Investors: Tools to Measure and Value Biodiversity Risks and Impacts

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Biodiversity loss is intimately linked to the climate emergency and increasingly recognised as such by leading companies, governments and the public. To give just one example, scientists have demonstrated that the preservation of the rich diversity found in natural forests is one of the best solutions available for mitigating global warming. It’s not surprising then that just as pressure is building to take action to counter climate change, so too attention is shifting to the interconnected issue of the destruction of our living planet.

Investors have an important role to play in ensuring we move to a world in which biodiversity flourishes, and they are starting to take action. For instance, investors are integrating environmental, social and governance (ESG) issues into their investment criteria, driven by evidence of improved financial returns, increasing shareholder activism and increasing demand. They are also demanding more information on biodiversity from the companies in which they invest, with a view to ensuring these risks are well managed. Meanwhile, growing awareness that assets can become stranded through biodiversity loss as well as climate change, is adding to a sense of urgency. For example, pollinator loss on agricultural land reduces the ability to grow crops and can lead to the land becoming stranded. Although this progress is positive, we need many more investors and companies to step up and play their part. A new range of new tools are emerging to help:

  • Financial organisations identify biodiversity-related risks and dependencies
  • Investors understand how companies are responding to biodiversity risks
  • Companies disclose to investors and other stakeholders the impact of their economic activities on biodiversity.

Understanding the financial risks of a dependence on natural capital

Financial organisations must gain a granular understanding of the ways in which they depend on the natural world before they can hope to have a positive impact on it. To address this issue, Natural Capital Finance Alliance and the UN Environment have launched their ENCORE tool (Exploring Natural Capital Opportunities, Risks and Exposure). The open access, interactive web tool allows users to quickly and simply visualise how businesses across a range of sectors and geographies depend on nature and how environmental degradation could therefore present business risks. It comes with step by step instructions for banks.

Using the data in available in ENCORE, the tool’s creators calculate that nearly three quarters of FTSE All Share Index sectors are potentially highly dependent on natural capital. Banks who piloted conducting ‘rapid natural capital risk assessments’ using the ENCORE found it enabled them to identify systemic risks they were previously unaware of – thus empowering them to find solutions.    

The arrival of ENCORE follows the 2018 launch of a bespoke framework for financial institutions based on the Natural Capital Protocol decision making framework. The original protocol – and the updated version for banks, investors and insurers – provides financial and non-financial organizations with a standardised approach to identifying dependencies, and then measuring and valuing their impacts on natural capital including biodiversity. The creators of its new update for financial institutions claim that applying the protocol can provide competitive information essential to investors’ portfolios – and a number of banks including BNP Paribas Assets Management, Piraeus Bank and YES Bank have all taken advantage.

Investing to conserve endangered species  

When shaping their portfolios, investors can compare how companies are responding to identified biodiversity risks. S&P Global provides an ESG Evaluation service through which companies can provide investors with better information on how they are managing and mitigating ESG risks including those associated with land use and biodiversity. Investors can use this tool both to understand companies’ relative abilities to manage ESG risks and preparedness for unknowns, as well as to compare how companies are balancing financial returns with sustainability benefits.

The International Union for Conservation of Nature (IUCN) has also launched the Biodiversity Return on Investment Metric (BRIM), to more directly assist investors in their decision making. Based on the IUCN Red List of Threatened Species, the BRIM metric enables investors to assess how different investments impact the risk of species extinction across different geographies. Using this knowledge, investors can then choose investments, such as in protected areas, to mitigate factors such as deforestation, hunting and invasive species that threaten species survival. And then measure the impact their investment has on reducing these threats impact on extinction risk. 

Quantifying company impacts on biodiversity

Companies have long struggled to measure the impact they and their activities have on biodiversity due in part to the extraordinary complexity of the living systems that their value chains interact with. 

CDC Biodiversite, a subsidiary of Caisse de Depots Group has developed a methodology that allows companies to directly measure their impact on biodiversity through a single reference indicator. The Global Biodiversity Score expresses biodiversity loss as the surface area of destroyed pristine natural areas. Although it is noted that such an indicator could only ever be a proxy for “the infinite complexity of the living world and its dynamics,” the hope is the indicators will achieve for biodiversity loss what the “carbon dioxide equivalent” reference indicator helped do for the issue of climate change. In other words, by providing a simple and comprehensive reference indicator for biodiversity, CDC Biodiversite hopes to both raise awareness and mobilise action at a time when urgent action is required.

The University of Cambridge Institute for Sustainability Leadership (CISL) is due to publish its Healthy Ecosystem Metric Framework. Similar to the Global Biodiversity Score methodology, the framework aims to “condense the complexity of biodiversity into a simple but valid metric that can help inform business decision making.” First published as a concept in 2017, the tool is designed to help companies map key biodiversity risk areas across their operations, allowing them to develop response strategies to safeguard natural capital and drive improved business performance. CISL hope the metric will be particularly useful for multinational companies with complex supply chains, where biodiversity impacts and dependencies can be very far removed from corporate headquarters.

What next for investors and companies?

We are running out of time to limit global warming to just 1.5 degrees and we are similarly running out of time to limit the rapid decline in global biodiversity. To conserve our living planet and ensure its services continue to flow to all of us, it is vital that companies and investors urgently take advantage of the various tools and frameworks that have been designed to help them better understand their risks and dependencies, measure their impacts, and importantly to take action to prevent and regenerate this important shared asset.

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