The ESG data files, part nine: Biodiversity - the new frontier

Channels: ESG

Various initiatives from the financial sector could make this a breakthrough year for biodiversity data, ahead of a hoped-for global agreement on conservation for the next decade. Graham Cooper reports

The direction of travel is clear. Reporting on the 'E' factor of 'ESG' has long been dominated by data on greenhouse gas emissions, but investors and regulators are increasingly turning their attention to natural assets such as water, soil and biodiversity (living organisms).
Such assets – collectively known as natural capital – provide humans with a wide range of goods and services – including food, medicines, flood protection and pollination.

The financial community is expressing growing concern about the economic consequences of the depletion of these natural assets. Research by the World Economic Forum (WEF) shows that $44 trillion of economic value – over half the world's GDP – is moderately or highly dependent on nature and its services.

In the WEF's Global Risks Report 2020 – based on a survey of more than 800 'renowned experts and decision makers' – biodiversity loss was identified as the fourth most likely global risk over the next 10 years and the third most serious in terms of potential impact.

Both rankings are significantly higher than in previous years. In a comment on the WEF report, Peter Giger, group chief risk officer at Zurich Insurance, concluded that "businesses should develop metrics that assess the value of nature to their work and make these central to their decision-making".

"Businesses should develop metrics that assess the value of nature to their work and make these central to their decision-making" – Peter Giger, Zurich Insurance

Humans have already "caused the loss of 83% of wild mammals and half the world's plants," he noted, warning: "these losses are now occurring faster than ever. This will hit bottom lines, be it in reduced fish stocks disrupting commodity supply chains or the loss of potential sources of new medicine".

Zurich is one of a growing number of financial institutions turning their attention to the risks posed by biodiversity loss.

In a recent joint statement, AXA Investment Managers, BNP Paribas Asset Management, Mirova, and Sycomore Asset Management said they "strongly believe that preserving the planet's biodiversity is an urgent priority". "We believe it is crucial that the financial community addresses this issue in the same way that it has addressed climate change," they added.

The four French institutions have joined forces to raise awareness of the issue in the financial community and develop tools to help investors respond to the threat. They are calling for 'expressions of interest' for an ESG data provider to develop a tool to measure the impact of investments on biodiversity. (See box)

In a recent survey by The Nature Conservancy and Environmental Finance, many private investors said they are deterred from investing in projects that enhance natural capital by a lack of suitable data to measure the impact of their investments.

Data deficiency is particularly serious for fish, plants and fungi, academics say. Precautionary measures could be taken, if population declines are suspected, but may be difficult to justify if the species are being exploited for medicine, food or other goods which support many livelihoods.
Some useful data sources on biodiversity are already available, however.

They include the Integrated Biodiversity Assessment Tool (IBAT), a web-based map and reporting tool that provides rapid access to three of the world's biggest biodiversity datasets – the World Database on Protected Areas, the IUCN Red List of Threatened Species, and the World Database of Key Biodiversity Areas.

Jonny Hughes

It enables users to create bespoke reports based on these datasets, defined by geographical area.
IBAT helps companies incorporate biodiversity considerations into project planning and management decisions. Its applications include screening potential investments, siting of operations, assessing risks associated with potential sourcing regions, and reporting on corporate biodiversity performance.

Subscribers from the financial sector include The World Bank, Credit Suisse, Allianz and the Asian Development Bank (ADB).
Francesco Ricciardi, an environmental specialist with the ADB, says IBAT allows the bank's environmental team to use "a single, user-friendly database instead of a number of single-resource databases, or more complicated tools such as geographic information system (GIS) applications."

The bank uses IBAT "to identify if [a] proposed project is located in an area of high biodiversity value, if potentially there are endangered species recorded in proximity, as well as protected areas or natural reserves.

If one or more such risks are identified, it triggers additional studies and evaluations." Among the wide range of non-financial corporates using the tool are Singapore-listed food company Olam and US car giant General Motors.

New database lists ecosystem-based adaptation tools

The close interconnections between the global challenges of climate change and the rapid decline in biodiversity and other natural resources are becoming increasingly well understood by the investment community.

Indeed, a recent survey of institutional investors, conducted by Environmental Finance in partnership with The Nature Conservancy, found that 'resilience against climate change' was the most commonly cited driver of investments in natural capital.

This is in line with other studies showing that nature-based approaches to climate change adaptation can effectively bring down the total cost of resilience investments. According to the International Institute for Environment and Development (IIED) there are hundreds of tools and methodologies available to support the integration of Ecosystem-based Adaptation (EbA) into adaptation strategies.

To help make them more accessible, the IIED has partnered with UNEP-WCMC, the International Union for Conservation of Nature and the German development agency GIZ, to create an 'EbA Tools Navigator' which pulls together practical information about more than 240 tools, methodologies and guidance documents.

The Navigator is available in Excel format and users are able to add information about new tools not yet included, as well as their own experiences in applying particular EbA tools. 

"I use IBAT to look for key biodiversity areas ... and IUCN areas within 1km and 10km of our manufacturing sites," says Susan Kelsey, global biodiversity programme manager at GM. "I use IBAT as a research tool ... to look where we can improve the environment around us, and to be aware of where there may be issues near us." But only a small minority of corporates are paying close attention to the issue.

The WEF Global Risks report notes that biodiversity is currently mentioned in less than half of Fortune 500 company reports, of which only a handful set measurable and time-bound targets.

Another tool – Encore (Exploring Natural Capital Opportunities, Risks and Exposure) – has been developed specifically for financial institutions. It was developed by the Natural Capital Finance Alliance (NCFA) in partnership with the UN Environment Programme's World Conservation Monitoring Centre (WCMC) – which is also involved in the IBAT initiative – and incorporates some IBAT data.

The aim of Encore is to show how environmental change creates risks and opportunities for businesses and those that fund them. It covers numerous types of natural capital and considers the whole economy, so financial institutions can apply it to any portfolio by sector or location.
Around 40 banks and asset managers subscribe to the service and there has been a notable increase in interest in the past year, says NCFA founder Andrew Mitchell.

A new Encore initiative, funded by the Swiss Federal Office for the Environment, will focus on enhancing the tool's biodiversity elements. It aims to help banks and investors answer the following questions:

  • Am I influencing biodiversity through my investment or lending portfolio?
  • Am I harming or building the resilience of biodiversity with my investments?
  • To what extent is my portfolio aligned with global/regional biodiversity targets?

"The finance sector will be key to achieving the goals set out in the post-2020 Global Biodiversity Framework, but it can be unclear how financial portfolios are influencing biodiversity," notes Jonny Hughes, CEO of the WCMC. "This new phase of the Encore project will increase the ability of the finance sector to track progress against global biodiversity targets."

"The finance sector will be key to achieving the goals set out in the post2020 Global Biodiversity Framework" Jonny Hughes, WCMC

The intention is to launch the new biodiversity module at the COP15 meeting of the Convention on Biological Diversity (CBD) in Kunming in October, says James Hulse, an advisor to the NCFA. Biodiversity "is rising quite quickly up the investor agenda," he says.

Encore can already identify sectors and geographies that are 'high risk, in terms of biodiversity, Hulse notes. "It's not perfect, but it's got the basics," he adds. But "someone else needs to overlay corporate level data". No NGO could manage to provide that level of detail, he says.

The 'Request for Proposals' from the four French investment firms (See box) aims to flush out an established ESG data provider with the potential to add this corporate-level data.

"Both Encore and IBAT are tools we are looking at ... However, as of today, these tools do not allow an investor like us to concretely measure the biodiversity impact of our portfolios," says Julien Foll, responsible investment analyst at AXA IM.

"We expect not to build a database in competition with the developments mentioned, but to develop an investor-dedicated complementary tool, connecting the dots of various information sources, in order to better address our needs."

"Biodiversity is rising quite quickly up the investor agenda" James Hulse, NCFA

There is a lot of data available from various NGOs and international organisations, agrees Robert-Alexandre Poujade, ESG analyst at BNP Paribas AM.
"Some of it is very granular and forward- looking, but much of it is not appropriate for the mainstream financial sector," he says. "We want to be able to discriminate between companies on biodiversity criteria."

"We're in close contact with the NCFA and will collaborate closely with them," he adds.

It seems some of the ESG data suppliers may be ready for the biodiversity challenge. Sustainalytics, for example – one of the leading ESG data firms – has named biodiversity as one of its 10 investment themes for 2020.

It pointed to Netherlands-based ASN, a brand of De Volksbank, as a likely beneficiary. It is the first bank in the world to establish a long-term goal on biodiversity and "is a pioneer in measuring biodiversity footprints," Sustainalytics said.

It conducts biodiversity impact screening on its loans and investments. Since 2018, ASN has been working with Dutch asset manager Actiam and CDC Biodiversite, a subsidiary of French bank Caisse des Depots, to explore the common ground between the Dutch approaches to 'footprinting' and the Global Biodiversity Score (GBS) developed by the French firm.

"We want to be able to discriminate between companies on biodiversity criteria" Robert-Alexandre Poujade, BNP Paribas AM

Such initiatives would seem to give these institutions a head start in complying with likely regulatory changes.

In 2018 France launched a national biodiversity plan which "makes nature protection and preventing the loss of biodiversity central to government priorities, on the same footing as combating climate change".

Furthermore, the French government will extend its pioneering Article 173 legislation – which requires asset owners and investment managers to report on the climate impact of their investments – to also include disclosure of biodiversity impacts from next year. In a related initiative, the UK government pledged in its Green Finance Strategy, published in July, to "work with international partners to catalyse market-led action on enhancing nature-related financial disclosures."

Fig 1. The biosphere underpins all other SDGs

Source: Azote images for Stockholm Resilience Center

Meanwhile, the Dutch central bank is expected to issue a report, within weeks, on the risks to the financial sector arising from biodiversity loss.
The EU's new Taxonomy of Sustainable Activities, endorsed by Member States in December 2019, will add to the pressure. Although the initial version of the taxonomy only lists activities that "can make a substantial contribution" to climate change mitigation and adaptation, it also insists eligible projects should "do no harm" to any of four other environmental objectives: sustainable use and protection of water and marine resources; circular economy transition; pollution prevention and control; and healthy ecosystem protection and restoration.

Separate criteria for these additional environmental objectives are expected to be drafted by the end of 2021 and come into force in late 2022. Furthermore, as governments around the world step up plans to comply with the Paris Agreement targets on climate change, many of them are acknowledging the enormous potential of natural capital and biodiversity in this effort.

The UN-REDD Programme goes so far as to say: "Achieving the objectives of the Paris Agreement at the pace required will not be possible without nature-based solutions".

The Global Commission on Adaptation adds that "nature-based solutions can be cheaper, longer lasting and yield more co-benefits than technology-based solutions".

Robert-Alexandre Poujade

Underlining this close connection between the two global challenges, such solutions will be a major focus of the forthcoming World Congress of the International Union for Conservation of Nature in Marseille, France, currently scheduled for June.

Later in the year, another major international gathering – COP15 of the CBD in Kunming, China – will attempt to set bold targets for curbing the loss of biodiversity over the next decade. This could have a galvanising effect on the investment community's attitude to biodiversity in a similar way that the Paris Agreement did for climate change, some observers believe.

The possibility of setting up a Task Force on Nature-related Financial Disclosures (TNFD), along the lines of the Task Force on Climate-related Financial Disclosures (TCFD), is being discussed by several central banks.

Supporters hope it may be possible to launch the TNFD at the CBD meeting in October. Such an initiative would add significantly to the pressure on investors to collect and report data on the biodiversity risks in their portfolios.

Another important driver is the rapidly growing number of investment strategies aligned with the Sustainable Development Goals (SDGs) (see image). Biodiversity underpins all these goals, says the Stockholm Resilience Center, among others.

This article is part of a series of features exploring ESG data.

  • To read 'The ESG data files – introduction, click here
  • To read 'The ESG data files – part one: reported data', click here
  • To read 'The ESG data files – part two: non-reported data', click here
  • To read 'The ESG data files – part three: ESG rating agencies', click here
  • To read 'The ESG data files – part four: fixed income data', click here
  • To read 'The ESG data files – part five: the impact of the EU's taxonomy', please click here
  • To read 'The ESG data files – part six: TCFD and the challenge of looking forward', click here
  • To read 'The ESG data files - part seven: Building data for real estate', click here
  • To read 'The ESG data files - part eight: Infrastructure, click here.

 This series of features is published alongside a directory of ESG rating providers.

Further features on this theme may follow. Please email peter.cripps@environmental-finance.com with any thoughts.

Environmental Finance's conference on The Future of ESG Data, scheduled for  27 April in London has been postponed to 9 September due to the coronavirus outbreak.

French investors seek data on biodiversity impact

AXA Investment Managers, BNP Paribas Asset Management, Mirova, and Sycomore Asset Management have launched a joint initiative to get a better understanding of how companies' activities affect biodiversity.

They plan to commission an ESG data provider to develop and implement a methodology for measuring a company's impact on biodiversity.
In a joint statement, they said: "It is critical that we begin to take into account biodiversity-related challenges. We believe it is crucial that the financial community addresses this issue in the same way that it has addressed climate change. We hope that the tool we develop will be used by all market players, and that it will become a benchmark tool."

The investors say the methodology must be consistent with the following principles:

  • Impact measurement: the methodology must provide a 'physical' indicator (e.g. km2 mean species abundance, potentially disappeared fraction of species, etc.)
  • 'Lifecycle' approach: the methodology must factor in the entire supply chain from product use to end-of-life.
  • Sector estimates: sector assessment grids should make estimates tailored to the specificities of each sector possible.
  • Ease of use, for a variety of purposes: communicating about impact on biodiversity, providing more extensive reporting, etc.
  • Flexibility and transparency: the methodology must be compatible with the public taxonomies and internal environmental assessment systems already in use, regardless of whether they're proprietary or open source.
  • Aggregation and communication: the data provided must simplify portfolio performance assessment in relation to an index.
  • Application scope: the approach must be applicable to companies active in the main market indices (listed equities and fixed income). Ideally the method should also be compatible with other asset classes (unlisted equities, infrastructure, real estate, etc.).
  • Financial materiality: companies' levels of exposure to the challenges presented by biodiversity must be assessed in addition to physical impact.