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Biodiversity threat undervalued in ESG, finds S&P

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The report from the international credit ratings agency argues that biodiversity often has a low profile in ESG assessment and is sometimes absent. The reason, it suggests, is that nature-based metrics are harder to collect and report than those relating to greenhouse gases. Also, supply chains are long and complex, there is confusion about definitions and a lack of a standardised reporting methodologies.

Although biodiversity is creeping up the agenda, it argues, the term ‘climate change’ is still used far more frequently in reports than ‘natural capital’ or ‘biodiversity’.

The report proposes that resources and natural capital should be included in accounting. Nature-focused accounting would calculate the total input of natural capital across the value chain of a product, versus the outputs of greenhouse gas emissions, pollution, and waste 

The World Economic Forum, says the report, estimates that more than half of the world’s GDP is "moderately or highly dependent on nature and its service". Yet official estimates indicate that approximately a million of the earth’s eight million plant and animal species are threatened with extinction. 

Commercial fishing is causing extreme harm to marine biodiversity, driving many fish species to near extinction. There is also proven connection between habitat loss and the risk of emerging infectious diseases, especially those transferring from animals to humans.

The report also reveals that the production of palm oil, beef, and soy is responsible for up to 80% of the 10 million hectares of natural habitat lost annually to deforestation. Yet habitat and natural capital loss issues are "not on the ESG radar" of most investors. The less direct relationship between corporate action and biodiversity loss, it suggests, compared to that with greenhouse gases, has helped obscure the risk.

It calls for "targeted action to reduce deforestation linked to soy, beef, and palm oil," as a key part of government and corporate efforts. There should be more robust supply chain monitoring, support for sustainable agriculture, universal accounting standards for biodiversity and better use of marginal, already deforested land.

Michael Wilkins, senior research fellow and managing director of sustainable finance at S&P Global Ratings, said: "The complexity of nature means that capital markets are not yet truly aware of their growing exposure to biodiversity loss. In theory, nature-focused accounting can raise awareness of our use of nature for productive purposes."

He added: "We are starting to see tentative signs of progress to protect nature — both at a national level and among corporates. However, any meaningful halting or reversal of biodiversity loss will require us to completely reassess our interactions with nature."

The report reflects a discussion held by the S&P Global Ratings Sustainable Finance Scientific Council on 11 March 2021.

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