Flora, Fauna, and Finance: Assessing Biodiversity Risk in Investment Portfolios

Abstract

Biodiversity loss poses significant risks to investment portfolios, yet these risks remain largely underexplored in financial decision-making. This paper highlights the need for the development and use of robust metrics to measure the impacts and dependencies of firms on biodiversity. We find that current approaches to measuring a firm's impact on nature suffer from several shortcomings. These include incomplete data on firm activities, supply chains, and natural systems. In addition, many impact modeling and assessment methodologies are inconsistent, and in some cases, incoherent. There has been limited testing of the reliability of nature impact and dependency assessment tools in real-world investment settings. Finally, there is a lack of understanding among business and finance actors about how these tools work and how to interpret their outputs. We propose integrating spatially explicit and ecologically grounded metrics into firm valuation models to improve the assessment of biodiversity-related risks. This approach enables investors to identify underpriced risks and generate returns exceeding benchmark performance by aligning portfolios with sustainability goals. By bridging the gap between ecological science and finance, we provide actionable insights to reduce risks and thereby enhance portfolio performance while addressing critical biodiversity challenges.

Keywords: JEL classification: G11, G32, Q57 Biodiversity, Environmental risk, Risk management

JEL Classification: G11, G32, Q57