Priority 1: Investing in solutions which build a clean, biodiverse and climate-resilient future
Target: 17% of our assets to be in climate solutions by 2025
Our most powerful tool to drive positive change is where we invest our money.
We want to invest in companies in the UK and globally that contribute to the long-term sustainability of the economy, nature and society and generate the financial returns we need.
We want to invest in products and services which produce less carbon; use less or cleaner forms of energy; help society adapt to climate change; and value and protect natural capital. We want every portfolio we invest in, in every asset class, to consider and act on sustainability.
We will invest in innovative solutions for a particular asset class if we believe the financial impacts from climate and or nature risks are not properly being factored into existing structures.
We will not judge by the label but instead delve deep to make sure we understand the portfolio and that it has the responsible investment ambition and financial returns we need.
We expect to see plenty of opportunities to invest in climate solutions in infrastructure and private equity and welcome the increased impact offering in private debt.
We would like to invest in solutions that recognise the economic, as well as social and environmental value of natural resources. We support the development of the circular economy so that natural resources will still be available for future generations to enjoy and benefit from.
We want to invest in solutions that enable real world change, identifying new models to facilitate the circular economy. In the future waste will be viewed as a resource to be reused so we want to focus our investments at the top end of the waste hierarchy, which prevent and reduce waste, not in companies at the bottom end which dispose of, or recover energy from household waste, or produce materials which can’t be recycled.
On property, we want to invest in real estate holdings that have clear social and environmental impact objectives. Energy efficient houses are good for the planet and people’s bills. Green neighbourhoods have recognised health benefits.
We welcome investment in properties which aim to be lower carbon than standard new build, or in lower-cost and affordable housing, sustainable SME workspace, healthcare, and schools. We welcome funds where the majority of properties are rated high by a recognised building sustainability standard.
We expect our Global Sustainable Equity Managers to provide, and report on, exposure to climate solutions and be considering nature impacts as a matter of course when selecting underlying companies.
We see a particular lack of investment opportunities to invest in climate adaptation, despite the scientific evidence and political will. We want to invest in products or services that help society adapt to climate change and welcome a greater focus on this by asset managers.
We will review progress towards this target in 2025.
How we will measure progress
We will report annually on the percentage value of our investments in climate solutions.
In listed equities and bonds, we will measure our exposure to green revenues generated in line with the EU taxonomy. This classification system is well established and used in the finance community and allows us to compare progress against our peers.
For private markets, we will use either green revenues or value of our exposure. This depends on who the asset manager is, as they have differing approaches.
Where we map the value of our exposure, we will map to the EU taxonomy climate solution sectors of climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems.
We are aware of potential overlap for mapping to climate change mitigation and adaption. We wish to avoid double-counting and will ask questions of our asset managers and data providers to make sure we avoid this.
All results will be sense checked by an independent party. We will report publicly on progress every year in our annual report and Stewardship Code.
A focus on Natural Capital
Natural capital can be defined as the world’s stocks of natural assets. This includes both living components such as plants and animals as well as non-living material such as soil, water and rocks. These assets provide ecosystem services we often take for granted such as water purification, climate regulation and pollination.
Natural capital, nature and biodiversity are terms that increasingly feature in the assessment of financial risk and opportunity when looking at investments.
In 2022 the EAPF committee formally documented their belief that poor natural capital management poses a significant financial risk to the Fund.
We know from reports such as the UK Treasury’s Dasgupta review ‘The economics of biodiversity’1 how reliant a healthy economy is on natural capital. These terms can often be used interchangeably and mean different things to different people. As a result, it is key to transparently define what we mean by them.
The EAPF defines ‘natural capital investing’ as sustainable investments that involve commercially viable land-based or freshwater/ocean-based activities that protect and enhance the natural capital found in those locations and evidence the improvement.
Traditionally income in this area came from activities such as forestry or agriculture where the yield was often dependent on crop type and geography among other things.
New income streams include carbon and biodiversity credits that aim to create financial markets for carbon sequestration & habitat restoration. Risk management is an integral part of any investment process, and it is right that risks from climate change and poor natural capital management are integrated into this process if they can result in a financial loss.
At the same time, we should also be considering the huge opportunities that will open up as we move to a lower carbon, circular and sustainable economy that values these natural resources.
1Final Report - The Economics of Biodiversity: The Dasgupta Review - GOV.UK (www.gov.uk)
EAPF cannot and should not try and solve all the climate change and natural capital problems of the world, but we should take the opportunities where they arise to develop sustainable investments that can make a healthy return and do good and share that best practice, which we have been doing for a number of years.
Target: Invest 4% of our total assets in natural capital, demonstrating that they are net nature positive and deforestation free
We expect investments in this asset class to be mainly in our infrastructure portfolio, although private equity also has a role with the potential for debt and listed equity to feature in the future.
We will continue to invest in the more mature sectors such as sustainable forestry and sustainable agriculture. We will also look for investments in proven evidence-based solutions which can monetise the restoration of ecosystems, such as peatland and grasslands, through biodiversity credits.
As this is a new asset class which presents us with reputational risk if not done well, we want to see the following:
A sustainable market rate return
Net nature gain. We want our investment to leave an overall positive impact for biodiversity, evidenced through baseline and ongoing monitoring of key nature performance indicators and to encourage continuous improvement.
Deforestation-free. We expect all Natural Capital asset managers to commit to assess their deforestation risk across direct operations as well as supply chains and report on this with time bound commitments for addressing any highlighted risk. In due course, we would like to see this deforestation-free commitment made by all our managers for infrastructure investments, and ultimately across all asset classes.
Inclusion of local communities. We want asset managers to empower local communities, by engaging them in decision making, creating jobs with high job satisfaction, retaining and or enhancing access to local amenities and sharing the long-term benefits from the sustainable development of the land.
Where carbon credits are generated, we will seek that additionality and permanent carbon removal are evidenced through respected accreditation, which is independently verified. We will go further than this and require permanence of land use using legal covenants, easements or regulation.
Where biodiversity credits are generated, a strong scientific approach to assessing the value of the credits and a credible regime for their use.
An understanding of the impact of a changing climate on natural capital and investing in a way that helps build resilience for the local community.
In sustainable agriculture investments, a focus on, and proof of, improving soil health. We expect asset managers to use standardised soil sampling techniques for baseline and ongoing monitoring, with reporting of changes.
The potential to crowd in additional funding. We recognise that these are early days for this asset class, so we would welcome the asset managers joining us in committing to being transparent and sharing what we learn, so that wider investor confidence can be built to drive sustainable growth.
Some of the investments in this asset class may contribute to the Fund’s wider target for 17% of the Fund’s assets to be in climate solutions. However, where the investments seek primarily to conserve a specific species or habitat, they may not be classified as a climate solution.
We will publish every year the value and percentage of our investments in natural capital. We will also publish the findings in our progress on generating net biodiversity gain.
