French financial institutions are highly exposed to risks associated with biodiversity loss, with over 40% of securities in their portfolios issued by companies heavily dependent on at least one ecosystem service, a paper has found.
The study, led by researchers at the Sorbonne Paris North and Paris-Saclay universities and published in the journal Ecological Economics, assessed €995 billion worth of assets, investigating how the firms that issued them relied on the benefits provided by ecosystems.
Researchers found that 42% of the total asset value is made of securities linked to companies that are highly dependent on at least one ecosystem service – in most cases water quality, erosion control, flood and storm protection, and climate regulation.
“If the quantity and quality of these ecosystem services were to decrease, the situation would likely result in substantial disruption of production processes relying upon them and potentially high exposure and vulnerability of the portfolio to the shock,” said the study.
Researchers took into account three types of securities – listed shares, short-term debt securities, and long-term debt securities – issued by 1,126 firms and held by French financial institutions at the end of 2019.
By leveraging the Exploring Natural Capital Opportunities, Risks, and Exposure (ENCORE) tool, they assessed the dependency of different production processes on 21 ecosystem services.
Results showed that the bulk of the examined assets hinged on ecosystem services related to water provision.
“Security issuers in the portfolio belong to a large extent to secondary sectors, e.g., manufacturing, many of which rely on production processes depending on water,” said the study.
GREATEST IMPACTS
While agriculture, forestry, and mining were among the sectors with the greatest direct impacts on nature, others significantly affected biodiversity through their value chains, according to the study.
These include processed food, beverages or wood products, chemicals, construction, and hotels and restaurants.
“As firms in the portfolio of French financial institutions are primarily located in secondary or tertiary sectors, their exposure to transition shocks appears mostly indirect,” said the study.
“Around one-third of the portfolio value is exposed to firms whose upstream value chain has substantial impacts on biodiversity.”
Rather than downsizing their dependencies on ecosystems, researchers recommended that companies focus on minimising the impacts on nature, both on-site and across their value chains.
“Attempting to reduce one’s dependencies on ecosystems may even deteriorate ecosystems further – e.g., shifting away textile production from plant-based fibres to synthetic ones may lead to increased plastic pollution – eventually increasing systemic risks,” said the study.
“Instead, the focus should be on limiting the probability of physical shocks by limiting the negative impacts on ecosystems.”
The risks involved in investing in companies whose activities are at odds with global biodiversity targets are driving an increasing number of financial institutions to review their investment decisions.
In February, for example, French-headquartered AXA Investment Manager pledged to target companies failing to disclose their impacts on biodiversity, emphasising that nature-related reputational and business risks are poised to affect its portfolio.
According to a 2023 report by the European Central Bank, 75% of corporate loans among euro area banks and over 30% of insurer investments in corporate bonds and equity are invested in economic sectors that heavily rely on at least one ecosystem service.
By Sergio Colombo – sergio@carbon-pulse.com
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