Land use and biodiversity controversies on the rise

The report highlights a growing number of industrial firms being linked to land use and biodiversity controversies in recent years. During 2012-2023, 1,659 incidents were reported with supply chain management related to land use and biodiversity. The food products industry had the largest number of incidents (776). Although many of these incidents had a low business impact initially, violations of Indigenous rights or destruction of endangered species’ habitat could cause high business impact and risk assessment. The report identifies industries with the largest portion of direct involvement in land use and biodiversity incidents are paper and forestry, oil and gas producers, industrial conglomerates, and utilities.

Managing land use and biodiversity risks

The report highlights that industries with high exposure to the land use and biodiversity issue tend to lack adequate management initiatives. Proper management initiatives should focus on reducing credit, market, operational, physical, and systemic risks. With more than half of the world’s total GDP moderately or highly dependent on nature, several organisations have recently published recommendations for companies and investors to incorporate nature into their decision-making process. The report recommends that investors take a long-short investment strategy for hedging portfolio risks tied to land use and biodiversity incidents to properly manage the associated risks.

Measuring risk levels and performance

Applying Morningstar Sustainalytics’ aggregate measure of the Material ESG Issue (MEI) Land Use and Biodiversity – Supply Chain, the report identified food products as the industry facing the highest levels of risk associated with land use and biodiversity incidents. The report showed that the three model portfolio strategies developed yielded promising results indicating that investing in companies that face less risk on this issue can coincide with strong financial performance. The Long-Short Portfolio, designed to incorporate ESG signals into alternative investments such as hedge funds, outperformed the market. A greener portfolio can help manage investment risks from land use, biodiversity loss, deforestation, and other potential environmental and social risks to create a sustainable investment portfolio.

Recommendations

Investors need to incorporate nature into their decision-making process to mitigate risks related to land use and biodiversity incidents. They should also focus on reducing credit, market, operational, physical, and systemic risks, resulting from these incidents. The report recommends investors take a long-short investment strategy for hedging portfolio risks tied to land use and biodiversity incidents. They should also assess a company’s approach to managing their land use and biodiversity risks, such as its management initiatives, involvement in relevant controversies, and its exposure to at-risk industries.