4 March 2021

Dasgupta Review doesn't go far enough on pricing nature, says Aviva's Waygood

The Dasgupta Review on the economics of biodiversity falls short in suggesting how policy makers and investors should price-in the externalities of nature, said Steve Waygood, chief responsible investment officer at Aviva Investors.

Speaking at Environmental Finance's Natural Capital Investment Conference, Waygood said the 600-page document released last month doesn't provide policy makers and investors with "anywhere near enough detail" about how to internalise nature-related risks to the economy.

The report, commissioned by the UK's HM Treasury and written by Sir Partha Dasgupta of the University of Cambridge, concluded that public and private financial flows are "critical" to supporting a "more sustainable engagement with nature". It also called for better disclosure of nature-related financial risks and tying asset manager fiduciary duty to biodiversity impact.

But Waygood pointed out that the report simply says this needs to happen, without outlining how it should: "Investors need to know: what is the external cost? Secondly, they need to know if it plausible that, over an investment time horizon, regulators are going to internalise that externality?

"As soon as it looks plausible, you then you have to price it into the way that you do routine valuations. That is how you capture the whole market and change market fundamentals. If we are going to power a transition towards a nature-aligned future, then we need to internalise these externalities."

Without this information or guidance, investors risk mispricing securities, he said.

"An externality is a market failure more than it is a market inefficiency. What that means is the current structure of the market, left uncorrected, does not lead to optimal outcomes for society or nature," he said.

As such, he sees a role for investors in encouraging policy makers and politicians to correct market failures, but adds: "We can't do it for them."

"It is for us – when we see a market failure – to encourage Defra and the Environment Agency [of the UK] and DG Clima and all the other directorates in the EU Commission, to change fiscal incentives, to change standards and regulations, to create market mechanisms or to create consumer awareness."

He said the structure of finance routinely ignores such externalities because "we have inadvertently set up a financial system that is wonderful at extracting natural capital – and converting it into financial capital – but cares not one hoot about keeping it conserved for future generations."

"We can only do that with governments taking bold, brave policy steps to internalise the externalities of nature."

With regards to the tools that can help investors make such assessments in their portfolios, Waygood would like to see increasing application of remote monitoring data. League tables that rank biodiversity impacts, governance, policy, management and disclosure would also be useful, he added.

"Investors can encourage companies to improve and join the best. League tables foster the race to the top and it would be good to see these league tables credibly used across large-scale assets under management. Organisations like the World Benchmarking Alliance are doing just that kind of work and it is incredibly important," he said.

He added: "The Dasgupta Review says that understanding and accepting the simple truth that our economies are embedded within nature is really important. I absolutely agree. But there is a more complicated truth that is much more inconvenient; we haven't yet structured capital markets in a way that finances the future that we all wish to retire into."

To watch this session on demand and view a pre-event speech from Sir Partha Dasgupta register for the Natural Capital Investment Conference here.