are aligned with a 1.5°C decarbonisation pathway, and those that have nature-positive characteristics, based on Northern Trust’s proprietary ESG exclusions. These exclusions can include, for example, companies that do not comply with the UNGC Principles, or International Labour Organisation conventions; those that derive any sales from tobacco products, firearms or controversial weapons, or for-profit prisons and detention centres; companies that derive revenue from thermal coal and unconventional oil and gas such as arctic oil, shale gas and oil sands.
The fund will aim to mimic the risk-return profile of the MSCI World Natural Capital Paris Aligned Equity Select Index, which is a custom index that screens out companies linked to ecosystem loss and water pollution, and those that are not aligned with the United Nations’ Sustainable Development Goals 14 (Life Below Water) and SDG 15 (Life on Land). The strategy will also include companies that can benefit from opportunities relating to solutions that address climate transition and biodiversity loss, such as land use, resource use and emissions, and waste management.
Julie Moret, global head of sustainable investing and stewardship at NTAM, said: “We are delighted to launch this strategy for investors across EMEA and APAC, recognizing that nature related risk mitigation and adaptation can play a significant role in achieving the Paris Agreement global warming objective.”
Lack of biodiversity-loss strategy may make stock-picking hard for NTAM
Companies appear to be failing to adequately protect biodiversity. Analysis by the World Benchmark Alliance’s (WBA) first Nature Benchmark shows that 97% of companies in the benchmark had not committed to a nature-positive trajectory by 2030. Less than 1% were aware of the link between their business operations and the dependency on natural capital.
Climate change and biodiversity loss are inextricably linked, and investors need to manage the risks that arise from the twin crises. Damage to natural capital and ecosystems from the impacts of climate change, such as forest fires and floods, in turn reduces the ability of nature to regulate greenhouse gas (GHG) emissions.
According to the World Economic Forum’s (WEF) Global Risks Report, the world is risking a further collapse in nature-based systems, as companies and countries make choices in their approach to short-term climate adaptation or mitigating climate risks over the long term. The COP15 summit in December 2022 saw the agreement on the landmark Global Biodiversity Framework to protect and restore nature, but we are miles away from incorporating biodiversity targets across all sectors.
The investing sector has a major role to play in tackling and helping to reverse the impact of biodiversity loss. Indeed, although major banks have committed to net zero, their actions do not reflect their commitments, and only a few have set targets for protecting or restoring biodiversity.
NTAM’s approach to sustainability investing can help highlight the importance of investing in the interconnected nature of the climate crisis and biodiversity loss. Yet, finding enough public companies that meet its biodiversity criteria for its fund may be difficult based on the WBA’s analysis. This will add challenges in outperforming its MSCI benchmark, an important consideration for fund managers.