Resource exploitation, climate change, pollution and the introduction of invasive species are among the main drivers behind the rapid degradation of the world’s land and water — and an average 69% decline in wildlife population since 1970.1
While ecosystems are essential for the well-being of humans and all living organisms, only 3% of global climate finance is currently spent on nature-based solutions.2
Luckily, politicians and regulators are turning their focus to reversing this. At the fifteenth conference of the UN Convention on Biological Diversity (COP15) in Montreal last December, 196 states reached a landmark agreement to protect and restore 30% of the world’s land and water by 2030. For many observers, the Kunming-Montreal Global Biodiversity Framework (GBF)3 accord could do for biodiversity what the Paris Agreement did for climate – become a tipping point for targeted investment flows.
In a 2021 blog post, we discussed biodiversity’s relationship with climate change, the related regulatory landscape and challenges with data, and why investors should care. In a follow-up article last December, we argued that the need for investors to step up action is unequivocal.
Those at the forefront of responsible investing are increasingly looking to integrate biodiversity considerations into portfolios, both as a risk-management exercise but also to tap opportunities with leading companies. The move to protect our habitats raises regulatory liabilities for investors, already facing biodiversity-related physical, transition and systemic risks.4
New indices to fight biodiversity loss
It is within these considerations that Qontigo has introduced the ISS STOXX® Biodiversity indices, a suite that allows investors to minimise their biodiversity footprint and help our world’s natural capital through a comprehensive approach.
The new indices exclude companies involved in activities causing harm to biodiversity, select securities that have a positive impact on ecosystems and those enabling exposure to relevant UN Sustainable Development Goals (SDGs) and, finally, reduce the portfolio’s carbon emissions.
A thorough biodiversity framework
The indices are classified into two categories: “Biodiversity” and “Biodiversity Leaders” (Figure 1).5
Figure 1: ISS STOXX Biodiversity indices framework
Those in the first category comply with current Article 8 requirements of the Sustainable Finance Disclosure Regulation (SFDR), while those in the leaders cluster are, as per present regulation, aligned with SFDR’s more ambitious Article 9.
Four-step stock selection process
The ISS STOXX Biodiversity indices’ building process consists of four main steps, as described in Figure 2.
Figure 2: Biodiversity indices’ methodology steps
1. Avoid
The indices exclude companies that are:
In breach of the United Nations’ Global Compact and OECD Guidelines.
Involved in controversial weapons, tobacco, thermal coal, unconventional oil and gas, civilian firearms and military contracting.
Involved in specific biodiversity-related products and activities: palm oil, GMO agriculture, hazardous pesticides, animal testing for non-pharmaceutical purposes, fur and exotic leather production
2. Minimise
ISS ESG has developed the Biodiversity Impact Assessment Tool metric, which quantifies each company’s impact on biodiversity through a Potentially Disappeared
Fraction of species (PDF) ratio. PDF represents — from a total preservation ratio of 0% to full destruction at 100% — the potential decline in species richness in an area over a period due to unfavourable conditions.
The indices select the top 80% of companies in each ICB Sector by PDF/size.
3. Enable
In a third step, the indices select companies with the highest exposure to selected SDGs.6 Here, the methodology differentiates between the Biodiversity and Biodiversity Leaders indices. The former calculate each stock’s total SDG exposure score among seven SDGs and select the top 80% into the index.
The latter adopt a more stringent and SDG-focused approach by selecting only companies with high revenues (between 25% and 50%) from activities aligned with eight biodiversity- and climate-related SDGs.
4. Decarbonise
If the resulting portfolio does not achieve a 30% carbon footprint reduction relative to the starting universe, companies are excluded in descending order of their carbon intensity until that target is met.
Sustainable investment alignment
Finally, only sustainable investment (SI) companies, defined as those that derive at least 20% of their revenues from products and services that make a positive net contribution to all 17 SDGs, are selected in the Biodiversity Leaders indices. The standard Biodiversity indices do not include this step.
The results
Our analysis shows that the ISS STOXX Biodiversity indices significantly improve both the overall PDF and SDG scores, and surpass the 30% carbon footprint reduction objective (Figure 3).
Figure 3: Results
Reversing the world’s fortunes
The ISS STOXX Biodiversity framework offers a complete toolkit for investors to customise and optimise existing indices incorporating additional objectives and constraints, in a transparent way and employing sophisticated data.
On top of managing biodiversity risk and impact, the ISS STOXX Biodiversity indices can also help investors meet reporting obligations and channel sustainability engagement. All in all, facilitating the investment community’s journey in an increasingly important topic.
For more information about ISS STOXX Biodiversity indices, visit www.qontigo.com/biodiversity-indices/
1 See “Living Planet Report 2022,” World Wide Fund for Nature (WWF). 2 Source: “Nature Based Solutions Essential For Climate Mitigation,” National Geographic, 2020. 3 The GFB features 23 targets to be achieved by 2030, also including the goal to reduce to near zero the loss of areas of high biodiversity importance and high ecological integrity, the phasing out or reformation of subsidies that harm biodiversity by at least USD 500 billion per year, and the mobilisation of at least $200bn per year from public and private sources for biodiversity-related funding. The accord also calls for requiring transnational companies and financial institutions to assess and disclose risks and impacts on biodiversity 4 Physical risks include the loss of raw materials and disruption of operating environments. Transition risks include policy shifts, change in market preferences and voluntary commitments. Systemic risks include global pandemics. Regulatory or litigation risks include increasing legislation. 5 The standard Biodiversity category includes indices that cover the World All Countries, Developed World, Europe 600, Developed Europe, US, Asia-Pacific and Emerging Markets regions. The Biodiversity Leaders category indices cover the World All Countries region. 6 Selected SDGS are SDG 6 - Clean Water and Sanitation (Biodiversity); SDG 7 – Affordable and Clean Energy (Climate); SDG 11 – Sustainable Cities and Communities (Biodiversity); SDG 12 – Responsible Consumption and Production (Biodiversity); SDG 13 – Climate Action (Climate); SDG 14 –Life below Water (Biodiversity); SDG 15 – Life on Land (Biodiversity)
