Danica Pension, a Danish pension provider, has calculated its dependencies and impacts on biodiversity.
- Pension providers are highly exposed to the risks arising from nature’s destruction.
- By mapping its impact and dependencies, Danica has identified the steps it will take in response.
- Pension providers have a significant role to play in influencing change across every industrial sector.
Danica Pension, a subsidiary of the Danske Bank (CSE:DANSKE), has mapped the relationship between its portfolio and the natural world. Its analysis covers both bonds and equities, exploring their impact and dependence on biodiversity.
The resulting document will help to inform the company’s risk management, enabling its continued protection of customers. It will also shed light on new opportunities to improve the protection of nature.
Biodiversity blindness puts pensions at risk
Biodiversity is essential for the health and resilience of our planet. In an interconnected world, it is utterly crucial to the stability and prosperity of the global economy. Without nature’s resources and natural services, few industries would survive very long.
Indeed, where else would we find our most important food ingredients, commodity materials and medicinal plants? Where else would we be able to set up safe and resilient infrastructure with reliable access to fresh water or fertile soils? By asking these questions, we begin to understand the undeniable importance of natural ecosystems that have for too long been taken for granted.
Overall, estimates suggest that around 55% of the world’s GDP is moderately or highly dependent on nature. While certain sectors may be more explicitly connected to natural assets, there is not one single industry that can be seen as entirely decoupled.
Pension providers, with their portfolios typically spanning a diverse range of companies, may be exposed to more risks than others. Bad investments may be stripped of their value by physical issues such as floods, wildfires or resource scarcities, while outdated assets could be stranded by new regulations. In today’s market, investee companies could easily be tarred by reputational disrepute or legal penalties.
At the same time, pension providers may be funding the very activities that are causing their problems. Whether it be the continued extraction of oil and gas or the industrial expansion of global agriculture, the wrong investment may result in nature’s destruction.
As explained in Danica’s report: “We recognize that the health and stability of ecosystems is directly linked to the long -term viability of our investments.”
“By assessing and reporting on biodiversity impact and dependencies, we can make informed decisions that promote sustainability, protect our investments, and contribute to a healthier planet.”
Shedding light on top priorities
When conducting its research, Danica relied on open-source data from the Natural Capital Finance Alliance. Its ENCORE platform comprises insights into global ecosystems and how they interact with each industrial sector. Using the ENCORE tool, Danica was able to estimate its dependence on nature as well as the potential impacts of each investment.
Its analysis revealed that 66% of its investments were highly likely to have an impact on biodiversity, while just under a third were dependent on at least one service that is only provided by nature. Surface water provision was identified as being particularly material, followed by natural protection from flooding or storms.
Based on its findings, Danica has outlined a series of priority actions. Initially, it will work with 30 investees to improve their relationship with oceans, wetlands and woodlands. With its support, the chosen companies are expected to minimise their impact on biodiversity and report on their progress towards strict, meaningful targets.
Danica itself will continue to assess its position and strive for further improvement. By engaging with portfolio companies, it hopes to encourage natural stewardship while protecting its customers’ pensions.
The role of pension providers in ensuring nature’s protection
As a pension provider, Danica’s influence is not to be sniffed at. Pension funds are the largest collective group of institutional investors, responsible for managing a significant volume of capital.
This money could be channelled into nature’s recovery, funding vital projects for the protection of people, the planet and profit. With warnings suggesting that nature finance must more than double by 2025, pensions could make a sizeable dent in the global shortfall and catalysing private investment.
As shareholders in thousands of companies all over the world, pension funds can also play a role in holding companies accountable and encouraging sustainable practices across every industrial sector. By raising their expectations of investees, they can apply significant pressure.
This would be of benefit not just to the planet but also to the providers themselves. Their exposure to risk would be greatly reduced, and their customers’ pensions would be better protected.
Even if customers remain unaware of the risks they would otherwise face, they are likely to favour providers that align with their moral values. Indeed, a recent poll of 2,000 British adults found that 68% of people would have a negative view of service providers that invest in companies harming the planet. This suggests that providers with a more sustainable strategy in place may be able to increase their share of the global market.
With last year’s agreement of a Global Biodiversity Framework, however, there will soon be few other options. World leaders have set some highly ambitious targets, to be met through the introduction of stringent national policies.
As new frameworks and methodologies come to the fore, pensions providers will be expected to provide transparent information on their portfolio’s relationship with nature and how they aim to improve it. While Danica may be ahead of the curve, others are sure to follow.
As pension providers and other financial institutions begin to take action on biodiversity, companies will fall under scrutiny. They will be asked to provide better data, demonstrating their efforts to reduce their exposure to risk while maximising the opportunities that nature can offer.
Though this may feel like a burden to bear, more and more help is becoming available. The Taskforce on Nature-related Financial Disclosures is soon to release its final framework, providing standardised guidance on how businesses should assess and disclose their impacts and dependencies on the natural world.
With such disclosures likely to one day be mandated, now is the time to be getting ahead. Companies should make the most of the support being offered by institutional investors, as there is simply no telling how long their patience will last.