The world cannot afford to lose any more of its natural capital.
Evidence shows that the companies most dependent on natural resources – whether that’s the plants used to develop medicines or the insect pollination essential for agriculture – face the prospect of higher capital costs.
Measuring the impact of biodiversity loss on investors' portfolios, therefore, is a crucial consideration for investors. But it is a complex undertaking. The tools currently available to assess and monitor such risks – all of which have the potential to affect investment returns – are not advanced enough.
"Businesses and investors cannot afford to disregard biodiversity loss as a risk factor. It is already a material financial variable, affecting the way firms conduct their businesses and how investors allocate their capital."
To guide investors’ efforts, we introduce the new research undertaken by scientists in the MISTRA Finance to Revive Biodiversity programme – of which Pictet Asset Management (Pictet AM) is a founding partner. The team has devised a prototype biodiversity loss measurement tool – the Earth System Impact (ESI) model - that seeks to give a far broader assessment of environmental impacts.
While still in development, the framework can already reveal a more comprehensive set of findings than what could be derived from analysing a company or industry’s own disclosures.
For example, researchers applying the model to the mining industry found that carbon emissions were the main source of environmental damage for only half of the mines analysed, while land disruption emerged as the primary driver of degradation for 40 per cent of them.
We also showcase Pictet AM’s own proprietary biodiversity impact model and discuss the ways in which we seek to draw on the insights from the ESI tool to further enhance our investment framework.
In brief
- Financial markets are beginning to discount risks from biodiversity loss, with companies most dependent on ecosystems facing the prospect of lower valuations and higher capital costs.
- Existing biodiversity impact calculation methods are not advanced enough. We believe the Earth System Impact (ESI) model breaks new ground by accounting for key biosphere-atmosphere interactions that are essential for planetary health.
- The ESI tool already reveals a more comprehensive set of findings than investors get from standard corporate disclosures. Companies and investors could use the ESI model to identify environmentally problematic sites and investments and set targets to reduce their biodiversity impact over time.
Did you know?
The feedback loop between climate change and biodiversity loss is expected to add an extra 0.4°C To the world’s temperature by 2100.
Source: Lade, SJ. et al (2019)
Pictet Asset Management and FinBio
Pictet AM is representing the global asset management industry as an “Impact Partner” in the MISTRA Finance to revive Biodiversity (FinBio) programme, geared to helping the financial industry develop strategies to protect natural capital and halt biodiversity loss.
The initiative, which receives approximately EUR5 million in research funding from MISTRA (the Swedish Foundation for Strategic Environmental Research), is overseen by the Stockholm Resilience Centre (SRC) at Stockholm University.
As the Impact Partner, Pictet AM is providing investment expertise and contributing to transdisciplinary research that seeks to bring about nature-positive changes in the financial system. The partnership includes other consortium members including the UN Principles for Responsible Investment, the Finance for Biodiversity Foundation, the University of Oxford and Stanford University.
More details can be found at https://finbio.org
