Biodiversity, or the variety of life on earth, is facing a sixth mass extinction. Humans have destroyed insurmountable areas of habitats both above and below water, resulting in a 68% decrease in animal populations since the 70’s¹. In fact, according to Dasgupta², demands on nature far exceed its capacity to supply them, putting biodiversity under huge pressure and society at “extreme risk”.
Yet, biodiversity is not just a matter of ecological concern. It is also a critical economic issue. The health of our planet and the stability of our global economy are inextricably linked to biodiversity. From the food we eat to the air we breathe; biodiversity plays a vital role in providing the essential goods and services that underpin our economies and sustain our societies.
To highlight the economic implications of biodiversity loss and to provide actionable insights for investors, we created a new biodiversity dataset. This innovative tool equips financial institutions with comprehensive insights into the impact of business activities on four main biodiversity drivers: land and sea use change, climate change, natural resource exploitation, and pollution; as well as SDG alignment and a collection of company operational factors such as carbon, waste and water efficiency and PAI flags.
In the following sections, we delve into our initial findings using the dataset, dispel some common misconceptions, and discuss the power of granular data in driving sustainable investment practices.
The big picture
Our initial analysis of four major world indexes using the dataset reveals some startling findings. Over 35% of the MSCI All Country World Index (ACWI), representing over $28 trillion, has exposure to biodiversity risk. This significant exposure extends to both developed and emerging markets, with over $19 trillion at risk in developed markets (MSCI World) and nearly $9 trillion in emerging markets (MSCI Emerging Markets).
What’s more, out of that $28 trillion market cap exposure, over $25 trillion is exposure to products and services that are contributing negatively to the drivers of biodiversity. This highlights the substantial financial risk associated with biodiversity loss.
Dispelling Common Misconceptions
The analysis also challenges some common assumptions. For instance, it debunks the stereotype of “dirty Americans vs squeaky clean Europeans.” When comparing the biodiversity impact relative to their respective market caps, Europe (STOXX600) shows nearly twice the negative impact on biodiversity per $ of market cap compared to the USA (S&P500).
In examining the differences between the US and Europe, we found that about 75% of the discrepancy is driven by European companies having twice the negative exposure to land use change compared to their US counterparts. This is a significant factor contributing to Europe’s higher overall negative biodiversity impact. The remaining 25% of the difference can be attributed to pollution levels, which are about 1.5x higher for European companies compared to those in the US. Interestingly, when it comes to climate and natural resource use exposures, the figures are comparable between the two regions.
For investors who are creating biodiversity strategies, this underscores the importance of understanding the specific drivers of biodiversity impact within different geographies and sectors. It also highlights the need for targeted strategies to address these specific challenges. For instance, investors with strategies focused on European companies might target land use and pollution reduction to decrease their negative biodiversity impact.
The Power of Granular Data
Our biodiversity dataset maps over 2,300 business activities to their respective impacts and dependencies on the four key drivers of biodiversity, as well as SDG alignment.
Unlike broader categorisations based on conventional indexes, this level of detail allows for a nuanced understanding of the diverse impacts of different business activities. For instance, within the agriculture sector, the impacts of palm oil production can be distinctly different from those of sustainable farming. Similarly, within the automotive industry, the production of alternative battery parts for electric vehicles has a vastly different biodiversity footprint compared to traditional fossil fuel-based components.
This granular view of business activities not only enhances our understanding of biodiversity impacts but also opens a wider range of options for investors, who can now create thematic funds with greater precision and have more precise tools for screening companies into (or out of) portfolios. This means investors can align their portfolios more closely with their biodiversity goals.
Our analysis reveals that the exposure to biodiversity-positive activities, such as ‘recycling equipment creation’, is significantly smaller compared to the negative impacts. This is not surprising, given that most business activities contribute in some way to environmental emissions. However, it’s worth noting that emerging markets are leading the way in this regard. They have 10% of their market cap exposed to positive biodiversity activity, which is 2% and 3% more than the US and Europe respectively.
While 2% and 3% might seem small, in the context of the emerging market index’s market cap, this represents a substantial $400 to $600 billion. This is not ‘small change’ by any means and highlights the significant potential for positive biodiversity impact within these markets.
This could be of interest to investors. The higher alignment of emerging markets with positive biodiversity activities suggests that there is a growing market to tap into, driven by factors such as increasing global awareness and regulatory impact.
Looking Ahead
As the financial sector continues to recognise the importance of biodiversity, tools like our biodiversity dataset will become increasingly valuable. By providing a clear, comprehensive view of the impact of business activities on biodiversity, as well as other operational impacts, we can help investors make more informed decisions to drive sustainable practices.
The ease of use and immediate applicability of our factorised dataset means it can seamlessly integrate into and enhance your investment strategy. For more information about our biodiversity dataset and how it can benefit you, please get in touch:
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