Over half of global economic output depends on natural conditions and processes. Biodiversity loss is not only an emergency for environmentalists but also entails large risks for investors. So far, there has been a lack of standard measurement methods and reference points for recording. But sound analyses enable us to set an initial starting point for potential risks in investment portfolios.
Importance of biodiversity for investors
Biodiversity describes species diversity, their genetic variations and the ecosystems where they live and interact with each other. Biodiversity is crucial for balanced, functioning ecosystems. They form the basis for our livelihoods, such as clean water, fertile soils and plant pollination.
Those who include biodiversity in their investment portfolios can reduce risks and promote long-term stability in their portfolio.
Those who include biodiversity in their investment portfolios can reduce risks and promote long-term stability in their portfolio.
Global economic output is estimated at USD 44 trillion
Global economic output is estimated at USD 44 trillion. More than half of this economic output is highly dependent on biodiversity: directly or indirectly. That is why biodiversity loss results in risks for companies, investors and society. Great progress has already been made in including climate factors in decision-making processes. In the future, biodiversity aspects should also be considered. This especially applies to companies and financial institutions. This is because they play a central role in the transition to a more biodiversity-friendly economy.
Lack of standard data, metrics and consistent frameworks
There are still no standard measurement methods for biodiversity that are comparable with the Greenhouse Gas Protocol (GHG Protocol). Similarly, there is a lack of investment in the credibility, collection, consistency and connection of relevant data from the land, sea and freshwater and on the specific regional ecosystems.
There are currently countless methods for measuring the impact of corporate activities on biodiversity. This makes it difficult for investors to compare companies or projects. An equally big challenge is to quantify the financing requirements for biodiversity-friendly measures and to demonstrate the effectiveness of sustainable financial flows. This is why it is so important to agree on standard measurement methods, exchange data and to be able to better assess entrepreneurial activity.
Starting point for investors
The Taskforce on Nature-related Financial Disclosures (TNFD) provides valuable guidance on integrating biodiversity risks and opportunities into strategic planning, risk management and investment decisions. It recommends that investors use the LEAP approach (Locate, Evaluate, Assess, Prepare) and the DIRO categories (Dependencies, Impacts, Risks, Opportunities) when analyzing companies:
- LEAP approach: The LEAP approach systematically identifies and assesses biodiversity risks and opportunities. This way, dependencies and effects can be localized and evaluated, risks and opportunities analyzed and suitable strategies and measures developed.
- DIRO categories: The DIRO categories are based on the analysis of biodiversity dependencies and their impact on companies, as well as the specific risks and opportunities. Investors should consider dual materiality. This means that there are both dependencies of the organization on biodiversity (outside-in) and effects of the organization on biodiversity and society (inside-out).
Impacts on biodiversity
If companies have a negative impact on biodiversity by their actions, this also creates risks from the company perspective: Governments and the finance sector are currently stepping up their efforts to halt biodiversity decline. That is why polluter companies are increasingly exposed to transition risks. These arise when an organization's strategy is not adapted to the environment in which it operates. Public awareness of biodiversity has risen sharply in recent years, resulting in reputational risks for polluter companies.
Dependencies on biodiversity
Business activities not only have an impact on biodiversity, but companies themselves can also be dependent on biodiversity because they rely on certain ecosystems for their operational processes, either directly or via their supply/distribution chains. These risks are particularly relevant when certain production processes cannot be financed without the use of an ecosystem. Mining companies, for example, are heavily dependent on a reliable water supply. If a mine can no longer access sufficient water from existing sources, this means higher physical risks for the company and its associated financial institutions.
Based on this starting point, investors should identify potential risks of companies with regard to their impact on biodiversity and dependencies on biodiversity and consider them in their investment decisions. The following questions may be helpful for this:
Conclusion
Investors should identify potential company risks as precisely as possible: both their impact on biodiversity and their dependencies on biodiversity. This double analysis, based on the TNFD guidelines, enables sound decisions to be made. This ensures that no one-sided diversity risks arise but that they are diversified, managed and opportunities can be used.
The analysis should focus on the following evaluation dimensions:
- integration of biodiversity into investment processes
- orientation towards biodiversity initiatives
- application of measurement parameters and data providers
- engagement activities with a focus on distribution chains
- sector commitment
- performance measurement
- reporting
