Historically, nature-related risks, including those stemming from biodiversity loss, have been discussed separately from climate change. There has been growing recognition however of the interconnections between the two factors – a trend that’s played out alongside a heightened focus on the potential materiality of nature-related risks to investments. In recognition of this, RBC Global Asset Management (RBC GAM)¹ first published our perspective on climate change and nature-related risks in our Climate Report 2022, and outlined key activities related to this focus. Since then, we’ve continued to advance our approach, which includes assessing RBC GAM’s exposure to nature-related factors See our Climate Report 2023 for additional details. 

A framework for nature

Nature-derived services, including food, clean water, soil formation, climate regulation, air purification, and cultural services, such as recreation and tourism, are important for the global economy. Research from the World Economic Forum found that over half of the world’s Gross Domestic Product (GDP) is either moderately or highly dependent on nature and its services.² The potential systemic impacts of nature-related factors are also increasingly being recognized. While not a legally binding agreement, the adoption of the Kunming-Montreal Global Biodiversity Framework (GBF) by 188 countries in December 2022 was an important development as it set out goals, targets, and expectations regarding national commitments that aim to halt and reverse nature loss.³

Despite the global economy’s dependence on nature, efforts to quantify related risks and opportunities have been constrained by a lack of consistent and reliable data and methodologies. Recent progress has been made, with the release of the Taskforce on Nature-related Financial Disclosures’ (TNFD) final recommendations in September 2023.⁴ The TNFD provides a voluntary framework and sector-specific guidance for the disclosure of nature-related dependencies, impacts, risks, and opportunities.⁵

Description of nature-related impacts and dependencies

The TNFD defines nature-related risks as potential threats posed to an organization, linked to their (and wider society’s) dependencies and impacts on nature. These can derive from physical, transition, and systemic risks, which may create a disruption in an issuer’s activities or value chains, volatility in raw materials prices, adaptation costs, stranded assets, or capital destruction, among others. There are also nature-related opportunities, which create positive outcomes for organizations and nature by creating positive impacts on nature or mitigating negative impacts on nature. For example, activities that avoid, reduce, mitigate, or manage nature-related risks, or that actively work to reverse the loss of nature, including through restoration or regeneration of nature, and implementation of nature-based solutions.

Nature-related dependencies consider the extent to which a decline in an ecosystem service may present a financial risk to a business. For instance, organizations whose operations and/or revenues are highly dependent on water availability may face transition and physical risks, which can cause increased costs and/or decline in operations.

 

Nature-related impacts consider the interplay between an organization’s operations and nature, and how that relationship may result in direct and indirect risks in the form of regulatory, legal, reputational, and market risks. Entities that greatly impact nature – for example, through emissions or waste – may face liability risks due to potential litigation.

 

RBC GAM perspective on nature-related risks

RBC GAM is encouraged by the final recommendations of the TNFD. We continue to take steps in evaluating the materiality of nature-related risks, including biodiversity loss, to investment portfolios, including issuers’ impacts and dependencies. We also collaborate with industry initiatives and other investors on nature-related issues, and our investment teams engage with issuers on this topic, as appropriate.

Moving forward, RBC GAM will aim to focus on the following:

• Continuing to build knowledge and understanding of the potential material risks that nature-related factors, and biodiversity loss specifically, may pose.
• Identifying and assessing the materiality of nature-related risks to investments, from the perspective of both impacts and dependencies, guided by the recommendations of the TNFD.
• Continuing to work collaboratively with other investors on nature-related issues through industry initiatives, and to engage with issuers on this topic, where relevant.

Approach for assessing and managing nature-related risks

RBC GAM may face exposure to nature-related impacts and dependencies through our investments in issuers who are themselves exposed to these factors. For example, issuers in the following industries may face significant impacts and/or dependencies from nature: agriculture, forestry and fisheries, energy, mining, transportation, food and beverages, apparel, utilities, chemicals, manufacturing, and construction.⁶

RBC GAM’s investment teams consider material ESG factors, which may include nature-related factors, that they determine may impact the value or price of investments.

Our investment teams have their own processes for integrating material ESG factors and for determining materiality, drawing from tools like the Sustainability Accounting Standards Board (SASB) materiality map, internal research and resources, speaking with industry experts, and sell-side and external research. They are also equipped with data and insights to manage the risk exposure of their portfolios, with data available on a wide range of factors, including financial and nature-related factors. Investment teams integrate material ESG factors into their portfolio management decisions in a manner that complements their distinct investment approaches and mandates, for applicable types of investments. In addition, proxy voting, engagement with issuers and regulators, and collaboration with like-minded investors and associations are important pieces of our active stewardship activities.

RBC GAM’s assessment of exposure to nature-related factors

In 2023, RBC GAM assessed the exposure of our equity and corporate fixed income investments to nature-related dependencies and impacts for priority sectors, which is a core metric for asset managers recommended by the TNFD (See Figure 1).⁷ This analysis shows that 22% ($US64.6 billion) of RBC GAM’s equity and corporate bond holdings are in TNFD priority sectors.⁸ Exposure to a TNFD priority sector is not necessarily indicative of the potential risk that issuers in that sector may face. As such, we have also assessed whether issuers in these sectors have operations in sensitive locations, or biodiversity-related controversies.⁹ For assets invested in TNFD priority sectors,¹⁰ 85% may have operations in sensitive locations. However, only 0.5% have also been involved in biodiversity-related controversies.

Figure 1: RBC GAM equities and corporate bond investments in TNFD priority sectors, and operations in sensitive locations and/or with biodiversity-related controversies ¹¹

As at December 31, 2023

To better understand the materiality of nature-related dependencies and impacts for investments in priority sectors we used the Exploring Natural Capital Opportunities, Risks and Exposure (ENCORE) tool.¹² Based on this analysis, the most significant nature-related impact of these investments across all sectors is related to pollution, and the most significant dependency is on water quality and availability. It is worth noting that the materiality of any risks related to this exposure is influenced by the actions taken by issuers to mitigate the risk and if, or how, this affects the valuation or price of securities (see Figure 2).

Figure 2: RBC GAM equities and corporate bond investments in TNFD priority sectors, and nature-related impacts and dependencies

As at December 31, 2023¹³

For more information on RBC GAM”s approach to climate change, visit rbcgam.com/climate

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¹ In this document, references to RBC Global Asset Management (RBC GAM) include the following affiliates: BlueBay Asset Management LLP (for the reporting period between January 1, 2023 – April 1, 2023), RBC Global Asset Management Inc. (including Phillips, Hager & North Investment Management), RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited (RBC GAM UK), and RBC Global Asset Management (Asia) Limited, which are separate, but affiliated subsidiaries of Royal Bank of Canada (RBC).

² New Nature Economy Report II: The Future of Nature and Business, World Economic Forum, July 2020.

³ COP15: Nations adopt four goals, 23 targets for 2030 in landmark UN Biodiversity Agreement, Convention on Biological Diversity, December 2022.

⁴ Taskforce on Nature-related Financial Disclosures (TNFD) Recommendations, September 2023.

⁵ Additional Guidance for financial institutions, TNFD, September 19, 2023.

⁶ The Climate-Nature Nexus, an investor guide to expanding from climate- to nature- data, United Nations Environment Programme World Conservation Monitoring Centre (UNEP-WCMC), Finance for Biodiversity Initiative, April 2022.

⁷ Additional Guidance for financial institutions, TNFD, September 19, 2023.

⁸ We categorized our corporate holdings into sixteen TNFD priority sectors, based on the corporate entity’s Nomenclature of Economic Activities (NACE) Class Code for the highest revenue earning activity. See RBC GAM Climate Report 2023 for scope of analysis.

⁹ Identification of sensitive locations is based on MSCI Biodiversity-Sensitive Areas and Deforestation Screening Metrics, which identify companies with operations in ecologically sensitive areas or with exposure to potential direct and indirect involvement in deforestation, using location-based data. Operations in sensitive areas are defined as companies with three or more known physical assets in Biodiversity Sensitive Areas denoted as either being healthy forests, intact biodiversity areas, prime areas for conservation or deforestation fronts. Operations in sensitive locations and biodiversity-related controversies are defined as companies that report having operations located in or near to biodiversity sensitive areas and have been implicated in controversies with a severe or very severe adverse impact on the environment. All data as at December 31, 2023, RBC GAM analysis based on MSCI ESG Research, MSCI®.

¹⁰ TNFD priority sectors based on Additional Guidance for financial institutions, TNFD, September 19, 2023. All data as at December 31, 2023, RBC GAM analysis based on MSCI ESG Research, MSCI®.

¹¹ See RBC GAM Climate Report 2023 for scope of analysis. RBC GAM analysis, based on MSCI ESG Research, MSCI ®.

¹² The ENCORE tool is maintained and updated by Global Canopy, UNEP FI and UNEP-WCMC. Accessed February 7, 2024.

¹³ See RBC GAM Climate Report 2023 for scope of analysis. RBC GAM analysis, based on ENCORE data. Nature-related impacts and dependencies are defined as per ENCORE but grouped based on RBC GAM analysis. RBC GAM groupings (with ENCORE categories in parenthesis) are as follows. For nature-related impacts: Climate Change (GHG Emissions), Land and water use (Freshwater ecosystem use, marine ecosystem use, terrestrial ecosystem use), Natural resource use (Water use, other resource use), Pollution (Disturbances, non-GHG air pollutants, Solid pollutants, Solid Waste, Water pollutants). For nature-related dependencies: Climate and air quality (Climate regulation, Filtration, Ventilation), Raw materials (animal-based energy, Fibers and other materials), Pollution and erosion control (Buffering and attenuation of mass flows, Bio-remediation, Dilution of atmosphere and ecosystems, Mediation of sensory impacts, Flood and storm protection, Mass stabilization and erosion control), Water quality and availability (Ground water, Surface water, Water flow maintenance, Water quality), Habitat and Biodiversity (Genetic materials, Pollination, Disease control, Pest control, Maintain nursery habitats, and soil quality).