Financial sector is at risk from biodiversity loss
There is a growing recognition of the potential impact of biodiversity loss on the financial sector. For instance, in its Global Risks Report 2022, the World Economic Forum ranks biodiversity loss among the biggest global risks in the coming decade. About 15% of the MSCI World Index – a global stock market index comprising shares of about 1,500 large companies – operate in a sector vulnerable to biodiversity risks. Together, these companies have a market capitalisation of $7,000 billion. Biodiversity loss threatens the survival of certain ecosystem services, such as animal pollination and soil formation, on which economic activities depend. A previous DNB study shows that Dutch financial institutions have material exposures to companies vulnerable to biodiversity risks. Dutch financial institutions have provided €510 billion in finance across the globe to companies that are highly or very highly dependent on one or more ecosystem services.
To measure is to know
Consistent and widely applied standards are needed to better manage biodiversity risks. Besides managing risk, more and more investors are seeking to have a positive impact on biodiversity. For example, in 2021, 84 financial institutions, with $12,600 billion in assets under management, stated their intention to increase cash flows to biodiversity goals in what is known as the Finance for Biodiversity Pledge. Both aims require the ability to monitor and measure the impact of biodiversity loss.
Biodiversity data is still under development
While biodiversity considerations are gaining prominence in the financial system, there are still shortcomings in the available data. For example, some indicators are not available for all companies. This is problematic because poor coverage makes them less suitable for financial risk analyses by market participants and financial institutions.
Also, biodiversity indicators often lack transparency in how they are calculated, which reduces their practical value. As a result, indicators from different providers cannot be easily compared and sometimes even produce contradicting results. This can be illustrated by comparing biodiversity scores from two major data providers (Figure 1). These scores measure how much harm companies cause to biodiversity, and how vulnerable companies are to the risks of biodiversity loss. The comparison shows that their coherence is limited. Moreover, there is a negative correlation, suggesting that companies that cause more harm to biodiversity have a lower biodiversity risk. This is remarkable, given that a more harmful business model usually poses greater challenges associated with the need for future changes and therefore has a higher risk profile.