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July 4, 2022

Biodiversity: new approaches to bridge data gaps and address requirements

Jimmy Greer, Bérengère Sim and Remi Koplinski
Moody's ESG Solutions

Despite a lack of widely-used decision-making and disclosure frameworks, standards and requirements, biodiversity is fast moving to the top of the agenda for investors as they seek to understand investee companies’ nature-related impacts and dependencies. Measuring progress around biodiversity still presents several challenges. Data collection is one of them, with the development of consistent, comparable measures to capture the multifaceted relationships between companies and biodiversity still in its early stages. New methodological approaches can bridge the gap and meet demand for information today from requirements where they do exist. We set out an overview of biodiversity developments below and share our approach to disclosure for the EU’s Sustainable Finance Disclosure Regulation (SFDR) Principal Adverse Impact (PAI) indicator on biodiversity.

Improving nature-related financial disclosure to growing support global action

Negative corporate impacts on biodiversity continue apace. Our Controversies Risk Assessment Screening currently has 540 active biodiversity-related cases, with historic data (including all biodiversity related controversies) finding that the most exposed sectors are mining and metals, food and energy (see Figure 1). Furthermore, highlighting the links between biodiversity impacts and other ESG issues, our data also finds that the top three related ESG topics impacted by biodiversity controversies are indigenous people’s rights, social impact on local communities and fundamental human rights.

Figure 1: Most exposed sectors to biodiversity controversies
Source: Moody's ESG Solutions

Figure 2: Most related ESG topics to biodiversity controversies
Source: Moody's ESG Solutions

However, support for biodiversity protection at an institutional level is taking hold. The second part of COP15, the United Nations’ Biodiversity Conference, now set to take place in Montreal in December this year, will be a landmark moment as government representatives look to draft a new global treaty to halt and reverse biodiversity losses focused on the implementation of the Post-2020 Global Biodiversity Framework. However, the treaty, which has been under negotiation in Nairobi in June, reportedly stalled and it remains to be seen what the COP15 conference will mean for the financial sector, given that implementation requires that the targets are interpreted into policies and regulation. According to the Principles for Responsible Investment (PRI), an investor organization supported by the UN, among the key policies the sector should look out for are financial disclosure on nature-related risks and supply chain due diligence legislation on forest commodities.  

Elsewhere, central banks and financial supervisors are also looking to address biodiversity-related risks. A report by the Network for Greening the Financial System (NGFS) and the International Network for Sustainable Financial Policy Insights, Research and Exchange (INSPIRE) found that some central banks and financial supervisors had already started to measure the exposure of its banking sector to biodiversity loss.

For example, De Nederlandsche Bank, the Dutch central bank, was the first to carry out such an analysis, finding in 2020 that 36% of its financial institutions were “highly or very highly” dependent on “at least one ecosystem service”. The following year, the Banque de France published an analysis that found its banking sector exposure to be 42%, although its methodologies were slightly different to that of its Dutch counterpart.  The corporate and financial sectors have thus been called on to do more to incorporate biodiversity and nature-related considerations into decision-making processes. Elizabeth Mrema, the co-chair of the Taskforce on Nature-related Financial Disclosures (TNFD) and executive secretary of the UN’s Secretariat of the Convention on Biological Diversity, said in October 2021 that the business and financial sectors “have a central role to play in shifting global financial flows from negative to positive outcomes for nature”.

The TNFD, which launched in June 2021 with the backing of the financial sector, corporates and governments, published the first version of its framework for market consultation in March this year, with an update launched on 28 June.1The first beta version of the framework, intended for use globally, is focused on evolving nature-related risk management and disclosure recommendations aligned with the Task Force on Climate-related Financial Disclosures (TCFD). The feedback collected from the TNFD’s consultations will feed into the final recommendations, expected in late 2023.

Following initial consultations for the first version of its framework,  the TNFD found that there is not yet a consensus in the market on the approach to measuring nature-related dependencies, impacts, risks and opportunities and, hence, an appetite for increased standardization. In an assessment undertaken by the TNFD, the Taskforce found that there are more than 3,000 different nature-related metrics in use. One of its focus areas is therefore to create a shortlist of existing indicators and metrics. Its latest update in June includes proposals for both metrics and targets, sector classification as well as guidance for market participants to start pilot testing from July. The proposed metrics are divided into two categories: assessment and disclosure. Feedback on the second version of the beta framework will be integrated into the TNFD’s next update in September 2023.

Growing regulatory developments

At a legislative level, action on biodiversity measurement and disclosure for corporates and financial institutions is also moving forward. Published in June 2021, France’s Article 29 of the law on Energy and Climate, which requires all financial institutions to disclose biodiversity-related risks and climate-related risks, set the pace for biodiversity disclosure requirements. On the European Union’s side, the SFDR’s mandatory Principle Adverse Impact (PAI) indicator on biodiversity, indicator 7, requires that companies disclose activities that negatively affect biodiversity sensitive areas. The first provisions of the SFDR legislation came into effect on 10 March 2021, and the majority of the mandatory, standardized ESG disclosure obligations for asset managers and other financial markets participants will start to apply in January 2023. The metric used for the indicator 7 is the share of investments in companies with sites or operations located in or near to biodiversity-sensitive areas, which negatively affect those areas.

This complements a range of wider proposals coming out of the EU. For example, on 22 June it introduced a proposal to slash pesticide use in a bid to prevent an “ecocide” as part of the Nature Restoration Law. Alongside the goal of halving pesticide use by 2030, the proposed law also sets out to restore Europe’s damaged nature, aiming to repair 80% of European habitats in poor condition by 2050. In November 2021, the EU published a legislative proposal which aims to tackle global deforestation and forest degradation by preventing the import of commodities linked to deforestation, including beef, palm oil and coffee, from countries which highly contribute to global deforestation, such as Russia, Brazil and Canada.

Furthermore, reporting on biodiversity at company level will be further increased through the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS), which will have a specific reporting standard on biodiversity and ecosystems (see latest draft). All large EU companies and non-EU companies with a significant presence in the EU will need to disclose specific metrics on the impact their activities have on biodiversity loss and ecosystems as well as the impact biodiversity loss will have on the companies. Such reported data points which are expected to start being reported in 2025 by in scope companies will be helpful additions to further close the data gap on biodiversity.

SFDR PAI biodiversity: Our approach and results

Biodiversity is one of the 18 mandatory PAIs indicators under SFDR which in scope entities are expected to report on from 2023, requiring collection of data from this year. Owing to a lack of widely reported, commonly used data, we employ an innovative methodological approach in order to support disclosure requirements. Our four-step approach allows us to identify operations of companies, associated with high resource use and pollution, in areas of high biodiversity significance that have seen negative impact. It leverages our in-house company data and global datasets on habitat condition to bring together various external and internal sources of information on biodiversity and polluting companies (see Figure 3). Using this approach, we are able to determine the percentage of facilities owned by a company which may have a negative impact on local areas of biodiversity significance.

Figure 3: Approach to addressing PAI 7 with facilities level and global environmental datasets
Source: Moody's ESG Solutions

In Figure 4 below we set out the percentage of companies with more than 5% of their activities that negatively impact biodiversity sensitive areas, by sector, finding that utilities, energy and materials are sectors that are most exposed.

Figure 4: Percentage of companies with more than 5% of their activities that negatively impact biodiversity sensitive areas, by sector
Source: Moody's ESG Solutions

Progress and commitments to action on biodiversity are gathering pace but at present biodiversity disclosure is still nascent. Swift progress made by the TNFD as demonstrated in this latest update will provide welcome support to market practitioners and institutions. Until the TNFD disclosure framework, other standards and supporting knowledge bases are well established and reporting cycles have improved disclosure practice to meet expected use cases, new methodological approaches in line with current market demands will prove relevant. They can also help inform other biodiversity-related disclosure challenges as demand for action intensifies.

Moody’s ESG Solutions provides insights and analyses on ESG themes and multi-stakeholder performance, climate-related risks and opportunities and global sustainable finance trends.