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May 26, 2021

Integrating biodiversity into a risk assessment framework

Moody's ESG Solutions
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Summary

Biodiversity-related risks are risingup the agenda for companies, investors and policymakers. As scientists findthat we are in the midst of a sixth mass extinction and with nature decliningat unprecedented rates, biodiversity loss has emerged as a concern forresponsible investors, financial regulators and companies whose activitiesimpact and depend on natural capital.

Impacts,dependencies and governance are critical elements to assess companies’biodiversity-related risks. Businesses sometimes engage inactivities that may harm nature and they may also depend upon natural resources.These impacts can manifest across the entire value chain. Our framework to assess the exposure of lending and investmentportfolios to biodiversity risks measures a company’s impact on biodiversity, itsdependence on natural capital and its governance of biodiversity risks.

Themain driver of biodiversity loss is the loss of habitat due to land use changes,which also exacerbates climate change’s negative impacts on biodiversity. To begin to understand a company’s impact on biodiversity, we measurehabitat loss around company facilities, and find that about 38% of 5,300 largepublicly-traded companies we assessed have at least one facility associatedwith habitat loss.

To understand companies’ governance ofbiodiversity issues, we assess the level of their commitment to protectbiodiversity, based on disclosures. The averagebiodiversity protection score for 1,200 assessed companies was 32 out of 100,highlighting a general lack of disclosures. Within a subsample of 67 heavy constructioncompanies, we find that 61% disclose commitments to address biodiversity.However, we consider nearly half of these companies “weak” in terms of the implementationof such commitments. This shows a clear disconnect between most companies’commitments and tangible measures disclosed to reduce their impact onbiodiversity.

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.