As nature loss rises up the agenda, investors are adopting increasingly sophisticated approaches to the issue. Reza Marvasti and Brian Colantropo from ISS ESG survey an evolving landscape.
Environmental Finance: How has investors' thinking about biodiversity risk and opportunity evolved over the last year or so?
Reza Marvasti: Essentially, what we have seen is that investors' interest in biodiversity and nature has shifted from just focusing on deforestation to also considering the impacts of issuers on biodiversity more broadly, as well as their dependencies on ecosystem services and the potential negative impact that the disappearance of those services could have on the bottom line.
Brian Colantropo: I would add that, over the last year or so, not only has the thinking around biodiversity evolved quite a bit, but there's also been a tremendous amount of upskilling in the market in terms of understanding the issue: what is meant by biodiversity, how do we measure it, what is material, how do we want to incorporate it into the investment process? There's just been a tremendous focus from an investor standpoint over the last 12 months.
EF: What has driven that growing interest in the issue?
RM: This is linked to a number of changes in the regulatory environment, as well as the recent release of biodiversity- and nature-related standards, disclosures and targets – most notably from the Taskforce on Nature-related Disclosures (TNFD) and the Science Based Targets Network (SBTN).
COP15, which took place in December 2022, saw the adoption of the Kunming-Montreal Global Biodiversity Framework, which included globally agreed nature-related targets and goals. There have also been a number of national-level regulatory developments, such as Article 29 of France's Energy Transition Law, which requires financial institutions to begin reporting on their biodiversity impacts.
In addition, we have also seen new investor-led initiatives, such as Nature Action 100, a global investor engagement initiative designed to encourage greater corporate ambition to halt and reverse nature loss.
All of these things have contributed to what we are seeing at the moment, namely ever-growing interest in biodiversity risk and impact assessment.
EF: How have you responded at ISS ESG?
RM: We launched our Biodiversity Impact Assessment Tool (BIAT) in 2022. The tool is based on a life-cycle impact assessment (LCIA) methodology, which allows for the quantification of drivers of biodiversity loss at a regional scale. The results are presented in a form of two of the most commonly used biodiversity footprinting metrics: potentially disappeared fraction of species (PDF) and mean species abundance (MSA).
In addition to regionalised modelled data, the assessment also takes into account company-specific sets of information, including ISS ESG's proprietary Corporate Rating and SDG assessment related to nature and biodiversity indicators.
So, overall, this provides a good holistic assessment of a company's impact as it relates to biodiversity. The dataset includes a total of around 700 different factors, looking at the impact per activity, region, biodiversity driver and ecosystem service.
Together, the biodiversity impact assessment and the ecosystem services dependency assessment address the topic of double materiality, allowing users to assess both the impact and risk exposure of companies.
The tool provides intuitive rankings, which allow for easy comparison of company biodiversity impact, both within its sectors and in relation to a wider universe of assessed companies.
To further support investors in measuring the impact of their investment portfolios on biodiversity, we have recently launched a portfolio report functionality. The report allows for comparison of a portfolio's biodiversity risk and impact against a benchmark, as well as providing a set of additional TNFD-related disclosures.
EF: Biodiversity impact can be highly habitat and species specific. Are there any universal metrics or indicators investors can focus on?
RM: It is important to acknowledge that, given the complex structure of our natural ecosystems, assessment of biodiversity loss requires consideration of multifaceted issues across species and ecosystems. Both PDF and MSA metrics can provide investors with valuable information regarding a company's impact on species richness (through the PDF metric) as well as changes in species abundance (by measuring MSA).
As we know, biodiversity is inherently local. In the coming years, with the implementation of the TNFD framework and other guidelines, such as those from the SBTN, we can expect a better alignment in terms of the standards and more complete site-specific reporting.
EF: How are you navigating gaps in data? To what extent will the TNFD address this issue?
RM: Lack of standardisation is one of the biggest challenges we face when it comes to nature and biodiversity data. There are many reasons for this lack of uniformity, including inadequate reporting and monitoring frameworks.
By providing a set of core global metrics as related to nature risk, opportunities and dependencies, the TNFD framework can provide all relevant market participants with a common language for biodiversity and nature-related risk assessment.
The question remains, of course, around the degree to which companies will use this guidance and, crucially, whether they have the necessary data to disclose against it and whether that data is of sufficiently high quality. Some of the TNFD's requirements are quite complex, so it may take a couple of years for companies to be able to meet them.
EF: What about sector impact? What is your research telling you about concentrations of risk?
RM: Recent scientific studies have shown land-use change has been the dominant driver of biodiversity loss across the globe. Based on our assessment of over 16,000 issuers, companies involved in land-based industries account for the largest impact on biodiversity. This includes industries such as food and beverages, energy and materials.
This underlines that biodiversity impact is highly concentrated. Our research found that, in a universe of around 3,000 constituents of the STOXX World AC index, the 100 companies with the largest biodiversity footprint accounted for 60% of total PDF, and the top 20% of companies by footprint accounted for 83% of the total. In terms of dependencies, surface and groundwater accounted for the largest percentage of ecosystem services dependencies. The implications for investors are that, by investing in indexes that tilt away from the companies with the greatest footprint, they can dramatically reduce the biodiversity impact in their portfolios.
EF: How do you anticipate investors' approach to biodiversity risk and opportunity evolving in the year ahead?
RM: The ongoing development of target setting and scenario analysis will be a big part of investors' evolving approach to biodiversity risk. To a large extent, this is linked to the implementation of the Kunming-Montreal Global Biodiversity Framework, as well as the roll-out of sector-specific nature targets.
We're beginning to see some work being done on this, for example from the Finance for Biodiversity Foundation and the SBTN. I expect that a lot will happen in that space in the coming year.
I'm also expecting to see greater focus on nature restoration and 'nature positive' solutions such as regenerative agriculture. This is something that has been talked about quite a lot in the past couple of years.
BC: One thing I'd add is that we are seeing an increase in engagement and some interest in biodiversity from a voting standpoint as well. As investors get up to speed and as data quality improves, we see engagement as a tool that investors are deploying – particularly to encourage policies on biodiversity and disclosure, given the tailwinds from the TNFD.
Reza Marvasti is senior product manager at ISS ESG in Paris and Brian Colantropo is head of research solutions product at ISS ESG in Boston.
For more information, see: www.issgovernance.com/esg/biodiversity-impact-assessment-tool
