Biodiversity: financial players must rise to the urgency of the situation

‍Last December, COP15 set a global target for reversing the "loss of nature" by 2030. The Kunming-Montreal agreement, described as historic by many observers, testifies to the growing importance of biodiversity issues in the international sphere. The agreement establishes a new global framework, the Global Biodiversity Framework, which sets ambitious targets. However, the contours of these objectives are still vague, and achieving them will depend on their operational implementation by public and private players, including those in the financial sector.

The Global Biodiversity Framework has grouped the objectives into three categories: 

• reduce our threat to biodiversity, 
• meet people's needs through sustainable, shared use of natural resources, 
• develop concrete tools and solutions to be implemented and shared with companies and the financial sector  

The biodiversity crisis is truly major: we're talking about a mass extinction on the same scale as the five that have occurred throughout history. Except that the rate of species extinction is a hundred to a thousand times faster. The United Nations estimates that a million species of plants and animals are threatened by extinction. From this point of view, this crisis is an unprecedented life-size experiment, a plunge into the unknown. COP15 set targets for reversing the "loss of nature" by 2030, notably by conserving 30% of terrestrial and marine areas and restoring 30% of degraded terrestrial and marine ecosystems. Most of the targets set are judged by the scientific community to be up to the challenge, but few if any are actually achievable today. We therefore need to move rapidly beyond the governance, transparency and reporting frameworks to achieve concrete action.

Much remains to be done in terms of biodiversity, but the main human pressures on biodiversity are well known and documented.

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In terms of the data and indicators to be implemented, the field is still wide open. The Global Biodiversity Framework calls for much greater transparency on the part of players, particularly financial players. However, unlike climate change, where the carbon footprint has long been the standard for defining and steering mitigation objectives, the Biodiversity Framework does not yet specify exactly what information this will entail.

More generally, methodologies are still imperfect, which presages the same difficulties if not worse than those for carbon credits: how can we justify that the restoration of one ecosystem is equivalent to the destruction of another elsewhere? Moreover, the very definition of what constitutes a protected area or what can be considered a restored ecosystem is not perfectly defined and is the subject of intense debate. Can there be mining activities at the bottom of oceanic protected areas? How can we compare the impact of financing companies in different sectors and regions, whose activities impact ecosystems that are also very different? 

There is therefore a great deal of collective intelligence to be generated around these operational issues, by getting financial, public and private players and the scientific community to work together. Numerous local initiatives already exist to engage financial players and get them to work together around new tools and methods.

While the interactions and dependencies between species, ecosystems and genetics are poorly understood, the main pressures exerted on biodiversity by human activities are better understood. These include land occupation and changes in land use, resource exploitation, climate change, pollution and invasive species such as the tiger mosquito and the Asian hornet. By drawing on the full range of tools already at their disposal, financial players can already do much more today. For example, they can already use benchmark indices to guide their investment strategy towards preserving biodiversity. Euronext has already developed such indices, selecting stocks according to two metrics based on the principle of double materiality: the Dependency Exposure Score identifies issuers whose sales depend on biodiversity, and the Biodiversity Avoided Impact⁾¹.

Some tools are already making their mark on the financial landscape. One example is the Global Biodiversity Score developed by CDC Biodiversité, a biodiversity footprint measurement tool that quantitatively measures the impact of a company's direct activities and those along its value chain on ecosystems. For the past 4 years, Iceberg Data Lab has been developing the Corporate Biodiversity Footprint (CBP) to measure the impact of companies on biodiversity. Or, if you want the most global and ambitious approach possible, use several sources and data. There are many such sources, and more and more of them are public and open source, such as the ENCORE tool. The latter enables us to map the impacts and dependencies of our assets on the living world. Some databases focus on specific themes to be integrated into biodiversity strategies, such as water (CDP Water Impact Index, WWF Water Risk Filter) or deforestation (Global Canopy Forest 500, Global Forest Watch Pro).

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Going beyond the reporting framework to build an investment thesis centered on the challenges of the living world

We have thus entered a pivotal period: a new international governance framework is emerging around the Global Biodiversity Framework, while regulations are evolving in parallel. For example, the European taxonomy is beginning to set minimum criteria for alignment with biodiversity objectives, and Article 29 of the French Energy and Climate Law already requires financial players to adopt and explain a biodiversity strategy. However, it has to be said that these requirements are not being met, or are only being met in part: for example, the elements relating to biodiversity in Article 29 published by financial players remain relatively succinct. Indeed, while some publish the biodiversity footprint of their investments, few have defined a real strategy for integrating this metric into their management processes. 

But building an investment thesis that integrates the challenges of life is not effortless, and must be done methodically. First of all, we need to provide our teams with serious training in these issues, as it is their knowledge that will enable them to properly identify the risks and impacts of each (investment) decision. Secondly, we need to provide high-quality, relevant data to understand the impact of the business models and projects financed. As part of an investment strategy, this data defines indicators, which in turn must be used to support effective, high-impact dialogue and monitoring between funders and investees. The Greenfin label has already proposed a list of indicators to assess the impact of investments on the preservation of biodiversity: issuers' average spending on biodiversity as a proportion of sales, or the land conversion area of all portfolio activities.

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A new nature reporting framework at the right time: TNFD publishes the final version of its recommendations

In addition to the reporting and steering tools already available, such as the Science Based Targets Initiative for nature or the Global Reporting Initiative (GRI), both economic and financial players can now rely on the recommendations of the TNFD. On September 18, 2023, TNFD published version 1.0 of its framework on risks and opportunities related to nature and biodiversity. 

In concrete terms, how can this change the reporting landscape? 

→ This framework is the culmination of a two-year consultation process and has already been tested by over 200 companies. 14 recommendations have been issued, divided into 4 pillars: governance, strategy, risk management and data and targets.

Like Mirova, which has already committed to adopting the TNFD's recommendations, financial players need to seize the opportunity offered by this new framework, which will enable them to identify and mitigate risks, as well as invest in biodiversity projects.

Constructing these indicators calls for the use of a number of complex methodologies, requiring a high level of scientific expertise, integrating a dynamic vision of impacts and based on several reference scenarios. Operationally speaking, building these indicators, then managing, interpreting and communicating them, requires expertise and adapted tools that connect all parts of the organization: from the analyst to the risk management team, right through to the investment department. 

Scientific rigor must not be forgotten, to ensure that financial players are not aiming at the wrong objectives. This rigor must be applied with absolute transparency, and this is the main issue at stake in today's regulations. However, to ensure that the financial sector fully embraces biodiversity issues, the convictions of each financial player must never be set aside, so that their biodiversity thesis fits perfectly into their overall strategy and reinforces it.

Without these 3 pillars - quality data, expertise and scientific rigor, and conviction - no action can be truly transformative and provide a necessary response to the current emergency.

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Position yourself today to better meet tomorrow's challenges

One might get the impression that the governance and regulatory frameworks are moving forward in a piecemeal fashion, that not everything has yet been stabilized from a methodological point of view and that, in this fast-changing context, it's wiser to wait and see. On the contrary, it will already be too late to tackle biodiversity issues once the framework has stabilized - if it ever does! It is essential for financial players to position themselves and reduce their impact on biodiversity now.

Admittedly, the living world is complex, but the urgency to act is obvious: humanity is part of the living world, and consequently the whole of humanity, and our economies that go with it, are sensitive and vulnerable to the current brutal erosion of biodiversity. The environmental challenges of life and climate, as well as the social challenges, are closely linked. Financial players need to position themselves today and equip themselves accordingly to begin managing this complexity, by multiplying data points and decoding methodologies. Accompanying financial players on this precise objective requires adopting a humble posture, seeking to reconcile the scientific dimension with the political dimension, pragmatically reconciling what science says with the convictions of each player, and thus unblocking, point by point, the obstacles preventing the acceleration of financing for the environmental transition.

Financing a world that truly rethinks our relationship with the living world has very concrete implications for financial players, which we need to anticipate if we want them to fully play their role as financiers of the transition.

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How do you position yourself today?

• Collecting, aggregating and managing data: data isn't perfect, but it does exist. The various databases, both public and private, have already been mapped and are becoming ever denser. It's important to start collecting data right away, so as to make the most of these complex data sets and link them together.
• Evaluate: On the basis of the data collected, define materiality matrices in order to understand areas of pressure and thus identify the sectors and geographical areas to be targeted as a matter of priority with regard to portfolio exposure.
• Define entity-wide objectives: use the results of the sectoral and geographical assessment to define a set of priorities which will then be translated into management policies:

1. Specific exclusion policy (palm oil, pesticides, water management, plastics, etc.).
2. Integrating data into the ESG assessment of issuers and adapting weighting to the sector
3. Engage issuers in training, setting targets and reporting on the risks, impacts and dependencies of their activities on biodiversity, 

• Reporting via the regulatory framework (Article 29 LEC, Main Negative Impacts in the context of SFDR)

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¹ Euronext Biodiversity Indices

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