Outerblue RI - Driving Action on Nature-Related Risks through Shareholder Engagement

Disclaimer: Welcome to our podcast series, Outer Blue Responsible Investing. Over our five-episode series, we will dive into the power of responsible investing and the critical role stewardship plays in shaping the future of sustainability. In each episode, we bring together leading responsible investment experts to discuss how shareholder engagement and voting efforts are driving real impact in the economy. Whether it's influencing corporate behavior or fostering accountability, Amundi is here to explore the strategies that make a difference. So let's get started. 

Julien Foll: Hello, everyone. I'm Julien Foll and I'm here today with Molly Minton. Together, we are working at Amundi within the ESG research and engagement team and today, we'll present you part of the work we do on biodiversity. Molly, do you want to present why do we care about biodiversity at Amundi? 

Molly Minton: Sure, Julien. Thanks. Pleasure to be here with you today. As part of our work, we're doing so much on biodiversity. And we're here to not just discuss how biodiversity is collapsing and also we're not here just to discuss all the benefits nature has to society. We're really talking here today about investor risks, key risks for the economy and society overall if we do not halt biodiversity loss, but also how we can find opportunities to favor biodiversity, drive financing where it's needed, but also as investors hopefully make a profit. So just to introduce it, according to the world bank in 2022, more than half of the world's GDP depended on natural resources. This includes stuff from sectors around construction, agriculture, food beverage which are all key industries that rely most on nature. These industries rely either on direct extraction of resources from forests and oceans or the provision of ecosystem services such as healthy soil, clean water, pollination, clean air. The list goes on and on. Stable climate and disease control are other examples of the services an ecosystem can provide. While the work today to quantify nature is still very much ongoing, the initial estimates are staggering. The World Wildlife Federation, WWF, has estimated that the true value around nature can be $125 trillion annually. According to the World Bank, an action to address nature loss under a partial ecosystem collapse scenario could cost the world by 2030 up to 2.3% drop in GDP per year. That's staggering. And to put that in perspective, the GDP drop in 2020 due to the coronavirus was 3.4%. So most businesses directly depend on biodiversity, either directly or through their supply chains. This biodiversity is collapsing and it represents major risks to our economies. We're also seeing the financial materiality become more acute in the short term. It's not just about these long-term vague stats and risks. Consumers, communities, governments, and other stakeholders are becoming more aware of the risks to health and their local environments, leading to increases in lawsuits, fines, and community protests due to issues such as pollution, chemical safety, water consumption, etc. So Julien, talking about our work that we're doing at Amundi. As an investment company, how can we act? 

Julien Foll: Thank you, Molly. So of course, we can act to reduce our direct impact on nature, such as by limiting our company consumption of energy and water, reducing our waste and reducing our direct biodiversity footprint. But as an investment company, it is through our investments that our impact is most important and the risk ismost acute. We can act to reduce our indirect impact meaning the impact of our investments, such as the impact of the companies we invest in have on biodiversity. To do so, there are several options we combine with investment strategy focusing on issuer selections, on specific investment instruments such as green bond or sustainability link bonds, or through direct investment in nature-based solutions, for instance. And this is also about how we can influence the company we invest in and the regulators and leaders of the world, because we believe we can act for the preservation of natural capital to protect biodiversity as an investor. Hence, we call on governments and other external stakeholders to encourage regulation and consistent standards to address biodiversity. We participate in collective initiatives with public authorities to create consistency between public policy and private action. 

Molly Minton: That was the case with Jean-Jacques Barbéris' speech at the COP15 in 2021. 

Julien Foll: Exactly. Indeed, Jean-Jacques Barbéris was representing the financial community on behalf of Finance for Biodiversity and this is a great illustration of these efforts calling on governments for more regulation to support the post-2020 global biodiversity framework. And in accordance with this, more recently, we have been supporting a statement to show the growing support from the business community for ambitious nature policies and governments' leadership. 

Molly Minton: And in parallel, we do engage with issuers. 

Julien Foll: Indeed. On the other side, in our everyday job, you and I, together with our 40 analysts in the ESG Research & Engagement Team, with the support of our portfolio manager and financial analysts, we engage issuers to ask them how they assess nature-related risks and opportunities and encourage companies to better integrate nature in their strategy and policies. Do you want to comment on this, Molly, on how we engage on biodiversity? What about presenting all the work you coordinated to use the planetary boundaries as a framework for nature-related engagements? 

Molly Minton: We've been engaging on nature for a long time, but I think this year we took a slightly different angle. We used the planetary boundaries to identify how specific themes that we were already engaging on, such as plastic and deforestation, link to the planetary boundaries and potentially other opportunities for engagement within this. Soo better explain, the Stockholm Resilience Institute has been developing the planetary boundaries for many years now. Nine in total, the planetary boundaries are the limits of pressures that the Earth can bear beyond just CO2. Climate change is one of them. We understand CO2 to be a limit to how much we can put out there before we have irreversible impacts on the Earth. But there are others, nine in total. Crossing these boundaries increases the risk for generating large-scale or abrupt environmental changes. So to say what these boundaries are, first one is climate change, which we address through the energy transition. But the others that are really linked to nature are biosphere integrity, meaning the genetic diversity and all of the organisms on this earth, ocean acidification, land system change, novel entities, fresh water change, atmospheric aerosol loading, biochemical flows and stratospheric ozone depletion. So we're not going to go through all of those today, but we'll highlight a few key ones throughout our chat today, Julian. Because we know that climate and nature are heavily related, and climate is one of the largest drivers of biodiversity loss. But as I was saying previously, at Amundi, we've noticed these are a really great way to map out these nature risks and identify priority engagements. We can do this by looking at these boundaries. However, we don't yet have a clear transition pathway or what I would say would be a fair share for each of these planetary boundaries, which is a bit of a problem. But in the short term, there is an excellent way to frame nature-related risks and get corporates to start understanding how their activities are both impacting nature and the types of risks within these boundaries they face due to their nature-related dependencies. And that's where we link this to engagement. We can start having this conversation now with corporates, even if the data is not there. This will in turn encourage corporates to collect and report on the relevant data and metrics that we as investors need so that we can make more informed investment decisions and the companies can better understand and drive action to address those risks. So Julien, based on this very complicated thing, you do a lot with industrials, driving our strategy for sectors around chemicals, construction, transportation. Do you want to comment on how we've examined the planetary boundaries for this large macro sector to define engagement priorities? 

Julien Foll: Well, as you said, we mapped the engagement themes we had to the nine planetary boundaries to assess which topics fell under which boundaries, how far certain boundaries have been transgressed and to what extent each of these issues were a risk for investors was then taken into account. If we focus on novel entities, within the planetary boundaries, the Stockholm Resilience Institute released new research in 2022. This research showed how far we have exceeded this planetary boundary, and it is the boundary that has been exceeded the most. Novel entities are defined as new chemicals we put into the environment, such as plastic, microplastic, pesticides, or more broadly, PFAS. Even more broadly, hazardous chemicals we release into the environment. We observed a high correlation between investor risk around chemical pollution and the fact that this problem was far from being sufficiently addressed by corporates. This led us to scale up our work on this subject in the last few years, and it also contributed to identifying key issues to focus on our biodiversity policy released in 2023, such as around pesticides and plastic producers. And in the last years, we also scale up our work on PFAS, also known as forever chemicals due to the risk to global and environmental health and in particular the key financial companies coming under new regulation or facing significant lawsuit for pollution. You also Molly, you use the boundaries to scale up our work around air pollution as well, didn't you? 

Molly Minton:Thanks Julien! I'm really excited about our work around air pollution because this is one of those planetary boundaries. I,t's defined as atmospheric aerosol loading and it's within the planetary boundaries safe operating limits still, meaning there is a huge opportunity for us to address it while we still can but it's also a topic that has so much evidence to support the financial materiality around addressing this but it is still largely poorly addressed by corporates and also not often engaged by investors so it's something that we really need to drive more action and more change. To give you a few examples about why this is so important and why there is such an opportunity, outdoor air pollution is the leading cause of environmental death annually, with 99% of the global population breathing air that exceeds WHO, or World Health Organization limits for health. This also translates into very key, well-researched business risks for companies. 1.2 to 1.8 billion workdays are lost annually due to air pollution. And these impacts are not only limited to productivity. Actually, Julien, there's been a multitude of academic studies linking air pollution to decreased rates in consumer spending. One study in Spain found that a 10% increase in particulate matter led consumers to spend between 20 and 30 million euros less per day. And there's also many studies linking the correlation between increases in air pollution and declines in stock prices in regions around the world, such as the United States and China. And going back to the nature element is that there's huge impacts around soil and biodiversity health, which ultimately links to agricultural productivity losses. Stanford found that decreasing NOx emissions by half can lead to a 25% increase in crop productivity, depending on the season and region of the world. Why are we not addressing this risk? And that's what we realized using the planetary boundaries, is we need to drive this up because we also saw that on a local level, corporates were facing many controversies around the subject, such as fines, lawsuits. I even have one company where operations have been stopped at a very profitable asset for about five years because of air pollution concerns. So we are really working to drive the subject and start showing that this is an investor case and a business case for companies. But Julien, you use the planetary boundaries quite heavily as well around deforestation, don't you? 

Julien Foll: Land system change is one of the nine planetary boundaries and deforestation represents indeed a significant part of that land use change. At COP15, a researcher from Brazil presented research that showed that as forest loss in Brazil exceeds a specific threshold, rainfall in the Amazon decreases, leading to a loss of up to $1 billion annually on the region's agricultural productivity in the medium to long term, making this a paramount issue. We do our best to address this key issue. In 2022, we developed our deforestation and ecosystem conversion policy to do so. And in this deforestation policy, with the help of CDP Forest data, we targe forest risk countries and forest risk commodities such as palm oil, soil, beef, rubber, timber as well as cocoa or coffee. Our policy targets companies with activities that may have very high impact on forests and that present weaknesses in terms of performance or in terms of policy or disclosure. All the companies identified are now systematically engaged in order to encourage companies to acknowledge their exposure to deforestation and ecosystem conversion risks and take concrete action to prevent and address these issues. We engage companies on direct operations and throughout the value chain, to ask them to better integrate deforestation and ecosystem conversion risk into their strategies and policies, to better disclose their exposure and, in case of controversy, to ensure that companies are taking appropriate measures for effective remediation. I talked a lot about deforestation to illustrate land system change, but some of the other boundaries are a bit more difficult to map. So Molly, can you talk about biosphere integration and ocean acidification? And what about the other themes that don't quite fit into the planetary boundaries? 

Molly Minton: Yes, two of our key themes for quite a few years that we've been engaging on are oceans and biodiversity strategy. For biodiversity strategy, we have heavily linked this to biosphere integrity, which is the boundary that measures the health of ecosystems and the genetic biodiversity included in them. All of those boundaries are ultimately related to the goal of preserving genetic variability of species in many ways, because we can drive biodiversity loss through the five drivers, such as pollution, invasive species, climate change, land system change, etc. But essentially, there's one particular boundary that is linked to this topic. But for us to engage on it, it's actually a lot more broad than just talking about the cute animals. Julien and I always joke that we want the bugs in our reports and we don't want koala bears or pandas. And it's absolutely true. So what we're trying to do here is we're trying to push corporates to drive action through robust nature strategies that incorporate all of the data and all of the policies they need to understand their impacts, their dependencies on nature, and as well, their risks and opportunities. We also do a lot of work around oceans, and we've mapped our ocean engagements to the boundary of ocean acidification. But this is not technically how you would link it, because ocean acidification is a direct impact of climate change, since as the ocean gets warmer, the amount of CO2 in the ocean increases, impacting biodiversity health. But we use this planetary boundary as a way to drive action and awareness around the fact that ocean is more of an intolerable environment for biodiversity and it can come with business risks. And I think we have a really cool example of this, Julien, because around our ocean engagements, one company we worked with was a shipping company. And they identified that they had impacts to oceans around invasive species, which is one of those drivers of biodiversity loss that is poorly addressed by investors because it has so few impacts. I think we have one really cool example, Julien. 

Julien Foll: Ballast water. 

Molly Minton: Exactly, ballast water. This example is because we don't see a lot of strategies around invasive species. Invasive species is a key driver of biodiversity loss, but often it's out of the range of corporate activities. Often, but not always. And one company in our engagement is a shipping company, and they identified that they were having direct impacts on oceans around invasive species, because ballast water is water that is used in ships to balance them and optimize navigation. This water is taken from one area in the globe and is released in another area, in a different ecosystem. There might be living organisms in this water and they will represent a threat to the ecosystem it is released in as an invasive species. However, this company found that they could address these impacts by using a water treatment system to reduce biological interferences and limit the transfer of species to new ecosystems. And this invasive species is not a planetary boundary per se. It's an element that drives decline in the boundary of biosphere integrity. So it's there, but it's only one element of it. And we also do some work around many nature-related engagement themes that don't even have a relation to the planetary boundaries at all. For example, circular economy. This is not a risk. Circular economy is a pure opportunity and a solution to help ease pressures on the earth's systems across all boundaries. And we see this real theme as a way of driving opportunities and driving solutions to show that we're not only talking about a catastrophic end to the world. We're actually talking about new ways we can think and drive funding and make our economy more circular. 

Julien Foll: That makes a great transition to the opportunity side of this biodiversity topic we are discussing today. We have talked a lot about the risk element, about identifying risk via planetary boundaries among other factors and how engagement is used to help addressing this risk. But can you talk a bit about the opportunity side, Molly? 

Molly Minton:Oh, yes. Outside some obvious exceptions, such as renewable energy and water treatment, it is hard to identify companies that favor biodiversity. It is not always straightforward, especially in high-impact sectors, due to data gaps, amongst other factors. If we want to create funds or drive financing to help reverse nature loss, we can't just focus on the obvious sectors or solutions. A fund that only invests in tech companies that have limited nature impacts or a fund that is heavily concentrated towards one or two sectors or activities isn't useful to drive funding where it's needed and it's also not financially attractive. So Julien, could you provide us some guidance on how investors can overcome this challenge? 

Julien Foll: We have been working for years now to identify companies providing sustainability solutions contributing to the SDGs, the Sustainable Development Goals, and participating in the fight against climate change and biodiversity in particular. But I will talk about a work we did this year and that I particularly enjoyed consisting in developing a framework to identify companies providing solutions for biodiversity-dedicated portfolios. Indeed, we have several portfolio managers that aim to invest in companies providing biodiversity solutions. If I make it short, we are used to advise portfolio managers to invest in companies that are reducing their negative impact on the environment, like reducing pollution, reducing their use of natural resources such as water consumption or companies avoiding deforestation. Climate change being a significant driver of biodiversity loss, as you mentioned previously, it's easy to propose also to invest in, let's say,in climate leaders for a nature fund. But some of the portfolio managers were, let's say, hesitant on the related storytelling and the limited differentiation with existing funds. We also noticed that there was also a real client demand asking for investment strategies that significantly differ from existing ones to drive concrete solutions on nature. So together with the ESG product development team and the ESG methodology and solution team, we work on a biodiversity dedicated framework. And on our side, based on the IPBS reports and the great work done also by the science-based StarCAD network, we particularly work on turning biodiversity loss drivers into biodiversity solutions. Let's say Biodiversity Solutions Companies Opportunities. So we started from the IPBS 5 biodiversity loss drivers you mentioned previously. So land, water, sea use change, natural resource exploitation, climate change, pollution, and invasive species. And then we use the work and the great work I would say done by SBTN to translate these five drivers in 12 pressures. I will not mention... all the trade pressure, but instead name few presenting the activities and company profile we consider offering solutions to address this pressure on biodiversity. Indeed, based on our knowledge of company activity, we propose a variety of investment opportunities for each of the identified pressures. 

Molly Minton: You are so right, Julien. We won't drive financing solutions if we only look at those obvious examples. I think engagement is essential in the near term to identify these solutions. as the data we need doesn't yet exist. I think, for example, we have a great one highlighted in our report on healthcare and pharmaceutical sector. We've been engaging on plastics in healthcare and pharmaceuticals for about five years now. And this is a very hard industry to transition due to regulation and product safety concerns. However, after five years, we've seen pharmaceutical and healthcare companies in our engagement pool who have launched and scaled industry-wide initiatives to upcycle healthcare plastic across multiple geographies and product types. One company in particular in our engagement has led this work. And it's a genuine story that means we can justify putting this into a nature fund with a unique example about how a hard to abate sector is driving solutions for change. 

Julien Foll: Yes. There are so many examples of interesting corporate actions that favor biodiversity. For example, the ballast water treatment system you mentioned previously, Molly, it's a great example of this, but there are so many others like I could say. vegetable and alternative proteins such as insect meal to reduce deforestation risk and find alternative feed for fish and animal production. Another example is sensor-based sorters that may increase the efficiency of mining operation, increase recovery rate and hence reduce waste and hopefully reduce the overall amount that needs to be extracted. Of course, water efficiency solution and water treatment technology are other opportunities to reduce water usage and water pollution. And we notably noticed some PFAS treatment solution companies. Noise also represents disturbance to biodiversity and specific noise reduction solutions can be considered for biodiversity solutions. Or companies offering solutions for rehabilitation of polluted sites and soil. This work is probably endless, but having a common framework based on the five main drivers of biodiversity loss and the derived 12 pressures, and also for almost 1,000 portfolio managers or analysts across Amundi to participate in building this in-development share biodiversity buy list. So the opportunity side is a fun part, I would say, but we also need to play a bad cop when we engage and we don't have the intended momentum. Do you want to talk a bit more about that, Molly? 

Molly Minton:You're totally right, Julien. Sadly, many companies are not yet prioritizing their management of nature risks at a speed that is feasible and required. In line with our biodiversity policy and our overall engagement approach, we sometimes need to take escalatory actions to push the engagement agenda a bit more. We have a toolkit approach to this, meaning we have certain levers at our disposal. We may ask questions at an AGM to drive more visibility and awareness at the top management levels during the AGM season, vote against the discharge of the board, or against certain board members after a few years, and even do internal downgrades on their ESG score internally to limit Amundi's ability to invest in this company and also decrease our risk or exposure to this company. And ultimately, when the risk is considered too high and corporate action too limited, we will consider exclusion as the last resort. We have some great examples of these escalatory actions in our nature section of our engagement report on a wide range of subjects from PFAS, plastic, deforestation, and many others. 

Julien Foll: Absolutely. We had many good examples in the report of the actions we took, but also interesting successes or positive evolution, let's say, to solve the pressing problems related to nature. It was hard to choose on which one to write about. 

Molly Minton: Indeed, Julien. It's a good problem to have. And considering how fast the topic of nature is evolving, and all the developments so far in 2024 around PNFT, CSRD, COP16. I think our list of examples will continue to grow, Julien. 

Julien Foll: Yeah, I also think so. And thank you, Molly, for this chat we had today. 

Molly Minton: It was a pleasure, Julien. 

Julien Foll: Bye-bye. 

Molly Minton: Take care. 

Disclaimer: Thank you for tuning into this episode of Outer Blue Responsible Investing. We hope today's conversation has shed light on how stewardship, shareholder engagement, and voting can shape the future of sustainability. As we continue to navigate the path toward a more sustainable financial system, your role as an engaged investor is key. Tune in next time to hear more on Amundi's insights. Until then, keep exploring the power of stewardship. This podcast is only for the attention of professional investors as defined in Directive 2014/65/EU dated 15th of May 2014, as amended from time to time on markets and financial instruments called MIFID II. Views are those of the author and not necessarily Amundi Asset Management SAS. They are subject to change and should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi products or any other security fund units or services. Past performance is not a guarantee or indicative of future results.