Backing natural solutions to the climate challenge

Environmental degradation has brought us close to irreversible tipping points for nature. The costs of inaction are inordinate: Not only does more than half of the global economy depend on nature¹ but also it has a crucial role to play in mitigating climate change and its effects.

Put simply, global net zero cannot be achieved unless we protect and restore forests and other natural ecosystems and improve the management of agricultural land around the world.

In this context, we must welcome the landmark pledge to halt deforestation by 2030 that was made by more than 100 countries on November 2, 2021, at the COP26 climate summit in Glasgow. Yet this is not the first high-level international agreement to stop unsustainable forestry. How can we have confidence that, this time, words will be translated into firm and urgent action?

Alongside sound policies that discourage the destruction of forests, financial tools must be employed to ensure environmental costs are fully captured in decision-making. The financial sector can play a critical role by both influencing companies to stop depleting natural resources and by deploying capital into nature-based solutions — at scale and without delay.

Our commitments

We believe our impact and influence can be greatest when we work in concert with peers. We are therefore delighted to have joined two investor initiatives, as part of our participation at COP26, that aim to tackle deforestation and catalyze investments in nature-based solutions.

First, we signed the Principles of Responsible Investment’s (PRI) Deforestation Commitment, under which Impax commits to work with fellow investors to bring a halt to agricultural commodity-driven deforestation. We believe we can add real value to this initiative through sharing our approaches toward engaging with investee companies and policy advocacy on how to support sustainable production of agricultural commodities. The COP26 Forest, Agriculture and Commodity Trade (FACT) Dialogue is an example of this in action, and we look forward to working with policymakers on how the transition to more sustainable land use can be achieved in practice.

Secondly, we have become a member of The Sustainable Markets Initiative’s Natural Capital Investment Alliance (NCIA). As a member of the NCIA, Impax aims to help accelerate the development of natural capital and biodiversity as a mainstream investment theme. We believe the Alliance has the potential to be a hub for engaging the global investment management industry to mobilize capital efficiently and effectively for natural capital opportunities.

The challenges

At Impax, we already integrate natural capital issues into our investment process at three levels: in the development of our investment universe; in company-level ESG (environmental, social and governance) analysis; and in engagement with investee companies. Through this work, we recognize that there are several challenges for investors in assessing biodiversity and nature-related risks.

While the drivers of biodiversity loss are well known, it can be difficult to understand the specific mechanisms through which biodiversity loss presents risks or opportunities, especially as a systemic risk. For example, while governments have made high-level commitments and targets aiming to stem biodiversity loss, the lack of specific policy responses and incentives for companies to act makes it difficult to quantify the financial impacts of different business strategies on company valuations.

Data is often a key challenge. Not only is it difficult to identify the best metrics for assessing the impact of activities on natural capital and biodiversity, and for evaluating dependencies on nature, it is also challenging to obtain appropriate information given the importance of location in making these assessments.

Collaboration with peers can help overcome these obstacles. We believe that as part of initiatives like the NCIA, we will be better able to exchange information with other investment managers on how to integrate natural capital into assessment of asset classes and to develop metrics for measuring natural capital objectives and impacts, which can then be shared more widely through initiatives such as the Taskforce for Nature-related Financial Disclosures.

The opportunities

We strongly believe there are opportunities for investors and companies providing solutions that enhance and regenerate nature and help create a global economy based on principles of sustainability.

Impax has invested in environmental solutions delivering natural capital benefits for more than 20 years. We invest in strategies aligned with natural capital solutions in areas such as clean energy, water treatment and infrastructure, pollution control, waste technology, resource efficiency and sustainable food and agriculture. We find it a compelling area of the market in which to invest, given the structural growth in demand for environmental products and services.

The opportunity set continues to widen. The World Economic Forum has identified nature-positive transitions with annual business opportunities worth US$10 trillion that could create 395 million jobs by 2030.¹ Finance-led initiatives can help seize these opportunities by integrating and promoting natural capital as an investment theme across different asset classes, and by putting policies, practices and metrics in place to accelerate the transition toward sustainable production supply chains.

There is no time to waste in mobilizing finance for these opportunities. Nature-based solutions could potentially contribute up to one-third of the global emission cuts needed by 2030.² We are therefore delighted that natural solutions to the climate challenge have risen up policy and investor agendas.

Read more about the investor initiatives that Impax joined as part of our participation at COP26.

¹ World Economic Forum, “The Future of Nature and Business,” 2020. 

² United Nations Global Compact, “Nature-Based Solutions To Address Climate Change,” 2019.

RISKS: Investments involve risk, including potential loss of principal. The investment techniques and decisions of the investment adviser and the Fund’s portfolio manager(s), including the investment adviser’s assessment of a company’s ESG (Environmental, Social and Governance) profile when selecting investments for the Fund, may not produce the desired results and may adversely impact the Fund’s performance, including relative to other Funds that do not consider ESG factors or come to different conclusions regarding such factors.

Environmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

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