17 January 2024

Taking a data-driven approach to nature risk and opportunity

Investors face a potential flood of nature-related data as efforts build to stem biodiversity loss. Bloomberg's Nadia Humphreys explains how they can begin to make sense of it.

Environmental Finance: As investor interest builds in nature impacts and dependencies, what advice would you give to investors who are beginning to grapple with the issue?

Nadia HumphreysNadia Humphreys: The first thing is to realise that nature-related risks are financially material: 55% of global GDP is moderately or highly dependent on nature. That might express itself through direct impacts, such as poultry or cattle farming where highly transmissible diseases can have a serious impact on producers, or less obvious impacts, such as the issues Tesla had with groundwater depletion in Germany.

Then, as an investor, you need to start with the basics: what commodities are they sourcing? What governance do they have around nature? Where are they operating? Who are they doing business with? The next stage is to consider more technical elements: have they made any claims around sustainable sourcing of raw materials? Have they implemented any nature-related policies? Are they reporting basic nature-related metrics, and how are those metrics trending over time? Getting the answers to these types of questions will help you get the information needed to develop your biodiversity-based investment and engagement strategies.

EF: To what extent is this data available? And how difficult is it for investors to find clear signals within it?

NH: These datasets exist. To see what a company is doing, an investor could review how and where they make money or where they have capital expenditure. Bloomberg has revenue segmentation data on 50,000 companies which we map to over 2,000 classification categories, and we're now seeing segmented capital expenditure. Only about 4,000 of those companies have any sort of biodiversity policy. We have data on 1.1 million physical assets that shows where they are operating, based on facilities that are material to their enterprise value, like manufacturing and R&D. We also have a supply chain dataset, to show who they are doing business with.

"Nature-related risks are financially material: 55% of global GDP is moderately or highly dependent on nature"

The value we at Bloomberg want to give to investors is in helping them to start knitting individual data points together to provide a clearer narrative about their impacts and dependencies on nature. What investors need to be careful with are datasets that are heavily proxied or estimated and, as a result, are difficult to substantiate. Investors want to have confidence in the datasets that are driving their investments or their engagement strategies so, if a dataset uses estimates, what's going into those numbers, and how transparent is that dataset?

EF: To what extent does the Taskforce on Nature-related Financial Disclosures (TNFD) framework help investors to identify and collect the data from companies they need?

NH: It is imperative that organisations understand and price their impacts and dependencies on nature; that allows them to better manage those impacts and dependencies. TNFD is still a reasonably new framework, but we can see that just over 750 companies have acknowledged in their corporate sustainability reporting that they plan to adopt it.

"It is imperative that organisations understand and price their impacts and dependencies on nature"

That is slightly lower than the nearly 1,500-strong TNFD community, but we see a bigger universe when we look at the framework's core components. For example, about 1,300 companies say they have board or executive management oversight of biodiversity-related issues. However, it takes time for some of these governance structures to affect how companies operate: currently, according to our data, only around 200 companies are disclosing discussions about biodiversity risk and opportunity in a meaningful way.

EF: Forest-risk commodities are a particular focus for some companies and investors. What tools and techniques are available to help them identify and mitigate deforestation impacts in commodity supply chains?

NH: Forest-risk commodities are under intense scrutiny, specifically because of recent legislation in the EU and the UK, but also because of the outcome reached in the final COP28 agreement. That agreement included a goal to halt forest loss by 2030, echoing the agreement reached in 2022 at the COP15 meeting of the Convention on Biological Diversity. That means that countries are now obliged to consider carbon stores such as forestland in the development of their next round of nationally determined contributions, due at COP30 in Brazil.

As an investor, you want to understand who is making money from high forest risk commodities. Where are they operating? Who is in their supply chain? Who are they supplying to? Where companies claim that their raw materials are sustainably sourced, investors will want to unpick or substantiate these claims. To do so, investors will need to see if the habitats around where the company is operating, or where its suppliers are operating, are in good health or whether they are degrading in terms of environmental integrity.

Until very recently, investors have had to rely on companies' claims and on the policies they have in place. Investors want to be able to interrogate whether the claims companies are making are in fact true, using a science-backed dataset that can inform discussions investors are having when they challenge companies about the way they're performing. That's where our collaboration with the Natural History Museum comes in.

EF: That collaboration involves Bloomberg licensing the museum's Biodiversity Intactness Index (BII). How will you be using it?

NH: The BII looks at the response to human pressure on ecosystems and provides an estimate of the remaining percentage of the original number of species that are present in a location. It represents the biodiversity makeup of certain terrestrial areas in comparison with a pristine area with minimal human interference.

What we will be giving investors will be the value of the BII index relative to the operational profile of a company and relative to the operational profile of its suppliers. Investors can use the index to identify portfolio companies with operations in areas of high ecosystem integrity, or where ecosystem integrity is declining rapidly. These are both asks within the TNFD framework.

What will become really interesting to investors as the dataset evolves will be the ability to see year-on-year changes. If a company has made a commitment to reduce its impact, the index will track whether that improvement is in fact being delivered.

EF: In terms of regulatory developments, what are you watching most closely?

NH: We're seeing considerable momentum building up on reporting and disclosure. For example, under the EU's Sustainable Finance Disclosure Regulation, one indicator looks specifically at operations in or near areas of high environmental integrity. What investors really want to know is whether they are also having negative impacts on those areas.

Biodiversity is also starting to take shape within the Corporate Sustainability Reporting Directive. Companies are being asked for transition plans to 2030 and 2050 as they relate to nature. We are also seeing the EU's biodiversity objective being added to the EU Taxonomy: companies will have to begin eligibility reporting this year and alignment reporting from 2025. Initially, the activities in question are focused on conservation, restoration and ecotourism.

EF: How much of a regulatory impact has the 2022 Global Biodiversity Framework had to date?

NH: We're not aware of any policies yet to implement commitments under the Global Biodiversity Framework. That is unlikely before countries submit their action plans, which need to be delivered at COP16, scheduled for the end of this year.

But this action will need to pick up fast. According to UNEP's State of Finance for Nature, financial flows towards nature-based solutions, at $154 billion/year, are dwarfed by $500 billion to $1 trillion of environmentally harmful subsidies.

But, on the other hand, there are enormous opportunities from a nature-positive economy: research from the World Economic Forum estimates that nature-positive solutions could create more than $10 trillion in business opportunities and 395 million jobs by 2030. If we do this right, there is an economic multiplier from which we can all benefit.

Nadia Humphreys is head of sustainable finance data solutions at Bloomberg LP, based in London.

For more information, see: www.bloomberg.com/professional/ solution/sustainable-finance