Stockholm (NordSIP) – Biodiversity has been firmly establishing itself on institutional investors’ agendas following the landmark Kunming-Montréal Global Biodiversity Framework agreed at COP15 in December 2022. As well as familiarising themselves with a new and diverse range of nature-related risks, investors are seeking ways to incorporate these into their investment processes. With a view to supporting the creation of readily investible products, Switzerland-based index provider STOXX has collaborated with ESG analytics provider Institutional Shareholder Services (ISS) to create a series of biodiversity focused indices. The indices were launched in May 2023, and on 17 October STOXX released a white paper describing the methodology behind the indices, which may prove useful reference material for investors.
The indices are based on screening out companies whose products, services and operations cause significant harm to biodiversity, and selecting companies that have a positive impact on biodiversity linked Sustainable Development Goals (SDGs). ISS ESG’s proprietary Biodiversity Impact Assessment Tool currently applies more than 600 factors to a universe of around 17,000 global issuers. The data underpins two increasingly common nature-related metrics: potentially disappeared fraction of species (PDF) and mean species abundance (MSA). The former quantifies the potential decline in species richness in a specific area over a defined time period and the latter measures the mean abundance of original species relative to their abundance in equivalent but undisturbed ecosystems.
Once the universe of companies has been evaluated, the ISS STOXX indices are constructed based on a framework targeting 4 main goals: Avoid, Minimise, Enable, and Decarbonise. The latter goal is included in recognition of biodiversity’s impact on the climate. The ISS STOXX framework supports biodiversity indices that comply with Sustainable Finance Disclosure Regulation (SFDR) Article 8 requirements, as well as a more stringent “biodiversity leaders” category aimed at Article 9 compliance.
The ”Avoid” screening stage targets companies with harmful activities, which may typically include certain palm oil producers, firms involved with Genetically modified organisms (GMOs), or those producing pesticides that have been proscribed by the World Health organization (WHO). Once the worst offenders have been excluded, the “Minimise” filter seeks to identify those firms having the least adverse biodiversity impact versus their sector peers based on the PDF metric, while taking into consideration their size. The inherent dependence and impact on nature of each economic sector is also used as context so as not to simply overweight low-impact sectors such as financials or technology.
The positive “Enable” screening within the ISS STOXX framework uses SDG-related datasets to highlight companies that have a beneficial impact on biodiversity. The revenue-based methodology analyses firms’ products and services to gauge their real-world impact on nature, and rewards those with the highest overall proportion of positive contribution across all their activities. The final “decarbonise” filter is designed to achieve a minimum 30% weighted average carbon intensity (WACI) reduction versus the parent universe.
A vast range of nature-related metrics is available to investors, but selecting these and applying them to portfolio holdings on a granular level is resource intensive and requires specialist expertise. By incorporating widely recognised biodiversity-related recommendations and guidelines such as those of the Taskforce on Nature-related Financial Disclosures (TNFD), United Nations SDGs and European Union SFDR, ISS STOXX believes that its framework provides a solid basis for investors seeking to begin incorporating biodiversity factors within their portfolio construction.