This article is the first in a series that is uncovering how investors are incorporating biodiversity and natural capital into their portfolios across asset classes.
When it comes to protecting biodiversity, it’s becoming increasingly clear that the private sector will need to take the lead, because the public sector isn’t.
That was in evidence at COP16 in October and November. The annual United Nations Biodiversity Conference, held this year in Cali, Colombia, ended with wealthy nations blocking the UN’s attempt to create a Global Biodiversity Framework Fund — a pool of capital established at COP15 in 2022 to be used to implement the Kunming-Montreal Global Biodiversity Framework. The framework’s goals including protecting 30% of natural areas by 2030. Initially aiming for $20 billion annually, the fund has only garnered about $400 million in capital.
This stark lack of public funding has made the private sector more crucial than ever when it comes to financing initiatives to halt biodiversity loss. But whether or not markets have the tools — and more importantly, the will — to do so remains uncertain.
The asset class with the clearest roadmap towards engaging on the biodiversity issue, many investors say, is public equities. That’s at least partly because governing bodies such as the Securities and Exchange Commission have structured guidelines for how investors can engage with listed companies via proxy votes – a method that activists have long used for a wide range of issues.
“You do have a lot of very small religious and faith-based organizations who have been doing this type of shareholder engagement work and socially responsible investing for decades,” explained Caroline Boden, director of shareholder advocacy at Mercy Investment Services.
Now that biodiversity as an investor movement has picked up steam these past two proxy seasons, Mercy has joined the movement but keeps its engagement focused on public markets, rather than targeting companies owned by private equity managers.
“The private equity ownership structure makes it more challenging to engage, and there aren’t necessarily the same points of leverage as you have with public equity,” Boden explained.
And Mercy is not alone in prioritizing public markets — investors across the globe recognize the structural incentive to start with public market engagement.
“If you’re a public company, you’re facing a broad range of people and stakeholders that you’re answerable to because everything you do is public, not only to your shareholders but to everybody else. And so I think the exercise there has to be a little more proactive,” said one lawyer, the head of ESG at a global law firm.
Full disclosure
Despite this, publicly traded companies still have a lot of work to do on biodiversity-related disclosure.
According to a spokesperson from the Carbon Disclosure Project, 76% of the S&P 500 responded to at least one question on biodiversity within the CDP’s 2023 climate change survey. However, only 33% of the S&P 500 reported that they were taking action on biodiversity and just 15% claimed to be assessing the impacts of their value chain and using indicators to monitor their performance.
Perhaps this is why most of the engagement in this space is still focused on reporting.
“The resolved clauses [in our engagements] have not included an ask to set targets for biodiversity risk mitigation, but we certainly are inquiring about that in dialogues. What we will often do is ask for an assessment and disclosure as a first step. And then the next step is to say, ‘Now that you know, what are you going to do about it? Let’s set some targets.’ The resolved clauses that include specific target-setting asks typically don’t get as much support as the broader report and disclosure asks,” said Annie Sanders, director of shareholder advocacy at Green Century Capital Management.
The disclosure Sanders refers to is the Task Force on Nature-related Financial Disclosures (TNFD), which has created a standard disclosure manual for companies. Green Century lobbied both PepsiCo and Kellanova to adopt TNFD this year. The battle with PepsiCo was a losing one, with Green Century bringing its motion to a proxy vote that ultimately garnered 15% of PepsiCo’s investors’ support, while Kellanova implemented TNFD reporting after negotiations.
While 2024 was the first year Green Century engaged explicitly on biodiversity, the investor has been engaging on biodiversity-related issues such as deforestation, native vegetation conversion, and plastic pollution for years. That’s not surprising; the Rev. Kirsten Snow Spalding, the vice president of Ceres’ investor network, said this is typically where she advises investors to start.
“I am hearing from my members that deforestation is on the front line. The investors have for years been focused on the food sector and engaging with food and agriculture companies about supply chain practices,” she said. “Certainly, sustainable agriculture is a priority and pesticides are a key, but water use and regenerative crop management are also critical to preserving biodiversity.”
The need for active investors
Cohesive and robust private sector engagement on biodiversity relies on investors being informed and active, and working together.
“When you look at the listed space, it really boils down to not investing, but down to active ownership,” said Flora Gaber, a sustainability specialist at Sjunde AP-fonden (AP7), a Swedish government-owned pension fund. “Since we have holdings in thousands of companies, our strategy has been to collaborate with other investors to jointly engage in dialogue with those companies that have the largest impact on biodiversity.”
There are some services that do this, like Ceres. The organization, alongside the Institutional Investors Group on Climate Change (IIGCC), launched Nature Action 100, a list of the 100 top companies that it directs its 230-plus investor members to engage with on biodiversity-related issues. A similar effort, the Spring initiative from the UN’s Principals for Responsible Investment, also coordinates investors to engage with a select number of companies.
However, active investors involved with organizations such as these are not the norm — more often than not, they have dedicated sustainability experts. Most investors rely on governance solutions providers, the largest being ISS and Glass Lewis, to inform their engagements and proxy votes.
“Our proposals sometimes receive recommendations of support from ISS and Glass Lewis, two proxy advisors that have an outsized influence on how larger firms tend to vote in proxy votes,” Sanders explained.
Glass Lewis advised investors to vote no on the PepsiCo proxy vote, despite Glass Lewis having started to include biodiversity risks in its ESG benchmarking this year. The company did not respond to a request for comment.
As for ISS, Brian Russo, managing mirector for Stewardship Solutions at ISS STOXX, parent company of ISS Governance and ISS ESG, gave a general comment: “Consistent with our commitment to offer choice, subscribers to ISS Governance customized voting policies will for next year’s annual meeting season be able to leverage a dedicated biodiversity offering covering the universe of Nature Action 100 companies.”
The offering will include research that assesses companies’ impacts on biodiversity issues, he added.
The guardians of the gate
But even for actively engaged companies, there are three major firms whose blessings are more-or-less needed to get meaningful work on biodiversity done: Vanguard, State Street, and BlackRock.
The three asset managers are the largest shareholders of the S&P 500, with Vanguard owning 9.5% of S&P 500 shares, BlackRock 8.3% and State Street 4.54%. Critics have recently raised red flags that the three of them hold far too much influence over corporate boards.
Still, of those three investors, only State Street mentions biodiversity in its engagement guidelines. The firm recommends that investors who are concerned about nature-related risks vote for disclosures aligned with the TCFD framework. BlackRock‘s guidelines mention nature-based risk, while Vanguard‘s guidelines don’t even mention climate (its separate climate risk governance outline does not refer to biodiversity or nature).
“We did an assessment of their voting guidelines and policies of the larger investing firms and asset managers. They really don’t say so much on environmental impacts and biodiversity loss,” said Elizabeth Levy, the biodiversity program coordinator for As You Sow, a shareholder advocacy group. “In this larger culture of anti-ESG where companies are backtracking on commitments… it’s harder for [large asset managers] to come out and say that these are their policies, adding that on to the already controversial climate policies [they have].”
But support from one of the big three is essential for biodiversity-related engagement, as Alexandra Pinzon, head of biodiversity at Share Action, a nonprofit focused on investor engagement for social change, explains.
“Asset managers have huge power in terms of the way they allocate capital and steer those portfolios, but… they lack any public policies that clearly say, ‘These are the restrictions that we have when it comes to protected areas. This is the monitoring we do, this is the due diligence and these are the red lines that we have established for that.’ What we want them to do is recognize that this is a blind spot,” she said.
When asked for comment, a BlackRock spokesperson pointed out that the firm launched an optional set of guidelines focused on climate and decarbonization in July, as well as launching a pilot program for choice voting in ETFs in 2023. The spokesperson also noted that BlackRock encouraged risk-related reporting on nature from portfolio companies in its 2024 Global Principles for investment stewardship.
This doesn’t mean BlackRock is supportive of all disclosure-related biodiversity engagements, though.
Joud Abdel Majeid, the firm’s global head of investment stewardship, stated that “in the U.S., shareholder proposals focused on climate and natural capital risks [increased]… Like last year, investors found the majority of these proposals to be overly prescriptive, lacking economic merit, or asking companies to address material risks they are already managing. As a result, these proposals continued to receive low support from shareholders, including BlackRock.”
Vanguard and State Street did not respond to requests for comment.
Moving forward
Nevertheless, there is still room for hope: even if the big three shareholders are not in favor of a biodiversity initiative, individual shareholders can find power in numbers. One example is the growth in attention being paid to proxy proposals over deep-sea mining.
“We didn’t get the large institutional investor support for the deep-sea mining proposals that we filed last year,” Levy said. “The reasons that they cited were that these were not standard practices for American auto manufacturer companies even though there are five right now — and growing — that have made deep-sea mining moratorium commitments.”
As You Sow filed deep-sea mining proposals this year against Tesla and General Motors, asking Tesla to “commit to a moratorium on sourcing minerals from deep-sea mining” and GM to “publicly disclose the Company’s policies on the use of deep-sea mined minerals in its production and supply chains.” Both resolutions went to vote, with As You Sow convincing 7.7% of shareholders to vote yes on its Tesla motion and 12.6% to vote yes on its GM motion.
Typically, successful engagements with listed companies never go to vote — the resolutions are resolved via negotiation, and the issuer eventually withdraws the resolution once satisfied. Levy noted that even though both engagements went to a proxy vote and lost, As You Sow considered that to be a win as it showed how many investors cared about the then little-known issue.
“Even if a shareholder proposal were to get a majority vote of support, the company isn’t legally obligated to do what the proposal is asking. That being said, our experience has been if you reach that 20% to 30% range of votes in favor of a shareholder proposal, it sends a strong signal to the company that a significant number of its shareholders see whatever that particular issue is as material to them and material to the company,” Mercy’s Boden said.
She concluded: “Usually if we hit 20% [yes vote] — sometimes even less, but 20% is a good threshold — there tends to be more responsive engagement from the company.”
For the 2023 proxy season, nature-related proposals, on average, got 24% of investors’ support. That’s higher than climate proposals’ 21% for the same period, according to a report from Harvard Law School.
The next proxy voting season comes in the spring of 2025, though most investors will finalize their voting policies by February. How many investors — and whether any of the big three asset managers — decide to include biodiversity in these guidelines remains will be revealed then.