Climate Asset Management's impact manager Leo Murphy explains how it incorporates natural capital into all its investment decisions and his hopes for COP16
Environmental Finance (EF): Why is natural capital so important as an asset class?
Leo Murphy (LM): For Climate Asset Management, natural capital is about trying to deliver biodiversity recovery and maintaining healthy and productive landscapes, by addressing challenges holistically rather than in isolation. We want to use our position to educate people about how they can help to regenerate and restore areas, by targeting the high-impact sectors where we can make a real difference, such as agriculture and forestry.
Natural capital is an incredibly important asset class for the delivery on global commitments. The asset class fits perfectly with delivering outcomes of the Global Biodiversity Framework (GBF). While headlines might have focused on targets to protect 30% of the sea and land by 2030, there are other key targets where natural capital can have a real impact. It addresses GBF targets for reducing biodiversity loss and enhancing biodiversity and sustainability in areas such agriculture, aquaculture, fisheries and forestry.
EF: How do you incorporate biodiversity into the management of assets within your portfolio?
LM: Climate Asset Management has always had biodiversity and our other positive impact goals built into our investment philosophy right from the very start. It is a fundamental component of our strategic planning. It is not something that we have had to retrofit into an existing portfolio. Our approach incorporates biodiversity-related risks and opportunities in line with the TNFD approach, of which we are an early adopter.
We make use of biodiversity screening as part of our due diligence process to identify risks and mitigate negative impacts. We want to ensure we eliminate any potential assets that might cause significant harm and are incompatible with our objectives at an early stage. Screening also allows us to develop an action plan to mitigate any residual impacts, such as transitioning to lower impact practices.
In addition, we have specific impact objectives across four categories – biodiversity, climate, water and communities – for all of our funds, and each asset has to make a contribution to at least three categories to be eligible for inclusion. This is an important part of our approach that allows us to address trade-offs and avoid maximising one outcome at the expense of another. For example, we want to ensure that achieving biodiversity and climate goals does not come at the expense of local communities that rely up the same natural capital.
As well as a portfolio-level approach to biodiversity, we also have the flexibility to enable asset-specific initiatives. Often, we find our operating partners on the ground are able to identify opportunities unique to their landscape, which can deliver significant benefits that a top-down approach simply won't capture, an example being one of our partners in Iberia who spearheads initiatives to support recovery of the Iberian lynx.
Overall, for us implementation of biodiversity management is a joined-up approach that requires buy-in from across Climate Asset Management and from our partners and stakeholders.
EF: How does data play a role in biodiversity management?
LM: Biodiversity management is very much data-driven exercise.
We use a lot of data in screening our projects. Over the years, many of the desktop tools have been getting better, and while not perfect, can do some really useful things to screen out the projects that don't align with our strategy. We are also using as many of the new data collection tools out there as possible, such as remote sensing, camera traps and audio recording. But it doesn't eliminate the need to be on the ground, collecting data and working with biodiversity experts, which still forms a core part of our biodiversity monitoring approach.
When we have that data, we can package it up at portfolio level to understand our progress towards impact objectives and to report it to our investors and others. As an early adopter of TNFD, we will begin reporting all the core metrics from next year. We want to show what we're doing in natural capital and prove that we are making progress in line with our expectations.
From an investor point of view, we are also looking at how we can share our data to start helping investors think about their biodiversity footprint. We aim to collect accurate location-specific data across a range of parameters that can feed into modelled approaches that large multi-asset class managers are adopting such as Mean Species Abundance.
EF: What role is there for biodiversity markets in delivering biodiversity commitments?
LM: Like climate, we believe that transition will be the key to delivering biodiversity. As a specialist natural capital investor, we are transitioning to a new way of doing things to halt and reverse biodiversity loss. A new approach will help create investment opportunities that no longer exacerbate biodiversity loss but help us to achieve our nature goals.
There is a role for biodiversity markets to play, whether offsets or voluntary credits, but we can't rely on them exclusively. The track record for biodiversity markets, so far, has been patchy at best. Numerous studies have shown that even well-intentioned projects can fall short of delivering the uplift they originally promised, so we exercise caution in how we use them.
We believe, biodiversity markets should be relied upon only in specific circumstances. This includes where impacts upon biodiversity are entirely unavoidable and local offset markets with strong track records, or where benefits to biodiversity can be maximised through contributions to existing landscape-level projects. They may also be appropriate where credits come from a company's supply chain landscape where they can build the resilience of the nature-related dependencies of their supply chain commodities.
In such circumstances, there are opportunities to generate and sell credits as part of our natural capital assets to provide additional revenue streams to support our biodiversity initiatives.
We are also integrating measurable biodiversity uplift as part of high-integrity, nature-based carbon credits to support and scale projects which provide credible and measurable co-benefits alongside carbon.
EF: With COP16 approaching, how have things changed in the way biodiversity is considered since COP15?
LM: Before COP15, many in the private sector were starting to talk about biodiversity but far fewer were yet putting in serious effort into tackling the issue. Since COP15 we have seen nature rapidly rise up the agenda and the publication of the Global Biodiversity Framework, has provided a clear and accessible entry point for organisations to begin their journey. Companies have started to bring in the kind of expertise that they need to manage it effectively. Our investors have started asking us much more detailed and refined questions. They are talking about biodiversity because they appreciate how it affects their business and want to learn more about how we are managing it.
TNFD and the EU's SFDR have really helped, providing frameworks for organisations to structure their biodiversity approach. We are going to see TNFD reports coming out for the first time next year. So, reporting is becoming a lot more structured and professionalised in terms of how people are thinking about biodiversity.
However, these initiatives are focused on disclosure and firm action to transition away from negative impacts is still needed if we are to capitalise on the momentum of the past couple of years.
I hope that COP16 builds on many of the pledges and commitments we saw at COP15 and institutions return to demonstrate the action taken and progress made in recent years. At Climate Asset Management, we have continued to make progress across our strategies. We have successfully raised $1 billion in commitments for our natural capital projects and begun to deploy this into a range of assets, including a project working with indigenous communities to restore around 900,000 hectares of degraded savanna ecosystem in southern Kenya and an agricultural asset combining improvement management of productive land with restoration of natural habitat in Australia.
Given a key focus of negotiations at COP16 will be on financing, we are looking forward to an important opportunity to give a clear signal to governments that the private sector is a genuine, credible partner in delivering our collective nature goals.
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