A major investment management firm has charted a pathway for integrating biodiversity into institutional fixed income portfolios, warning that investors face a myriad of regulatory and systemic risks in ignoring the issue.

Speaking to Citywire, Axa Investment Managers (Axa IM) senior solutions strategist Bruno Bamberger said companies that fail to recognise and address two key types of biodiversity-related risks could face difficulties in repaying future debt.

The first are the physical risks presented by biodiversity loss, for example ecosystem degradation and natural resource depletion, and the second are the transitional risks resulting from global efforts to combat the problem, such as adapting to new regulations, technological advances, and changing consumer behaviour that could include litigation and boycotts.

The interaction between these dual risk categories could lead to nature-related systemic risks that lead to negative repercussions on the wider global economy, Bamberger warned.

“Large asset owners are starting to measure their impact and consider how to adapt portfolios. At the same time, the risks are becoming ever more evident,” he told Citywire.

“We expect companies that do not proactively address these risks and do not adopt more sustainable nature-positive business models could face higher costs or lower revenues, therefore reducing their ability to repay debt in the future.”

As a result, fixed income investors are seeking to manage these risks, ensure their operations are having a positive impact, and meet evolving regulations by considering biodiversity in their investments and adopting sustainable nature-positive business models.

The Taskforce on Nature-Related Financial Disclosures (TNFD) will this September release its complete recommendations for a biodiversity risk management and disclosure framework.

Similar to climate-related disclosures, adoption may quickly lead to mandatory biodiversity reporting requirements, Bamberger said, meaning a greater understanding will be needed at all corporate decision-making levels.

On a positive note, he acknowledged that the quality, availability, and coverage of data on nature-related risks are improving, enabling investors to better identify and manage nature-related impacts, risks, and opportunities.

And by pinpointing portfolio “hot-spots”, Bamberger thinks investors can begin to realign their holdings to reflect best practices in biodiversity integration, with a good starting point being a steady shift away from bond issuers with large nature-related footprints coupled with little desire to reduce them.

Bamberger said fixed income investors can also use bond maturities to mitigate biodiversity-related risks, for example buying the debt of companies with big natural resource dependency or large biodiversity footprints only at shorter maturities, and then only reinvesting upon maturity if those impacts have been reduced or other risks mitigated.

He suggested investors engage in constructive dialogue with issuers to make them more aware of their practices and the shifting regulatory and consumer landscape, and to encourage them to modify their operations, including addressing related risks and building resilience in their supply chains.  This, in turn, can improve the odds that debt is repaid and future investments in those issuers can be made.

“As with climate change, engagement on biodiversity loss can be extended from individual dialogue with companies to participation in industry consultations or collaborative initiatives such as Nature Action 100. Ultimately, global collective action is important to achieve both issuer-level and system-wide positive impacts,” Bamberger told Citywire.

“If an issuer is resistant to change their business practices, perhaps for fear of reducing profitability in the short term, a clear and established engagement framework and escalation process – which, in extreme cases, may even result in divestment – is critical to monitoring and implementing actions based on engagement activities.”

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