Nico Frey, Bank J. Safra Sarasin was one of the first financial institutions to take up the topic of sustainable investments more than thirty years ago. Why?

In 1986, two major environmental disasters occurred – firstly, the nuclear accident in Chernobyl and, secondly, the massive fire in Schweizerhalle near Basel, where contaminated extinguishing water entered the Rhine. Both caused great consternation worldwide and brought concern for our environment and nature to the center of social awareness.

Against this backdrop, the bank launched its first sustainability mandate in 1989, followed in the early 1990s by the first ecological sustainability fund on the subject. A few years later, the basis of today’s sustainability methodology (our sustainability matrix) was created to evaluate investments accordingly.

«Biodiversity is defined as the variety of living organisms within and between species and ecosystems»

The bank was thus familiar with the topic at a very early stage and performed pioneering work. This head start in knowledge and experience subsequently made it easier to develop further in this area – at a time when much of the data we have today was not even available.

Meanwhile, an additional focus is biodiversity. What do you mean by that?

When discussing nature, it is important to bear in mind, in very simplified terms, the four main pillars that nature comprises: air, water, soil and biodiversity.

Biodiversity is defined as the variety of living organisms within and between species and ecosystems. This also includes genetic diversity. It is the foundation of nearly all ecosystem services which are provided primarily by living organisms. As in all complex systems, however, diversity is also essential for stability, by allowing and absorbing small shocks – similar to the diversification of a financial portfolio.

«Biodiversity is the backbone of the ecosystem stability»

In other words, biodiversity is the backbone of the ecosystem stability and its processes such as plant pollination, water purification, flood control and CO2 storage, which are essential for human well-being and economic prosperity. Inaction related to biodiversity loss carries very high social and economic costs.

Can you quantify that more precisely?

From 1997 to 2011, an estimated $4 trillion to $20 trillion per year of global ecosystem functions were lost. Combine this with the fact that more than half of the $44 trillion global gross domestic product is partially or highly dependent on nature and its resources, such as food, fiber, and timber.

Why is biodiversity relevant for the financial industry?

Unprecedented biodiversity losses threaten value creation. It is estimated that biodiversity loss alone reduces global GDP by 3 percent a year¹ and with over half of the world’s GDP dependent on nature and its services² we need to act now to ensure our planet can continue to thrive.

Companies that depend on nature's functions could lose part of their market capitalization and bond credit ratings. Transition risks for companies with high biodiversity footprint are increasing as the societal consensus for nature protection and hence regulatory scrutiny is tightening.

How do you take into account biodiversity in your investment process?

The first step in our investment process is to specifically exclude controversial activities. Biodiversity considerations also come into play here. For example, excluded activities with a high impact on biodiversity include coal and nuclear energy (mining and electricity generation) as well as genetic engineering in agriculture.

«It needs a second step that defines the investment universe with an in-depth sustainability analysis»

Companies that clearly contravene the UN Global Compact are also excluded. Palm oil production, fracking and tar sands are other relevant criteria for exclusions that have significant consequences on biodiversity.

Is the exclusion of companies sufficient for a sustainable investment strategy?

No, it needs a second step that defines the investment universe with an in-depth sustainability analysis based on J. Safra Sarasin’s proprietary Sustainability Matrix.

This comprises a combination of a best-of-class (industries) and a best-in-class (companies) approach and assesses the ESG risks of industries and individual companies. Biodiversity aspects are included in both analyses.

«Controversies are included in the company rating via global media monitoring»

In addition, controversies are included in the company rating via global media monitoring. For example, companies that appear in the press or other public reports due to environmental pollution receive a higher deduction in their ecological rating (environmental factor), depending on the impact of the incident.

What are the relevant ESG risks at the company level?

Currently, we include the following issues in our analysis, which directly or indirectly represents biodiversity risks:

• Biological diversity and land use (relevant to 19 sectors)
• Toxic substances and waste (relevant to 35 sectors)
• Water scarcity (relevant to 30 sectors)
• Sourcing of raw materials (relevant to 24 sectors)
• Opportunities in cleantech (relevant to 25 sectors)
• CO2 emissions (relevant to 80 sectors)
• Carbon footprint of products (relevant to 25 sectors)
• Financing of activities with environmental impacts (relevant to 8 sectors)
• Packaging material and waste (relevant to 6 sectors)

When analyzing investments, we furthermore consciously keep a lookout for companies offering solutions to address long-term and transformational trends. These include combating the loss of biodiversity and restoring a balanced relationship with our natural environment.

How do you feed these ESG criteria into your investment process?

We diversify ESG risks such as those presented by the loss of biodiversity not only in relation to individual securities but also at the portfolio level. On one hand, this is achieved through our ESG analysis of the portfolio through a monthly dashboard and monitoring.

For many strategies, we set specific portfolio goals such as reduction in carbon footprint, temperature alignment, targets for «green revenues», Social Development Goals (SDG) turnover and in the future, most likely biodiversity, and natural capital goals as well.

«We are aware that more granular data is required»

We are also active owners and support the companies to reduce their ESG risks even more and to generate a positive impact. Biodiversity is anchored in our voting policy and we actively engage in direct and collaborative dialogs with companies.

How do you tackle the issue of lack of data for biodiversity?

It is clear that much remains to be done in data collection and reporting on biodiversity risks and impacts. Efforts and data on biodiversity as a sustainability factor in portfolios are now at about the same level as the understanding of climate risks was when the Paris Agreement was signed in 2015. We vow to do our part as biodiversity conservation becomes more urgent, and not just for investors.

While we are aware that more granular data is required, some recent initiatives have been introduced to improve transparency. For instance, the Task Force on Nature-related Financial Disclosures aims to clarify the metrics surrounding biodiversity risks, and plan to test-run a reporting in 2022.

Bank J. Safra Sarasin is also a founding signatory of Finance for Biodiversity Pledge. With this pledge, we commit to increasing and sharing our knowledge and expertise in biodiversity risks. We are also calling on global leaders to take action to preserve biodiversity.

¹European Environment Agency, Report on Biodiversity, 2015
²World Economic Forum, «The New Nature Economy Report», 2020

Nico Frey joined Bank J. Safra Sarasin’s Sustainable Investment Research team in October 2019. In addition, he is responsible for the Bank’s ESG Country Rating and conducts sustainability analysis for external funds. Prior to joining the bank, he gained experience as Account Director in Corporate Relations for the financial industry at one of the internationally leading environmental NGOs, WWF, in the area of Corporate Sustainability at Lidl, one of the largest retailers in Europe, and at the Institute for Economy & the Environment at the University of St. Gallen. He furthermore worked in the field of Public Policy for Credit Suisse and temporarily for the Swiss Federal Department of Foreign Affairs in Colombia.