The sustainable investment arm of ISS STOXX, ISS ESG, has enhanced its biodiversity assessment product with a new portfolio report, and has expanded the full solution’s coverage to over 17,000 companies.
ISS ESG’s Biodiversity Impact Assessment Tool (BIAT) Portfolio Report add-on enables investors to compare a portfolio’s biodiversity risk and impact against a benchmark, and is a key enhancement to its holistic BIAT solution launched in 2022.
The data and methodology of ISS ESG’s BIAT is already providing the basis for the ISS STOXX Biodiversity Index Suite and a set of exchange-traded funds (ETFs) built by German asset manager DWS Group. The index was originally launched in May last year.
Till Jung, Head of ISS ESG, told ESG Insight that the holistic approach taken across the firm’s biodiversity related offerings reflects the fact that many factors within the environment, social and governance realm are interlinked, and that its offerings seek to support investors in light of the broader evolving regulatory landscape.
“Decarbonisation is an essential strategy to reduce climate change portfolio risk and climate change is among the biggest biodiversity pressures,” Jung said. “The social screens are a component of the index suite methodology because a lot of investors that would invest in biodiversity products would also look more broadly at ESG or responsible investment products to be compliant with regulations and other stipulations.
The BIAT methodology, which seeks to help investors minimise their portfolios’ impact on nature, is built on potentially disappeared fraction of species (PDF) data, which measures changes in species diversity, and mean species abundance (MSA) information, which tests for the level of ecosystem destruction. The index suite methodology adds norms-based and sector-based elimination screens, as well as specific biodiversity screens that identify companies involved in nature-negative activities such as palm oil and hazardous pesticide production. Also built into the index suite model is data on positive-impact activities such as alignment with UN Sustainable Development Goals (SDG).
There are further screens for companies that aren’t aligned with human rights, labour practices and other responsible social metrics, and eliminates those involved in proscribed sectors, such a fossil fuel production. There is also a decarbonisation test, which assesses portfolio companies’ carbon intensity.
ISS ESG’s latest BIAT Portfolio Report launch comes at a time of heightened demand for biodiversity data as the topic has climbed the agendas of investors, regulators and governments.
Spurred by the Montreal Global Biodiversity Framework, which was signed in 2022 to provide a framework for finance to flow into measures that tackle and restore nature loss, data providers have been busy offering institutions the information and tools to align their portfolios. As well as ISS ESG, NatureAlpha, Clarity AI and RepRisk have launched services aimed at nature investors.
The importance of the topic was also underlined last week when 320 companies including 100 financial institutions with $4 trillion in market capitalisation announced at the World Economic Forum’s (WEF) Davos meeting that they would begin voluntary reporting aligned with the Taskforce for Nature-based Financial Disclosures (TNFD). That was the biggest commitment made to the reporting standards since TNFD recommended them in June.
The creation of the TNFD in 2021 has also been a driver in raising awareness of the financial importance of nature, which according to estimates, supports about half the world’s economic output. Regulators and standards setters are following suit, with France including nature disclosure requirements among its corporate regulations. The Global Reporting Initiative is about to retool its own disclosures recommendations to align them with TNFD guidelines.
“Biodiversity is obviously a huge topic today for investors and the whole financial markets,” said Jung. “And that’s being reflected in some markets, such as France, where regulators are requiring reporting on how investors are integrating biodiversity impact and risks in their portfolio.”
Jung accepts that biodiversity data has its limitations. There are difficulties for instance in mapping satellite data, which can identify impacts and risks present in specific areas, with companies and assets in those locations. That will require better corporate reporting, he says.
“The data is far from perfect and there will be people who say that because the data is not fully there then we can’t do anything about it,” he said. “But it is certainly good enough to show that some companies are having a far greater impact than others. Comparatively and in relative terms, the data absolutely is good enough to start using for investment purposes.”
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