Natural capital management, and why it matters to investors

As a global investor, the systemic risks presented by the degradation of our natural environment are of great importance to us and to our clients. We recognise that the long-term strength of companies, financial systems, economies and societies depends on the health of nature’s services, and we are therefore committed to addressing the growing threats to it.

LGIM’s nature framework outlines how we structure this work across the full breadth of our stewardship activity. In it, we introduce the sub-theme of NCM – our efforts to strengthen companies’ holistic understanding and management of nature-related risks and opportunities, impacts and dependencies.  

We’ve now published our NCM policy, which provides more granular detail on LGIM’s approach and expectations. Below we summarise some of the key points covered in the policy.

The importance of NCM to investors

Organisations have dependencies (necessary environmental assets and ecosystem services) and impacts (a change in the state of nature) that give rise to nature-related risks and opportunities. These interfaces are varied, location specific and often spread throughout complex value chains.

While some companies are very familiar with measuring and managing their material interfaces with nature, the breadth and consistency of this is a long way from maturity. This creates a problem. Companies are not looking at their nature-related risks comprehensively, meaning there are unknown risks (and opportunities) going unmanaged. This corporate risk transfers to investors.

As such, it is appropriate that we focus our efforts to strengthen the understanding and management of nature-related risks in a way that is globally aligned.

A market-wide approach

Our NCM work is multifaceted and involves engaging with a wide range of stakeholders and market participants, such as other investors, policymakers, regulators, non-governmental organisations (NGOs) and academia.

For example, we engage directly with data providers to support the development of available metrics and, where it is appropriate to do so, leverage what data is currently available in our analysis and decision-making tools[1].

Beyond third-party metrics, and to further develop our ability to assess risks and opportunities across our investment universe, we require globally standardised corporate reporting that presents material information consistently while not oversimplifying it.

The TNFD recommendations are a key lever to facilitating this, particularly in the absence of global standards such as the ISSB^[2] and supporting national regulation. There is no time to waste, and we have therefore been unequivocal^[3] in our support of the TNFD, calling policymakers to rapidly adopt it and introduce regulation that would mandate disclosure against the framework.

We are presently engaging key stock exchanges on this topic in Asian markets.

Taking action at investee companies

Market-wide regulatory and policy action and improved data are critical, but our work under NCM goes beyond that. Corporate action is essential and underpins progress.

While LGIM has been engaging with investee companies directly and collaboratively on specific material nature-related topics, such as deforestation risk exposures, for many years, through our NCM work we are engaging corporates to ensure they take a comprehensive approach.

For example, we are working collaboratively with Nature Action 100. With the time in which we can enact meaningful change rapidly shrinking, we intend to scale our corporate engagement in the coming months.

In our NCM policy we have introduced a broader set of minimum expectations that we are looking for from companies. These include:

• Assess – Evaluate location-specific interfaces with nature and priority impacts, dependencies, risks and opportunities across direct operations and value chains
• Set targets and ambitions – Based on detailed assessments, set time-bound, context-specific, science-based targets
• Develop strategies – Create and implement comprehensive strategies, policies and mitigation actions that address nature-related impacts, dependencies, risks and opportunities
• Monitor and be accountable – Establish robust accountability and governance mechanisms
• Engage – Engage with external parties, including actors throughout value chains, trade associations, policymakers and other stakeholders
• Disclose – Report on progress and regularly evaluate performance

As it stands, large global investors do not have standardised yet credible nature-related information that is required to hold companies to account and to inform capital allocation decisions.

Our efforts under NCM aim to fix this. A big challenge, but one we are working hard to address.

[1]LGIM ESG Score: We currently integrate nature-related programme assessment metrics within the score and are working to move beyond these to leverage at scale geospatial data that relates company operations to specific impacts on nature.

[2] IFRS - ISSB to commence research projects about risks and opportunities related to nature and human capital

[3] LGIM Blog: What TNFD means for investors and the planet