Available metrics to assess biodiversity may not be fit for purpose and risk embedding negative biases into investor decision-making, according to a new paper that proposed two “forward-looking” approaches for biodiversity-focused investment decisions.
The paper, released on Wednesday, argued that while existing biodiversity metrics may look to understand biodiversity impacts, few metrics are comparable between companies for investors to judge. It was produced by an international group of researchers from the London Stock Exchange and academic institutions in the UK and Australia.
“There’s a huge role for biodiversity indicators measuring current firm impacts like STAR (Species Threat Abatement and Restoration), biodiversity footprints, etc. But, in many cases, the data informing these is currently incomplete,” Sophus zu Ermgassen, an ecological economist at the University of Oxford and one of the paper’s authors, said on LinkedIn.
“For example, metrics based on red list data use the best data that is available, but there remain enormous gaps in red list data – e.g. no spatially explicit info on threats,” added zu Ermgassen.
Metrics such as Mean Species Abundances, Potentially Disappeared Fraction, or Biodiversity Intactness have not been broadly accepted by the investor community and are reliant on spatially explicit data sets, the researchers said in the paper.
Data gaps in existing metrics could create “systematic biases” if they’re not combined with other information, such as corporate disclosures, the authors said. Geospatial data could provide independent asset and infrastructure assessment.
However, the authors highlighted that a lack of consistency and sufficient coverage from data providers could erode investor confidence and make reporting difficult across different portfolios.
The authors proposed two new metrics as “interim solutions”: Biodiversity Management Quality, a metric based on company disclosures, and Biodiversity Revenues, a tier-based rating that could be used to identify opportunities for financial investors.
Biodiversity Management Quality (BMQ) could be built on the Transition Pathway Initiative’s Management Quality framework, which uses publicly available disclosures through questionnaires to assess companies’ “biodiversity-positive” actions. The researchers said that if companies refuse to publicly disclose information, then they would be given an index value of zero, but companies that do disclose can be given the opportunity to respond to the metric assessments.
The paper proposed an initial questionnaire to assess BMQ, which the authors said is incomplete, that analysts could develop to assess companies through sequential levels. The example questionnaire began with assessing whether the business acknowledges biodiversity loss as a business issue, then moves into how the company integrates nature into its operational decision-making, sets long-term biodiversity targets, and ties those targets to executive performance.
Meanwhile, the Biodiversity Revenues metric aims to capture what proportion of firms’ revenues came from activities that help restore or harm biodiversity, the authors said. It’s informed by the FTSE-Russells Green Revenues data model that helps investors and financial markets to identify companies with green products and services and could be used in this case to identify companies taking advantage of opportunities in the nature market.
Both metrics aim to provide take a forward-looking view that would help financiers better understand the company’s direction of travel.
The question of metrics is a prominent discussion that is still developing through the Taskforce on Nature-related Financial Disclosures (TNFD) which released recommendations in New York earlier this week. TNFD proposed several core metrics that companies can use at different points in the LEAP (Locate, Evaluate, Assess, Prepare) process for risk assessment, but disclosure metrics will be published in due course.
The paper’s authors noted that while the TNFD has begun to offer direction, there are no broadly accepted methods, indicators, or guidelines for the financial valuation of biodiversity impacts or risks, without which investors cannot assess biodiversity management performance or practices.
By Tom Woolnough – tom@carbon-pulse.com
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