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‘We struggle to find biodiversity champion companies in Asia’

Federated Hermes' Ingrid Kukuljan and Sonya Likhtman discuss the challenges of investing in nature.
Monarch butterfly on top of a blue Scabiosa flower. High quality photo

Preventing biodiversity loss is one of the key ways of tackling climate change, both in terms of mitigation and adaptation and in Asia, one of the most biodiverse places in the world, the need is acute. But, Federated Hermes’ Ingrid Kukuljan and Sonya Likhtman told ESG Clarity Asia, the attention from private finance in the region is still at the early stages.

Data from the World Resources Institute show that the illegal conversion of forests produces 2.7 gigatonnes of carbon dioxide annually. Of this, 81% if the illegal conversion happens in Asia.

“The first problem is there is lack of awareness and commitment in Asia. If you look at the target setting and what the companies are doing, it is very much behind the Western world,” Ingrid Kukuljan, head of impact and sustainable investing at Federated Hermes said.

“If you looked at industrial farming practices and if you look at the growth in animal protein consumption, the majority is driven by Asia, whereas it has been declining in the Western world. So, the unfortunate data is that today livestock accounts for 60% and humans for 36% of all mammals and wildlife only for 4%, which is the result of the industrial livestock farming, also considered the main cause of animal cruelty globally,” she added referencing data from Ecowatch.

In line with this, Federated Hermes’ inaugural biodiversity fund has no exposure to Asia.

“We struggled to find a publicly-quoted company that meets our standards to be considered as a biodiversity champion and which satisfies our liquidity criteria” Kukuljan explained, adding that the genesis of the fund is to only allocate capital to those that are helping preserve or restore biodiversity.

Data challenge

The fund was launched last year in collaboration with the Natural History Museum in London, which uses a biodiversity intactness index to map out the performance of 58,000 species across 48,000 sites from 100 countries.

Despite a growing amount of data and ability to map species, Sonya Likhtman, associate director within the engagement and stewardship team at Federated Hermes, said measuring biodiversity still presents a challenge.

“Some researchers have calculated that the value of natural capital and ecosystem services is somewhere between $125trn-145trn per year. That is the value that some people think we derive from nature, whether it is from the food we eat, raw materials, clean water or other ecosystem services,” she told ESG Clarity Asia.

“Some companies and countries are starting to look at natural capital accounting, as it’s called, where you can really break things down by water, land and other aspects to understand the value they generate. There is lots of work ongoing in in this area, but it is not as straightforward as just a carbon dioxide metric. However, there is already enough data and information to start working on halting and reversing biodiversity loss.”

The Federated Hermes biodiversity fund has six themes: land pollution, marine pollution, and exploitation, sustainable living, climate change, farming and deforestation. It is benchmark and style agnostic and focuses on finding companies that are looking to preserve, restore or prevent further biodiversity loss via solutions and/or operations. So far, it has an investable universe of 150 stocks and is overweight on industrials and materials.

Its top five holdings are: Tetra Tech (5.58%), AECOM (5.52%), Tomra Systems (4.74%), Kerry (4.67%) and Brambles (4.29%).

Expanding private finance

The fund is one of a growing number of biodiversity funds launching. Likhtman said historically biodiversity preservation has been the reserve of government funding and philanthropy. But the Global Biodiversity Framework agreed at COP15 last year, with its targets to increase impact investing, blended finance and innovative methods of financing for nature, has changed that.

“There is greater focus now on how we scale up financing and get the private sector more involved in the conversation, including in Asia,” she said.

“We also need to focus on aligning public and private financial flows with biodiversity goals and targets. That alignment is paramount because it serves to reduce existing financial flows that are having a negative impact on biodiversity. For instance, investor engagement with companies in the real economy could lead to a reduction of negative impacts on biodiversity in the company’s operations and supply chain,” she added.

“You need both sides of the coin, because even if you increase financing for nature but keep destroying biodiversity through some of the other activities that are being financed, it’s not going to add up.”

This story first appeared on our sister publication, ESG Clarity.

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