Antonio Celeste on how investors should urgently mitigate against biodiversity loss
Antonio Celeste, Director for Sustainability Product Management at STOXX spoke to Climate Action about how investors should urgently mitigate against biodiversity loss.
Antonio Celeste, Director for Sustainability Product Management at STOXX spoke to Climate Action about how investors should urgently mitigate against biodiversity loss. He goes on to describe the sector as being at the dawn of a revolution that will embrace a wide range of biodiversity-related data and intelligent systems, giving investors more visibility on current and future, risks and opportunities.
Why is biodiversity loss an urgent issue for investors?
The fight to protect our ecosystems is gaining momentum, and investors are increasingly paying attention to this topic as it represents a source of risk and opportunities for portfolios. Biodiversity loss is now where climate change was for investors some years ago. At the 15th conference of the UN Convention on Biological Diversity (COP15) in Montreal last December, 196 states reached a landmark agreement to protect and restore 30% of the world’s land and water by 2030. For many observers, the Kunming-Montreal Global Biodiversity Framework (GBF)1 accord could do for biodiversity what the Paris Agreement did for climate: become a tipping point for targeted investment flows.
The move to protect our habitats raises regulatory liabilities for corporates and investors, already facing biodiversity-related physical risks (the loss of raw materials and disruption of operating environments), transition risks (policy shifts, changes in market preferences), and systemic risks (global pandemics).
Those at the forefront of responsible investing are increasingly looking to integrate biodiversity considerations into portfolios, both as a risk-management exercise and to tap opportunities with companies whose operations, products and services are best positioned in biodiversity action.
Managing the data challenge- how can investors factor in biodiversity impacts and risks across portfolios?
Investors still need concrete and standardized data on the biodiversity footprint of companies. Fortunately, that has changed in very recent years. Data providers have developed comprehensive revenue datasets mapped to specific activities causing harm to biodiversity or to the United Nations’ Sustainable Development Goals (SDGs), of which biodiversity is a key part.
With advances in technology and information, we now see new and existing data providers producing biodiversity-specific metrics to help investors measure the impact of their investment portfolios on biodiversity in alignment with scientific and economic frameworks.
The two most widely used metrics are the Mean Species Abundance (MSA)2 and the Potentially Disappearing Fraction of Species (PDF)3. STOXX uses ISS ESG’s biodiversity dataset providing PDF and MSA assessments for more than 18,000 companies.
How can investors develop a comprehensive approach to biodiversity?
This was a question we have heard more and more from clients, so we recently introduced a comprehensive biodiversity framework and index suite to help them integrate biodiversity risks and opportunities in portfolios.
We have partnered with ISS ESG to build an investment framework that goes beyond simple exclusion criteria, and that also positively screens for companies aiding the planet’s biodiversity – in line with COP15 goals. More precisely, the strategy is based upon an avoid, minimize and enable approach: avoid companies involved in activities causing harm to biodiversity; minimize exposure to companies with the worst impacts on nature; and capture companies supporting biodiversity through alignment with biodiversity-oriented SDGs — such as life below water and life on land.
Finally, the indices also target an aggregate reduction in the portfolio’s carbon intensity of at least 30% because biodiversity and climate change go hand in hand. Investors can either choose one of the ISS STOXX® Biodiversity indices or customize them according to their investment policies.
How can investors access biodiversity forward-looking data?
There is a lot happening on the regulatory front that will result in even more tangible and reliable biodiversity data. The Corporate Sustainability Reporting Directive (CSRD) will come into effect from January 1st 2024 and will play a key role as it will introduce mandatory reporting on a broader set of sustainability topics, such as climate change, biodiversity and human rights for companies operating within the European Union (EU). The Taskforce on Nature-related Financial Disclosures (TNFD) framework is also likely to speed up the availability of biodiversity information from companies.
With better granularity in capital and operating expenditures disclosure, combined with advanced patent analysis, we will be able to visualize tomorrow’s biodiversity leaders more accurately. We are at the beginning of a revolution that will embrace a wide range of biodiversity-related data and intelligent systems, giving investors more visibility on current and future, risks and opportunities.
1 The GFB features 23 targets to be achieved by 2030, also including the goal to reduce to near zero the loss of areas of high biodiversity importance and high ecological integrity, the phasing out or reformation of subsidies that harm biodiversity by at least USD 500 billion per year, and the mobilization of at least USD 200 billion per year from public and private sources for biodiversity-related funding. The accord also calls for requiring transnational companies and financial institutions to assess and disclose risks and impacts on biodiversity.
2 The Mean Species Abundance (MSA) is a metric that describes impacts in terms of biodiversity intactness. It reflects the increase or decrease in the number of species, i.e., the relative abundance within each endemic region compared to a pristine state. 100% MSA means that the ecosystem is intact and equal to the undisturbed, original state; 0% means that an area has completely lost its original biodiversity.
3 The Potentially Disappeared Fraction of species (PDF) is a metric used to quantify the impact of corporates on biodiversity. PDF represents the potential decline in species richness in an area over a period due to unfavorable conditions associated with environmental pressures. 100% PDF means full destruction of biodiversity in a given area, 0% means total preservation from human activities.