
The climate-nature nexus: An investor guide to expanding from climate to nature-data
This guide helps investors identify opportunities at the climate-nature nexus, emphasising integrated approaches to reduce risks and enhance returns. It provides tools, case studies, and frameworks to align portfolios with climate and biodiversity goals, fostering sustainable and resilient investments.
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OVERVIEW
Introduction
The finance sector faces growing challenges from nature-related risks, as over half of the global GDP depends on ecosystems, and 47% of these systems are already altered. The guide identifies these risks as stemming from impacts (e.g., pollution, land use changes) and dependencies (e.g., reliance on water or soil health). Despite data gaps, existing tools and frameworks like those for climate-related risks can help assess these issues.
The report stresses that nature-related risks are systemic, affecting economic sustainability and financial portfolios. Key concepts include physical risks (e.g., resource depletion), transition risks (e.g., regulatory changes), and nature-related opportunities (e.g., biodiversity restoration). Financial institutions are urged to integrate nature considerations into Environmental, Social, and Governance (ESG) processes.
Key steps to identify relevant datasets and tools
The guide outlines three main steps for financial institutions:
Step 1: Identify priority industries
Industries with high impacts and dependencies on nature should be prioritised. Examples include agriculture, energy, mining, and transportation. These sectors are particularly vulnerable due to their reliance on ecosystem services like water, soil, and biodiversity. Using prioritisation frameworks and datasets such as ENCORE can highlight significant risk areas.
Step 2: Assess risks
Tools like ENCORE, InVEST, and IBAT help analyse the impacts and dependencies identified in Step 1. For example, ENCORE visualises material risks by mapping pressures like pollution and resource exploitation, while IBAT focuses on biodiversity and species conservation. Dependencies on ecosystem services (e.g., water or atmospheric regulation) should be evaluated to identify high-risk geographies.
Step 3: Respond to risks
Insights from the first two steps should inform financial decision-making. Institutions are encouraged to:
- Engage with investees to promote asset-level data disclosure.
- Integrate findings into ESG screening and stewardship activities.
- Address data gaps through collaboration with stakeholders.
The guide emphasises that financial institutions must act with urgency, using available data even if imperfect, while adhering to precautionary principles where uncertainty exists.
Application with a hypothetical financial portfolio
Two case studies illustrate the practical use of these steps:
Company G (Apparel)
An apparel company with operations in France and material sourcing from India highlights the risks of water depletion and land-use change. Tools like the Ocean Health Index and ENCORE identified heightened physical risks in India due to water scarcity and natural capital depletion. Recommendations included:
- Acquiring detailed location data for sourcing.
- Engaging with the company to assess and improve its management practices.
Company C (Mining)
A mining company with a mine in Brazil and a distribution centre in California demonstrated risks related to atmosphere depletion and biodiversity loss. ENCORE and IBAT revealed significant pressures on nature in both locations. Suggested actions included:
- Collecting site-specific data for the mine and distribution centre.
- Investigating pressures such as pollution and invasive species.
- Engaging with the company to mitigate land-use change and water use.
Both examples reinforce the need for location-specific data and collaboration with companies to address nature-related risks effectively.
Conclusions and recommended actions
The guide concludes by urging financial institutions to integrate nature into their risk management frameworks, starting with:
- Prioritising high-risk industries: Focus on sectors with significant impacts and dependencies on ecosystems.
- Leveraging existing data: Use datasets from climate-related risk assessments, supplemented with nature-focused tools.
- Promoting data disclosure: Advocate for asset-level, location-specific data to enhance risk assessment accuracy.
- Applying the precautionary principle: In cases of data uncertainty, conduct additional due diligence and apply stricter screening criteria.
By adopting these measures, financial institutions can proactively address emerging nature-related risks and align their portfolios with sustainability goals.