Impact Cubed tool finds Europe has greater level of biodiversity exposure than US or emerging markets.
ESG and climate data provider Impact Cubed has launched a biodiversity dataset that offers investors granular insights into more than 2,300 business activities from approximately 60,000 globally listed companies.
The tool, which aims to help investors to pinpoint the biodiversity-related risks in their portfolios, found that US$28 trillion of market cap within developed markets is exposed to significant biodiversity risk, with the vast majority (US$25 trillion) stemming from products and services that have a negative impact on biodiversity.
This biodiversity exposure affects both developed and emerging markets, with US$19 trillion at risk in developed markets (constituents of the MSCI World index) and up to US$9 trillion in emerging markets (MSCI Emerging Markets), underscoring the global scale of financially material biodiversity risk. This includes US$6 trillion being at risk in Europe, and US$10 trillion in the US.
Antti Savilaakso, Partner and Head of Research at Impact Cubed, told ESG Investor that “anybody who takes responsible investment or ESG seriously” needs to look closely at biodiversity risks.
Impact Cubed uses a machine-learning system to gather information from publicly listed companies that disclose their operations through resources such as annual reports, which comprises 70-80% of the company’s dataset.
It then leverages science-based insights from sources such as the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), to map disclosed activities to their potential impacts on four primary biodiversity drivers: land and sea use change, climate change, natural resource exploitation, and pollution.
The company additionally reviews each company’s alignment with the Sustainable Development Goals (SDGs) and evaluates operational factors such as greenhouse gas emissions, water, and waste efficiency.
The biodiversity dataset is supported by the Taskforce on Nature-Related Financial Disclosures (TNFD). This blend of disclosed data and science-based insights provides a robust and comprehensive view of biodiversity risks and opportunities in the financial markets.
European biodiversity exposure
Savilaakso said investors are increasingly focused on understanding biodiversity risks and impacts. This follows the signing of the Global Biodiversity Framework (GBF) last December in Montreal, committing signatories to enacting measures to halt and reverse nature loss, including protecting 30% of the planet’s surface by 2030.
The GBF also encourages regulators to implement new reporting requirements, with many expected to leverage the disclosure framework being developed by the Taskforce on Nature-related Financial Disclosures.
“We’ve talked to investors mostly in Europe, but also some from the US,” Savilaakso said. “There is curiosity over the opportunities that there are to tackle biodiversity, but also anxiety.”
A key finding of the dataset was that despite the US being perceived as subject to a greater level of exposure to biodiversity, Europe (as represented by the constituents of STOXX600) had nearly double the negative impact on biodiversity per unit of market cap compared to the USA (S&P500).
STOXX600 has an overall biodiversity exposure of 46%, of which 43% is negatively aligned with biodiversity, compared to the S&P500 which had 26% exposure and 21% negative alignment.
Europe’s overall biodiversity exposure was also higher than the MSCI EM at 39% and MSCI ACWI at 31%.
Impact Cubed found that roughly 75% of the discrepancy was caused by European companies having twice the negative exposure to land use change compared to their US counterparts, which is branded as a “significant factor” contributing to Europe’s higher overall negative biodiversity impact.
It said the remaining 25% of the difference could be attributed to pollution levels, approximately 1.5 times higher in Europe compared to the US.
“For investors who are creating biodiversity strategies, this underscores the importance of understanding the specific drivers of biodiversity impact within different geographies and sectors and the need for targeted strategies to address these specific challenges,” the organisation said.
Savilaakso said: “As an investor that cares about biodiversity in your portfolio, you can’t automatically think that as long as I stay close to home everything will be fine. If you want to find biodiversity opportunities, you should very actively seek things outside of Europe.
“If you are only investing in Europe, you definitely have a biodiversity risk in your portfolio,” he added.
Providing deeper data
Savilaakso said the dataset’s wide coverage and the granularity and objectivity of its data were key to its utility for investors.
“Usual ESG datasets only tend to cover a small percentage of companies in a portfolio which can really give you a great insight into 20-30% of your holdings, but not knowing anything about the rest creates problems,” he said.
“Giving investors the actual granular data points and figures means they can feed this information into things like quantitative portfolio models, portfolio optimization models.”
Savilaakso expects investors to deploy the new tool for a variety of uses, including for regulatory reporting, building funds, or as a complementary source.
“Over one-third of the developed world is that risk from biodiversity. Investors could potentially lose a third if not more of their investments if we continue to pollute and kill the planet as we are at the moment,” he warned.
Corporate biodiversity initiatives
New research by Imperial College Business School and HSBC has analysed 40,000 biodiversity initiatives disclosed in the sustainability reports of over 6,000 publicly traded companies. It found that the number of corporate biodiversity initiatives had climbed sharply from 600 between 2005-2007 to 4,000 between 2019-2021.
However, it also revealed that just 6% of the 651,880 sustainability corporate initiatives identified between 2000-2021 were related to biodiversity, and that the majority of those focused on land-based initiatives as opposed to ocean-linked projects.
By sector, utility companies implemented the highest number of biodiversity initiatives as a proportion of their overall sustainability initiatives, at 16%. This is followed by 14% for industrials and materials companies (including mining), and 12% for consumer goods.