DWS: assessing the impact of biodiversity loss

A new report from DWS looks at how investors can best assess the financial risks from biodiversity loss.

By the DWS Research Institute, ESG Thematic Research, headed by Michael Lewis.

Biodiversity loss creates two sources of risk: physical risks such as limited protection from floods or wildfires or water scarcity; and transition risks stemming from a misalignment of economic activities with actions aimed at protecting, restoring, and/or reducing negative impacts on nature.

Corporate impact on biodiversity
How a company’s direct and indirect activities can affect biodiversity along the entire value chain is shown below. This shows the relevance of a particular sector or activity, such as farming, to one or more of the drivers of biodiversity loss.

In analysing the transmission channels between economic activity, biodiversity loss, and financial risk, investors can consider following these four steps:

(i) Identify the most exposed and dependent sectors and companies across the investment portfolio.

(ii) Assess those sectors and companies with a high dependency on nature, for example those with a high dependency on water resources.

(iii) Assess those sectors and companies with a high impact on nature, such as those operating in ecologically or biologically significant areas of the world.

(iv) Assess the supply chains of sectors and companies, since often this can be where the greatest dependencies and impacts on nature and ecosystem services exist.

Assessment tools
A number of tools exist to assess nature dependencies and impacts at a corporate and portfolio level. Two such tools are those developed by ENCORE and WWF.

Exploring Natural Capital Opportunities, Risks and Exposure (ENCORE) provides users with a view of how economic activities (referred to as ‘production processes’) might depend on or impact natural capital. The tool also provides qualitative materiality ratings for dependencies and impacts, which help users understand which dependencies and impacts might warrant the most immediate attention.

WWF Biodiversity Risk Filter is a spatial risk assessment tool, helping companies and financial institutions prioritize high risk areas and issues relating to the physical and reputational risks around biodiversity loss. This can then enable companies and investors to prioritize action on what and where it matters the most to address biodiversity risks, and for enhancing business resilience and contributing to a sustainable future.

Impact on stockmarkets
Analysis by PwC examined the exposure to financial risk through high or moderate dependency on nature across 19 major stock exchanges. Their findings showed that for 10 of the 19 major stock exchanges, more than half of the value of the listed companies exhibited high or moderate nature dependence. Additionally, of the 1,565 companies of the MSCI World Index, the top 250 high-impact companies capture over 70% of the negative potential impact on biodiversity of the index.

However, according to one S&P Global study, only 20% of the constituents of the S&P500 have made nature-related commitments. While almost half of the companies assessed have climate-related commitments, achieving net zero by 2050 requires an end to commodity-driven deforestation as soon as 2025. Yet, only 13% of evaluated companies have made a commitment to zero ecosystem conversion, with just 6% setting a time-bound target to eliminate deforestation.