Biodiversity is increasingly becoming a priority for investors as they study the impacts of a company’s nature-related impacts, even as standards on such information are lacking, according to a report from Moody’s.
Data collection and consistent standards to capture how companies fare in terms of biodiversity are still in their early stages, according to the Moody’s report. Reporting programs like the EU’s Sustainable Finance Disclosure Regulation’s Principal Adverse Impact indicator (PAI) on biodiversity, and the Taskforce on Nature-related Financial Disclosures (TNFD) seek to close those gaps.
By next year, financial market participants will be required to report on PAI indicators, which also include carbon emissions and water impacts. The metric used for the biodiversity indication includes the share of investments in companies with operations located in or near biodiversity-sensitive areas, which negatively impact those areas, according to Moody’s.
Due to a lack of data, Moody’s developed an approach to address that PAI biodiversity indicator. It includes identifying facilities owned by a company, checking its proximity to biodiverse areas, looking for signs of negative biodiversity impact, and checking for the environmental impact of the associated industry.
Moody’s also shared the percentage of companies with more than 5% of their activities that negatively impacted biodiversity-sensitive areas. Utilities, energy, and materials were the sectors most exposed, Moody’s says.
With issues like natural capital lacking the same focus as other sustainability efforts, topics like biodiversity are more of an ESG focus in business. Moody’s previously forecast biodiversity to be a significant financial impact in 2022.
Bloomberg recently reported on the growing trend of biodiversity investment, and cited a Paulson Institute study that showed investments in biodiversity could reach $93 billion by 2030, highlighting the importance of improved information on the issue. Bloomberg also highlighted that a Citi survey shows that 80% of respondents see an overlap between biodiversity risk and financial risk.
Moody’s says negative corporate impacts are quickly growing, and its Controversies Risk Assessment Screening currently has 540 active biodiversity-related cases. The sectors most exposed to biodiversity issues are mining and metals, food, and energy.
TNFD published the first version of its framework earlier this year as well. Through its work, the TNFD found that there are more than 3,000 nature-related metrics currently in use. Moody’s says the group aims to create a shortlist of metrics, and an update includes targets, sector classification, and guidance for market participants to start a pilot program later this summer.
“Progress made by the Taskforce on Nature-Related Financial Disclosures will provide welcome support to market practitioners and institutions,” says says Jimmy Greer, vice president – Analyst Outreach and Research at Moody’s ESG Solutions. “The Taskforce, alongside new methodological approaches, can bridge the gap and meet demand for information regarding existing requirements.”
Additionally, the second part of the United Nations Biodiversity Conference, called COP15, is set to take place in December 2022 in Montreal, and representatives will be looking to create policies to stop and reverse biodiversity loss. The Principles for Responsible Investment also is calling for financial disclosure on nature-related risks and supply chain legislation on forest goods.
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