How the loss of biodiversity impacts companies and investors: Q&A with Sylvain Vanston of MSCI ESG Research

Among the questions at the COP15 biodiversity conference underway in Montreal is how to align both public and private investment with the goal of protecting nature.  

MSCI Communications spoke with Sylvain Vanston of MSCI ESG Research, who is attending COP15, about what the global imperative to halt biodiversity loss and boost funding for conservation means for companies and investors. 

More than half the world’s economic output depends on nature and yet it seems that companies are only now starting to account for nature-related risks and opportunities. What do you hear from investors with whom you speak? 

Part of the difficulty we hear stems from the absence of a consensus on how to measure the financial impacts of biodiversity loss and risks such as deforestation. Unlike with climate change, investors don’t have comparable tons of carbon to work with; there’s no ‘nature budget.’ It also hasn’t been easy for companies or investors to source data on nature-related risks within their businesses or portfolios. The risks of asset stranding are less straightforward, while the upside of nature-based solutions are equally hard to evaluate.  

Like most observers, I anticipate we’ll start to see the picture change in the coming year with the publication of the disclosure framework being developed by the Task Force on Nature-related Financial Disclosures. The TNFD is the nature equivalent of the Task Force on Climate-related Financial Disclosures, which has standardized reporting of climate-related financial risk. We are also starting to see more institutional-scale data on biodiversity risk coming into the market. 

MSCI ESG Research reported this week that nearly 11% of the roughly 2,900 companies in the MSCI ACWI Index could be contributing directly or indirectly to deforestation. What is the impact those companies are creating? 

Deforestation is to biodiversity what thermal coal is to climate: It has no space in any nature-positive scenario. Forests play a vital role in sustaining a multitude of species, as well as in the production of food and medicine. They provide clean water and limit erosion and effects from floods. Deforestation also contributes to the destruction of natural carbon reservoirs. The world’s forests absorb about one-a-half times the annual emissions of the U.S. every year. In many ways, addressing deforestation risk is the lowest hanging fruit in any biodiversity strategy. 

What role do you see policy and regulation playing in leading companies and investors to take nature-related risks more seriously? 

Both policy and regulation play a critical role. The European Union, for example, has just agreed to ban the sale of products if made or based on land that was deforested after Dec. 31, 2019. We’ve identified more than 140 companies in the MSCI ACWI Index – about 5% of the total – with direct operations in deforested areas or that tie to production of commodities such as palm oil, soy, beef or timber, and another 244 that may be contributing indirectly to forest degradation through their supply chains.  

We’re also starting to see regulators in the EU and elsewhere mandate disclosure of nature-related risk, which is likely to add to pressure on companies from shareholders and other stakeholders to detail their dependencies. Depending on what countries agree to here at COP15, we could also see pressure on companies to address biodiversity risk in the context of national targets. 

MSCI has developed tools to help investors screen for biodiversity risks in their portfolios. What are those tools designed to measure? 

We’ve introduced two screeners to help investors analyze biodiversity risks. The first identifies companies that have physical assets located in areas of healthy forests, species-rich areas or other places of high biodiversity significance. The second pinpoints companies exposed to deforestation-related risks, including those that may be contributing either directly or indirectly to deforestation.  

Both metrics add to other measures and analytical tools from MSCI that are designed to help companies and investors address nature-related risks, generate positive impact through things like sustainable agriculture, and report on progress. 

The U.N. Environment Programme said recently that private sector investment in sustainable supply chains and other nature-based solutions needs to increase “by several orders of magnitude” from the current USD 26 billion a year. What would it take to make that happen? 

That’s a question on the table here at COP15. There’s a real push to get countries to up their financial pledges for environmental conservation. Such commitments could spur more alignment of investment portfolios with global biodiversity goals and add to pressure on companies to improve the sustainability of their supply chains. For companies and investors, meanwhile, a good and relatively simple starting point is to address deforestation. 

 Please join MSCI on January 26th at 4pm GMT/11 am EST to go deeper on biodiversity and other ESG and climate trends to watch in 2023. The event will be hosted virtually but advance registration is required. For more information and to register, click here. 

This information is provided as is and does not constitute legal advice or any binding interpretation. Any approach to comply with regulatory or policy initiatives should be discussed with your own legal counsel and/or the relevant competent authority, as needed.