Biodiversity Dashboard – A Look at the Metrics

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    Stockholm (NordSIP) – Vague claims to be “nature friendly” have long been popular in the consumer goods sector.  As the public starts to get wise to greenwashing, regulators have been clamping down.  The UK Competition and Markets Authority (CMA), for instance, published a set of principles last year designed to help eliminate misleading environmental claims in companies’ marketing materials.  A similar trend is happening in the investment industry, but the mechanics of the solution are far more complex.  In the first articles on our “Simply Said” series on nature and biodiversity, we introduced the basic concepts and touched on some of the specific risks at play.  The focus of this article will be on the nature-related tools and metrics that investors can use to gauge the impact on nature of their portfolio.

    The Paulson Institute estimates the annual funding gap for biodiversity conservation at roughly USD 800 billion, which can only be filled if the largest institutional investors such as pension schemes, insurance companies or sovereign wealth funds step in.  The investment industry has always needed reliable data flows to function properly.  Asset owners can only redirect their capital towards natural capital if the asset management industry is able to design and supply sufficiently scalable, institutional-quality investment vehicles.  The process will rely on the access to a range of nature-related metrics, many of which remain absent from asset managers’ investment platforms.

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    A somewhat belated realisation that climate change mitigation and adaptation cannot happen without protecting and restoring the biosphere has led to a scramble to catch up.  It is hoped that the upcoming 15th Council of Parties (COP15) to the United Nations (UN) Convention on Biological Diversity (CBD) due to take place in the third quarter of this year in Kunming, China will generate the same level of international consensus as the purely climate-focused 2015 Paris Agreement.  Such an agreement would be expected to lead to new investment guidelines and legislation requiring nature-based reporting and promoting nature-positive activities.  Thanks to the efforts of non-governmental organisations (NGOs) like the CDP (formerly known as the Carbon Disclosure Project) and the Task Force on Climate-Related Financial Disclosures (TCFD), investors already have access to a broadening range of data on greenhouse gas (GHG) emissions.  There has been an effort to standardise carbon-related disclosure and produce catch-all metrics such as Carbon dioxide equivalent (CO2e).  Several tools are also available to estimate the warming pathways of companies and sectors and help align portfolios with long-term net-zero climate goals.

    Natural capital accounting is complex

    When it comes to biodiversity and nature, there are far more moving parts to keep track of.  The sheer number, complexity, and interconnection of ecosystem services and biosphere resources makes it seemingly impossible to design a single inclusive metric such as CO2e.  Thankfully, an enormous effort is underway from NGOs, academia, and industry to build a practicable framework for investors.  Rather than reinvent the wheel, there is also a determination to accelerate the process by learning from the development experience of previous carbon-focused projects.

    In March 2022, the market-led, science-based and government-endorsed Taskforce on Nature-related Financial Disclosures (TNFD) released the first beta version of its framework for market consultation.  It includes material designed to educate market participants on assessing and disclosing nature-related risks and opportunities, and a draft disclosure recommendation.  The TNFD goes beyond simple disclosure with information provided on how to incorporate nature-related data within business decision making.  Now is the perfect time for NordSIP readers to get to grips with the new framework as the TNFD is inviting feedback as part of the development process.

    Start in widescreen and zoom in

    A bird’s eye view is a good place to start when trying to assess the exposure of portfolio companies to various nature-related risks.  The geographic location of a firm’s facilities and value chain can provide an initial clue as to potential red flags.  For instance, a service company based in a single urban location would be less concerning than a multinational food producer with multiple raw material supply chains throughout the developing world.  This basic concept has been developed into a powerful tool by the Natural Capital Finance Alliance (NCFA), which was set up by the United Nations Environment Finance Initiative (UNEP FI), Global Canopy and the UN Environment World Conservation Monitoring Centre.  Their online tool, launched in 2018, is called Exploring Natural Capital Opportunities, Risks and Exposure (ENCORE) and incorporates a database covering 167 economic sectors mapped against 21 ecosystem services.  As explained in our introductory article in this series, these services include processes such as natural water filtration and pollination that are essential for large proportions of the global economy.  There are related physical, transition and liability risks when they come under threat, which can in turn link to credit, market, liquidity, and business risks.  ENCORE allows users to focus in on a particular sector or sub-industry in their portfolio to understand the potential natural capital risks that are present.

    Other services such as the Integrated Biodiversity Assessment Tool (IBAT), Moody’s fixed income-focused Environmental Heat Map, and the Sustainability Accounting Standards Board (SASB) materiality map can also provide a high-level visualisation of nature-related exposures.

    The high-level perspective that these tools offer can be followed by a more granular analysis of individual portfolio companies.  Investors may use a variety of free or commercially available tools that capture different aspects that will most likely be used in combination to get a more complete picture across all asset classes.  The Corporate Biodiversity Footprint (CBF) tool can be used to estimate the impact of the full life cycle of a portfolio company’s activities on biodiversity.  It is available for a fee and was developed by Iceberg Data Lab (IDL) in partnership with several European banks that are members of the Consortium for Biodiversity Metrics.  CDC Biodiversité, a specialist subsidiary of France’s Caisse des Dépôts, is behind the development of the Global Biodiversity Score for Financial Institutions (GBSFI), which measures economic activities based on Mean Species Abundance.  The latter metric uses pristine nature as a base level of biodiversity, on which the effect of specific economic activities is then applied.

    Work-in-progress, but begin building your dashboard now

    All these tools are still under development.  The good news is that there appears to be considerable coverage overlap and some collaboration between developers, which should hopefully lead to consolidation and simplification at the user level over time.  A detailed overview of all the tools on the market is beyond the scope of this “Simply Said” article.  NordSIP readers wishing to begin testing nature-related and biodiversity metrics on their portfolio holdings may refer to the comprehensive and regularly updated Guide on biodiversity measurement approaches published by the EU Business@Biodiversity Platform and the Finance for Biodiversity Foundation.  Beyond the biodiversity tools developed specifically for investors, there is an enormous amount of nature-related information available from NGOs, academia and supranationals.  These sources are included in the UN Environment Programme, UNEP Finance Initiative and Global Canopy 2020 publication Beyond ‘Business as Usual’: Biodiversity targets and finance.  The University of Cambridge Institute for Sustainability Leadership (CISL) has also published a Handbook for Nature-related Financial Risks that aims to provide institutional investors with a solid grounding in nature-related financial risks assessment.

    These nature-related metrics, methodologies and tools clearly need further development to become fully integrated into asset owners and managers’ investment platforms.  There is still much work to be done on consolidation and automation capabilities.  Moreover, several of the main tools so far only cover “Life on Land”, i.e. Sustainable Development Goal (SDG) 15, with SDG 14 “Life Below Water” notably absent.  The oceans are not only a major carbon sink, but also home to hundreds of thousands of species, which means the marine environment must be included if the investment industry’s efforts to become nature positive are to have any hope of success.  Nevertheless, there is already ample information available for asset owners to begin engaging with portfolio companies regarding their impact on nature. In the next article in this NordSIP “Simply Said” series on biodiversity, we will aim to summarise the practical steps institutional investors can begin to take on their own journey towards nature positivity.  What investable natural capital strategies are out there, and which industry-wide initiatives can help investors stay on track?

    Article produced with the assistance of Angelo Bello, Junior Reporter at NordSIP.

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