Guidance on how investors can identify and navigate nature dependencies and risks is spelled out at GreenFin 23.
As the financial industry awakens to the profound risks of biodiversity loss and business dependency on nature, it is moving quickly to develop metrics, tools, and frameworks to evaluate and act on those risks. While progress is rapidly advancing, there are still data gaps as well as a lack of unifying standards and metrics.
How then does an investor address these gaps, and sort through the plethora of tools and metrics to identify portfolio risks and take meaningful action?
And the need to act is urgent. According to Divya Mankikar, global head of market engagement-sustainability, S&P Global, a staggering 85 percent of companies in the S&P Global 1200 are moderately or highly dependent on nature — with stormwater flood protection being the No. 1 dependency — while 46% have at least one asset in a key biodiversity area.
Mankikar spoke at a GreenFin 23 panel discussion on “Unpacking Decision-Useful Data for Nature.”
Here are six key takeaways from that session:
- Needed: A common language to talk about nature
To accelerate protection of nature, it’s critical to align around a language system similar to what’s been developed for climate, said Tony Goldner, executive director, Taskforce on Nature-related Financial Disclosures (TNFD).
“When we talk about risks and impacts, I can’t tell you the number of times I’ve been in the room and people who are using those two words [are] pointing to the opposite direction. Someone will be talking about the risks to nature and the other person will be talking about risks to the business or to the capital.”
Goldner further asserted that nature and biodiversity are not interchangeable. Nature in simple terms, for business, is a set of assets — atmosphere, freshwater, oceans and land — that provide a set of ecosystem services that feed into business processes and into our society, he said. Goldner describes biodiversity as the diversity of ecosystems and the living things. “It’s a bit like the diversity of your investment portfolio, as opposed to the assets in the portfolio.”
Tools are coming along quickly to help investors think geospatially, but there are still gaps.
While Goldner advocated for framing language around nature, Chris Goolgasian, director of climate research, portfolio manager, Wellington Management, said he uses the term biodiversity which he boils down to: “soil, water, vegetation, species and then the intersection of those things.”
Over the past five years, Wellington Management, in partnership with Woodwell Climate Research Center, has evaluated seven physical risks of climate change — heat, drought, fire, hurricanes, flood, water scarcity and sea level rise — and projected those risks over 30 years on a geospatial tool. “We take something like water, which we view as a physical risk, and then put it into biodiversity,” he said, adding that water is both a climate risk and essential for biodiversity, and that it’s important to link the two.
Meanwhile, Brianne Hendrickson-Smith, vice president, geospatial data scientist, global sustainable finance at Morgan Stanley, said that nature is not just biodiversity, and a specific definition for nature “needs work.”
- Location, location, location
Location is fundamental to understanding businesses’ dependencies and impact on nature, but investors often start by analyzing nature-related risks at the company level. That needs to be flipped, Mankikar argued. Investors need to start thinking geospatially rather than purely at the company level, she said.
“We focus on key biodiversity areas, and all of the actors who are important to that area, and then … build our engagement…” with those relevant companies, she said.
S&P Global’s Sustainable1 built a tool that maps key conservation data with the locations of mining and oil companies, pipelines and support services. “We overlay those two things so that you can get beyond a lack of disclosure from companies to have insight into where they are operating,” she said.
Goolgasian agreed and said that leading with location when engaging with companies helps with “long-term shareholder credibility,” and it also benefits governance. He recommends investors engage with companies by saying, “Look, we’re worried about these five locations … that have enormous flood risk, or heat risk … in the next 10 years. Have you made those sites more resilient? Do you have the right insurance policies? What’s your backup plan?”
Duration is important too, he added. “The longer the expected life of that asset, the more [physical, climate] risks you’re taking.”
Tools are coming along quickly to help investors think geospatially, but there are still gaps.
“[Loss of] biodiversity is a problem that is happening right now. We can’t wait 10 years for the perfect solution. We have to use the metrics we have developed now and hopefully get better in the future.”
Company locations were a “bottleneck” when Wellington started its climate risk mapping in 2018, Goolgasian said. It had to search for company locations on Google, which is very inefficient, because 10-Ks typically don’t provide them.
As Hendrickson-Smith put it, “You can take a bottom-up [approach] with: Where are you? What are you located near? And then you can take a top-down approach, because the data is just not there to go bottom-up for every single company on the S&P 500. So right now, we kind of need to be able to do both.”
- Democratize geospatial data
A plethora of data tools and satellite data sets are rapidly emerging to help companies and investors map their nature dependencies and risks. Public sector initiatives are also generating high-quality data, such as UNEP’s World Conservation Monitoring Center, that private companies are using in their geospatial tools. But as these tools and private satellite data providers emerge, it’s important to develop consensus on how to publicly share the information.
“The private sector is going to be increasingly generating [and] providing us with valuable natural data,” said Goldner. “The question is, how will other people access that data in a fair, equitable, open and transparent way?”
- A single metric for nature will not emerge anytime soon
The TNFD identified 3,000 metrics for measuring impacts, dependencies, risks and opportunities for nature when it started its work on the disclosure framework, Goldner said. A leading indicators approach is needed, and stakeholders need to align on what those core metrics are.
Goolgasian argued that a single metric, such as carbon footprint per dollar sales, is preferred and theorized that all nature impacts could be rolled up into a dollar value per hectare of land. “That paper has yet to be written,” he said, “And obviously that’ll be geographically based as it’s going to differ everywhere.”
Other panelists were not so sure.
“It’s seductive to say, we can wrap this all up in one number and we would love that if that popped up on our Bloomberg terminal… but we’re a long way away from that,” said Goldner, adding he has doubts that nature’s complexity can be boiled down to a single number. “Portfolio metrics is tedious, but that’s probably a better approach, and it probably leads to better decision-making,” he said.
Hendrickson-Smith said investors shouldn’t wait for that magical single metric. “[Loss of] biodiversity is a problem that is happening right now. We can’t wait 10 years for the perfect solution. We have to use the metrics we have developed now and hopefully get better in the future.”
- Collaborate with, don’t sideline Indigenous groups
Civil society and Indigenous groups voice frustration at being left out of, or marginalized, in global conversations about protecting nature and biodiversity. Goldner sees opportunity in collaboration with Indigenous groups.
“Indigenous people are stewards of 80% of the remaining biodiversity on the planet. And we talk a lot about recognizing that traditional knowledge. But in fact, we don’t really recognize that. We just give it lip service.”
TNFD has had a running dialogue with 40 Indigenous leaders from around the world, as well as input from civil society organizations as it develops its reporting framework, he said. “The current models of engagement with Indigenous people doesn’t work for them,” and [they’re] not producing good outcomes for nature, or for business or investors.”
TNFD’s next framework, due out in September, will include guidelines for stakeholder engagement, but Goldner said, “It’s not just about process. It’s also about harnessing these relationships in a different way. Indigenous people are stewards of 80 percent of the remaining biodiversity on the planet. And we talk a lot about recognizing that traditional knowledge. But in fact, we don’t really recognize that. We just give it lip service.”
“Is there a world in which Indigenous communities can get paid as data collectors to be contributing to this public data cloud that we all need to benefit from?” he queried. That would compensate them for, and tap into, their traditional knowledge of landscapes and help solve a collective problem, he said.
- Addressing nature risks can move the needle
About 200 institutions have pilot tested the TNFD’s framework, using the LEAP risk assessment approach, said Goldner. When one large consumer goods company found that their nature-related risk was bigger than their climate risk, it completely changed their internal conversation around risk management, he said. “While everyone’s been focusing on climate, they’ve now got a number, even if it’s only directionally correct, about what nature means to them, and it coincided with the fact that they moved the private and natural risk management function from a sustainability team to the CFO’s office. This is the point, right?”
For more insights from GreenFin 23, see coverage here.
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