Pension funds could be missing out on bolstering their environmental, social and governance (ESG) credentials and better diversifying their portfolios by not investing in biodiversity, a report from Pensions for Purpose and Gresham House has suggested.

In the report, Natural capital & biodiversity - where are UK asset owners on their journey?, the pair said that trustees should be made more aware of the opportunities they have to positively impact nature restoration while delivering strong returns for members.

The report includes findings from a recent survey of a number of high-profile funds and consultants, including Nest, the Tesco Pension fund, Aon and Mercer, which showed that at least 62 per cent of UK pension funds are not invested in natural capital solutions, despite growing awareness of biodiversity risks.

It defined natural capital as habitats and ecosystems that provide social, environmental, and economic benefits to humans.

The report also showed that most respondents to its survey agree that addressing biodiversity risk is at least as crucial as tackling climate change, with some considering it an even more significant threat.

Challenges with data and availability of investment products, however, make it difficult to understand and address biodiversity loss through direct investment.

Pensions for Purpose and Gresham House say pension funds can access natural capital investments in three ways.

Firstly, as part of their infrastructure bucket, secondly within their property allocations, and thirdly, as a fixed income-type instrument. Investible solutions can be found in natural capital assets such as sustainable forestry and biodiversity habitat banks.

The report admits, however, that there generally remains a lack of supply for investible solutions that meet investors’ risk, return and impact profile.

The research also highlights a divide among pension funds when it comes to their responsibility to invest in natural capital.

While 38 per cent of those questioned believe it falls within their remit, an equal percentage believe it does not, with the remaining respondents undecided.

Some funds focus on the responsibility and role of their own investment portfolio, while others adopt a more active stance, considering the future of investment and the wider implications of securing a better world for their members' retirement.

Pensions for Purpose chair and founder, Karen Shackleton, said the investments of the past, based on natural capital exploitation "are no longer viable" as the cost of depleting our resources has "become too high", both environmentally and financially.

"Investors must therefore seek sustainable alternatives that preserve and enhance our planet's natural capital," she continued. "Addressing biodiversity loss is essential for preserving ecosystems and is a smart investment decision, enabling more resilient portfolios amid growing public awareness and future regulation.”

Gresham House managing director of institutional business, Heather Fleming, added: "Investments that avoid or reduce biodiversity loss and the depletion of global natural capital will be central to investment portfolios of the future, as investors realise the opportunity and the financial imperative to reverse nature loss."

Share Story: