Biodiversity: data and impact measurement

We discuss the role of data in biodiversity and the complexity of measuring impact.

Key points

• Biodiversity data from companies or investors tends to be disclosure-based, meaning it is not standardised, and is often patchy or incomplete.
• There is also no consensus approach to assessing risks or opportunities, but we see this as an opportunity as an active investment manager to develop our own approach.
• Measuring biodiversity is a complex task, but several methods do exist.
• How companies affect and rely on biodiversity is an incredibly important issue, and as an asset manager, we are at the beginning of our journey on this topic.

The role of data

There is no way to discuss environmental, social and governance (ESG) issues without discussing the limitations of ESG data, and biodiversity is no exception. Biodiversity data from companies or investors tends to be disclosure-based, meaning it is not standardised, and is often patchy or incomplete. Moreover, most data points that exist are simple ‘yes’ or ‘no’ questions and tend to be ambiguous. For example, ‘does the company have a biodiversity policy?’, ‘does it audit its supply chain?’, or ‘does it have any biodiversity-related controversies?’. There is also no consensus approach to assessing risks or opportunities, but we view this as an opportunity as an active investment manager to develop our own approach, to tie together our technical knowledge of biodiversity with our investment approach, and even with our sustainable investment framework.

We see several trends in biodiversity data that we think will emerge in the near future:

1. Localisation – we think the focus will be a more granular view of a company’s activities and operation, such as physical locations of where a company operates and datasets which show biodiversity intactness, tree loss, etc. This data exists in specific locations, and can help in understanding dependencies on biodiversity, as well as the impacts a company has, but it needs connecting across the full supply chain to enable the level of visibility that companies and investors require to fully comprehend this risk.
2. System-level data, such as considering how a company pushes on planetary boundaries. As a systemic risk, it raises the question: how should a single company be put into the context of the overall planet? Planetary boundaries provide a framework to view not only biodiversity, but other important environmental thresholds, which often interlink. 
3. Internalising risk – the US government is going to be reflecting natural assets such as land, water, minerals, animals and plants on the nation’s balance sheet. Natural capital supports economic prosperity in similar ways to financial capital that is traded or buildings and machines that make up physical capital. Companies need to disclose a full suite of natural capital accounts in order to internalise current environmental and social externalities such as biodiversity.

Measuring impact

Measuring biodiversity is a complex (if not impossible) task. The natural world is a resilient, self-organising and hierarchical system. Corporations’ desires for stability and productivity are often at odds with the characteristics that make the natural world such a successful system. Identifying both how a business affects this system and its reliance on it has the potential to be an overwhelming challenge.

Several approaches to measuring biodiversity exist:

• Mean species abundance (MSA): This is a measure of intactness, comparing the actual abundance of native species in a given ecosystem relative to an undisturbed state. This is user-friendly as the output is one number with a comparison to put it into context, but it has its limitations too. There is no clear reference benchmark, and judgements must be made on what a pristine environment would be. An example is the Biodiversity Intactness Index (BII), determined by the Natural History Museum in the UK, which summarises the change in ecological communities in response to human pressures.¹
• Ocean Health Index (OHI): The OHI defines a healthy ocean as one that sustainably delivers a range of benefits to people now and in the future.² Ocean benefits delivered to humans are labelled ‘goals’within the OHI framework and are widely recognised for supporting human wellbeing and sustainable ocean ecosystems. The ten goals that comprise the global OHI were based on an extensive study by scientists, economists and sociologists.
• Tree cover change (TCC): Global satellite data can show tree cover gain and loss over the last 20 years. This is a powerful tool that can give us a number of insights, including natural habitat loss, destruction of carbon sinks and the threat to key biodiverse areas (e.g. the Amazon rain forest).

Theoretical approaches to measuring biodiversity also exist, and have existed for many years, but there have not been any efforts to measure these in practice. For example, Martin Weitzman lays a theoretical foundation for measuring the value of biodiversity: the diversity of one species and its distance from another.³ This is used to suggest an approach to preservation – essentially which species are of systemic importance when considering biodiversity at an ecosystem level rather than an individual-species level. Weitzman’s ‘Noah’s Ark Problem’ offers a methodology to preserving biodiversity within the context of constraints and trade-offs, using a ranking criterion to prioritise the importance of species.⁴ It pragmatically recognises that there is an opportunity-cost to all actions and therefore takes a mathematical approach to navigating this. The Weitzman paper was written 25 years ago, and yet there is still no sense as to how it can be used in practice. However, it does raise interesting questions and practical considerations. For example, from an economic standpoint, are certain species or natural services more important? Should we seek to prioritise these? Do they warrant a higher price as an externality? What does this mean if we consider that natural ecosystems are interlinked?

Investment implications

Given all the challenges discussed above, how do we plan to move forward? There is no simple fix or out-of-the-box solution, and adding more complexity to the problem does not appear constructive. However, how companies affect and rely on biodiversity is an incredibly important issue. As an asset manager, we are at the beginning of our journey on this topic. We require a sensible, clear and informative approach to this issue – knowing that it is a first iteration. We need a strong foundation that we can build on and add in complexity when appropriate, and we plan to build out a framework in which we can view how a company affects, relies on and provides solutions to lessen its impact on the natural world. We are working to ensure we understand where the trends are emerging, and to proactively move in the right direction, despite there not yet being a clear view as to what the end state of measuring biodiversity will look like.

Sources:

1. Natural History Museum, About the Biodiversity Intactness Index, accessed 19 April 2023: https://www.nhm.ac.uk/our-science/data/biodiversity-indicators/about-the-biodiversity-intactness-index.html
2. Ocean Health Index, Methodology Overview, accessed 19 April 2023: https://oceanhealthindex.org/methodology/
3. Weitzman ML, On Diversity*, Quarterly Journal of Economics. 1992;107 (2) :363-405.
4. Weitzman ML, The Noah’s Ark Problem. Econometrica. 1998;66 (6) :1279-1298.

Authors

Rebecca White

Global ESG integration lead

Niall Brennan

Co-Head of Responsible Investment Data Integration