ESG Focus: The Little Big Things – 18-10-2023

This story features ORICA LIMITED, and other companies. For more info SHARE ANALYSIS: ORI

This story was originally published on October 12, 2023. It has now been re-published with the correct spelling of Legal & General Investment Management America’s John Hoeppner.

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

ESG Focus: The Little Big Things

Biodiversity is in the spotlight this week; Morgan Stanley highlights potential investment opportunities; and Jarden announces a Global Nature Credit Markets Tracker.

-TNFD publishes final recommendations
-Morgan Stanley spies opportunity in regenerative agriculture
-Jarden launches nature credit markets tracker
-ASX50 rankings
-Australian developments
-Brazil flags a biodiversity protection taxonomy and $2bn bond
-US Republicans relate to biodiversity over climate and ESG

Compiled by Sarah Mills

Investors are largely aware that biodiversity taxonomies are on the rise globally, which will have significant repercussions for investment markets.

The World Economic Forum observes about US$44trn (more than half of global GDP) is moderately or highly dependent on nature, and that the three most dependent industries are construction, agriculture and food & beverage.

Of that, the Taskforce on Nature Markets (TNM) values nature markets at US$7.3trn worth of goods and services, equal to 8.6% of global GDP, observes Jarden.

The TNM estimates spending on biodiversity conservation in 2019 ranged between US$124bn and US$143bn in 2019, leaving an estimated financing gap of between US$598bn and US$824bn.

As part of the COP15 Kunming-Montreal Global Biodiversity Framework set last year, 200 countries pledged to cut harmful subsidies by -$500bn a year by 2030, so that is likely to flow through to global companies.

While fossil fuel companies are prime subsidies targets, these are likely to be caught up in carbon frameworks. 

Agriculture is a heavily subsidised industry globally, although not in Australia.

The food & beverage market often receives manufacturing subsidies; and sometimes the government subsidises material and labour in the construction industry.

The primary sector of the construction industry is most likely to be in the biodiversity spotlight given it involves the extraction of natural resources; water is an issue for food & beverage; and fertiliser and chemicals for agriculture, among many others.

Biodiversity still suffers from issues such as poor reporting and poor data, as well as a lack of bankable projects, and is likely to continue to do so in the near term, meaning it the investment theme isn't ready to roll yet.

But the frameworks and architecture for biodiversity are in the process of being adopted, and they are likely to make their presence felt in markets post 2025 say the pundits.

This December half has witnessed a flurry of biodiversity news and research on this front, some of which we canvass here.

TNFD Publishes Final Recommendations

The Taskforce of Nature-related Financial Disclosures has published its final recommendations on standardised, voluntary corporate reporting of biodiversity-related impacts, dependencies, risks and opportunities.

Europe is a tad ahead of the pack and has already drafted regulation, which is due to kick off in early 2025, demanding large companies disclose their impacts on nature, positively, negatively, actually and potentially. 

This could yield some very interesting findings and flow-on effects, given companies have never had to account or pay for the damage they incurred on the environment in the past (with the exception of a few notable lawsuits, often related to human health and livelihoods).

The framework includes 14 recommended disclosures, with three new ones being added to the TNFD’s original 11:

-engagement with local communities – both indigenous and local and other stakeholders
-sensitive locations both upstream and downstream to be prioritised
-value chains – the organisation’s processes for identifying assessing and prioritising dependencies, impacts, risk and opportunities

Macquarie Pegs First Adopters

Macquarie suggests the ASX300 sectors with the greatest impact on biodiversity – food & beverage, agriculture, materials and energy, are likely to be the first adopters of TNFD recommendations.

The disclosures will take a few years to implement, says the analyst, and it is expected to be gradual, with corporations leading the banks.

Morgan Stanley Checks Out Global Biodiversity Trends

Morgan Stanley attended Climate Week events covering nature and biodiversity and passes on its findings.

Morgan Stanley observes that, unlike climate, biodiversity is likely to result in reporting on multiple metrics.

The investment bank says from a regulatory standpoint, nature is today where climate was five years ago, and expects mandatory nature-related reporting to become mainstream this decade.

Regenerative Agriculture Tops Proposed Solution

Morgan Stanley identified Regenerative Agriculture as a key area of focus for discussions at Climate Week.

Morgan Stanley notes regenerative agriculture includes: “agro-ecology; agro-forestry; composting; holistic planned grazing; no-till pasture cropping; perennial crops; and silvopasture [the deliberate integration of trees and grazing livestock operations on the same land] ”.

The aim of many of these farming methods is to improve yields, and the quality and nutritional value of crops, water useage and carbon emissions, and eliminate the use of fertilisers and pesticides. Petrochemical companies stand out as possible losers in this respect – think Orica ((ORI)) and Incitec Pivot ((IPL)).

A few stats from the Morgan Stanley report:

-A 2018 US National Institute of Health study showed regenerative farming of corn drove higher profits for farmers, which correlated with particulate organic matter in the soils, not yields.
-Regenerative fields had 29% lower grain production but 78% higher profits over tradition corn production systems;
-Pests were 10-times higher in insecticide-treated corn fields than in insecticide-free regenerative farms, suggesting that pest-resilient food systems outperform.

Morgan Stanley determines the most exposed global companies are: Pepsico, General Mills, Kellogg, Mondelez, Target and Walmart in the US; Danone and Nestle in Europe; and Budweiser Brewing Company in China.

These are probably good indicators for vulnerable Australian companies. 

Many also expect that, on the construction industry front, the REITs are likely to be affected, along with  contractors, and building products suppliers such as Boral ((BLD)), James Hardie ((JXH)), Fletcher Building ((FBU)), and timber supply companies.

Packaging companies relying on timber products such as Amcor ((AMC)) are likely to be affected, much of which will gathered up under the circularity theme. Ditto Brambles ((BXB)) and other pallet providers. Miners will also have to account for biodiversity, with rehabilitation and offsets likely to play a role.

In reality, given the world's dependence on nature, the biodiversity theme should affect nearly every company to some degree.

Debt For Nature Swaps On Rise

Morgan Stanley notes Gabon and Ecuador are recent additions to the debt-for-nature (DFN) swap market, which aim to ease debt burdens through climate-related incentives.

Basically, the country buys back existing debt and reissues loans guaranteed by a government or institution with a higher credit rating. The country pledges the saving to nature preservation projects.

Jarden Tracks Nature Credit Markets

This month, Jarden launched its Global Nature Credit Markets Tracker to track the trillion-dollar nature market.

Credit markets provide a vehicle for financing the protection, regeneration and stewardship of biodiversity, and support large global commitments to biodiversity protection.

Jarden expects nature markets will develop in two ways: government-led and private-sector led.

In its first tracker, the broker observes Australia and New Zealand are in the fledgling stages of government-led biodiversity market development and examines global private-sector led biodiversity programs.

Like carbon markets, nature credit market issue credits or certificates to those achieving nature-positive outcomes, and these can be sold as offsets or used to satisfy investors of their internal progress.

The broker observes nature-specific credits such as water-quality credits or voluntary biodiversity credits and nature-related carbon credits are all under development.

Jarden envisages that, given the crossover between many biodiversity projects and carbon projects (i.e. climate affects biodiversity), it is conceivable that both biodiversity credits and carbon credits could be generated from one piece of land.

The analyst notes biodiversity approaches are mainly either: outcome based; activity based; or project based.

As we observed in a previous issue of Little Big Things, carbon markets have been beset by fraud and mismanagement, and it is more than likely that biodiversity will have its own teething problems. Verra, a major provider of biodiversity certificates, was at the centre of the most recent scandal.

ASX50 Ranked

The publication of Jarden's actual tracker followed swiftly on the heels of its introduction. 

The tracker is based on the 11 factors that stem from the four TNFD pillars of governance, strategy, risk and impact management, and metrics and targets.

After evaluating the ASX50 constituents on their progress against these factors (much of which revolved around reporting and accounting), Jarden ranks the heavyweights.

Fortescue Metals Group ((FMG)) leads the pack with a score of 9.5, followed by BHP ((BHP)) and Brambles ((BXB)) with scores of 9.

Commonwealth Bank of Australia ((CBA)), National Australia Bank ((NAB)), Rio Tinto ((RIO)) and South32 ((S32)) all staged solid performances with scores of 8. 

Origin Energy ((ORG)) and Woolworths ((WOW)) both garnered mentions for undertaking TNFD pilots, with scores of 5 and 6 respectively. 

Jarden expects to see the strongest progress in the sectors most exposed to the theme: mining, food production and oil and gas, and observes miners are already on the case, scoring 6 on average. 

Less nature exposed companies such as healthcare, TMT and gaming predictably had low scores.

Australia and Biodiversity

Responsible Investor in its 2023 Biodiversity Report also urges Australian governments to adopt biodiversity measures. 

Australia has already committed to protect and conserve 30% of land and 30% of oceans by 2030 – a United Nations initiative dubbed 30 by 30.

The initiative aims to protect against biodiversity loss that jeopardises food and water supplies and species globally.

Australia has also been labelled as megadiverse. This is not surprising given most biodiversity exists in the southern hemisphere, much having been destroyed in the north.

It is unclear yet whether this will be an impediment to Australian growth, or a benefit. 

Jarden observes the Biological Diversity Unit (BDU) represents 1sqm plot of permanently protected and actively managed land in high ecological value projects across Australia.

Government sector-led programs in the country include:

-Biodiversity certificates Scheme (Australia)
-Ocean Conservation Creits (Niue)
-Biodiversity credit system
-The proposed Australian Nature Repair Framework

Private-sector led programs include:

-GreenCollar, NaturePlus Credits (each represents one hectare of measured audited and certified restoration)
-Terrain NRM, Cassowary Credits (each represents one unit of rainforest condition improvement)
-South Pole, EcoAustralia
-Wilderlands Biological Diversity Units

Jarden observes EcoAustralia combines a Gold Standard international carbon credit and one Australian Biodiversity Unit equivalent to 1.5 sqm of government-accredited and protected vegetation.

States are also developing schemes, the NSW Biodiversity Offset Scheme being one example, which operates through landholder stewardship agreements.

Jarden observes landholders have set aside about 50,000 hectares of land aside to grow credits, and the analyst says it is probably the most developed biodiversity market in the world.

Aussie directors deprioritise biodiversity

Despite biodiversity receiving strong mentions in Australia’s FY23 corporate result season, Jarden in its non-executive director survey finds biodiversity has fallen as a priority for Australian directors.

Brazil Flags Biodiversity Protection

Brazil is the country with the highest biological diversity on the planet, and many may have noticed a disturbing rise in fires in the Amazon as landholders rush to clear forests ahead of impending biodiversity legislation.

On the bright side, deforestation in the Amazon fell -66.11% in August to its lowest level for the months since 2018 based on satellite imagery under the new government, reports Reuters, a period when destruction often spikes.

The new President Luiz Inacio Lula da Silva is differentiating himself from his predecessor Jair Bolsonaro, who presided over a slashing of environmental protections.

Responsible Investor advises the Brazilian government has flagged biodiversity protection in a new draft taxonomy, opening consultation ahead of the proposed launch of a roadmap at COP28.

Brazil is issuing its first sustainability bond sometime before December, and given its track record on deforestation, expects these will be linked to rainforest preservation.

The country is expected to try to raise $2bn.

ICMA Issues Blue Guidance

The International Capital Markets association recently published guidance on Blue Bonds to support the ocean economy.

Morgan Stanley observes this represents a small percentage of ESG-labelled debt, but expects healthy demand from Article 9 funds.

Biodiversity More Popular With US Republicans

Bloomberg observes biodiversity may be an easier subject to broach with Republican-leaning US investors, for many of whom the word climate has become synonymous with Voldemort.

According to Legal & General Investment Management America’s John Hoeppner:

“Using phrases related to carbon emissions instantly becomes a highly political conversation in a Republican state” while “habitat conservation has support across the political spectrum".

Bloomberg refers to a survey showing more than 55% of GOP voters agreed that land and water conservation, waste management and biodiversity were relevant to future prosperity, while support for net-zero goals in ESG investing fell to 42%.

The article observes that analysts at Bank of America Corp forecasts biodiversity-related investments may rise 20-fold to more than $400bn by 2030, while the Finance for Biodiversity Foundation targeted food, beverages and tobacco as top industries for biodiversity investors.

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms