How can investors evaluate risks and impacts of biodiversity loss?
Biodiversity loss has quickly become a major issue for the global financial system. In January 2022, we launched a study to examine the biodiversity risks and impacts for Finnish investors using a stock market index.
What is it about?
Earth’s ecological carrying capacity is one of the cornerstones of Sitra’s strategy. In the Climate and Nature Solutions project, we are focusing on the integral role of the global financial system in halting biodiversity loss.
The Dasgupta Review, published in February 2021, stressed that the economy does not operate in isolation from nature, but is dependent on it. The review brought biodiversity to the debate among investors, asset managers and financial institutions in a new way.
But investors, asset managers, banks and other financial institutions currently lack tangible tools for evaluating biodiversity risks and impacts from an investment portfolio perspective.
In June 2021, we hosted an international webinar in June 2021, to hear about global best practices for investors to consider the risks and impacts of biodiversity loss in their investment decision-making processes.
In January 2022 we launched a study to examine the risks and impacts of biodiversity loss for business investment using a stock market index, which is relevant to many Finnish investors.
What do we do?
It is far harder to monitor biodiversity loss compared to the progress of climate change. With global heating we can measure the concentration of greenhouse gases in the atmosphere, or measure how many tons of CO2-equivalents a company emits annually. There are as yet no comparable indicators for biodiversity loss.
Biodiversity loss can however be examined through its five key drivers. These are climate change, changes in land and sea use, natural resource use and exploitation, pollution, and invasive species.
Companies are dependent on nature in their operations. This dependency creates risks for companies as biodiversity loss progresses. In our study we model, for example, how the degradation of nature’s ecosystem services poses risks to the business environment and operations.
Business activities can also degrade biodiversity. It is likely that legislators or market actors will seek to regulate the activities that harm nature more stringently. Changes in consumer habits could also put pressure on businesses to curb their negative impacts on nature.
In the study we seek to model companies’ impacts on the drivers of biodiversity loss – for example the extent to which their activities cause changes in land use. If drivers of biodiversity loss are priced or regulated in the future, it could result in significant financial losses for companies and investors.
We also seek to examine the legal and reputational risks of biodiversity loss for companies.
Who is involved?
The study is being carried out by the international consultancy Vivid Economics. The study is one of the first of its kind in the world.
Where are we now?
The goal is to publish the study in summer 2022.
Finnish businesses will benefit by assessing the impact of biodiversity loss on their operations in time. Once the study is published, we will have extensive discussions with Finnish investors, asset managers, banks, and companies on how to effectively manage the risks and impacts of biodiversity loss.