Franklin Templeton and the University of Melbourne uncover inconsistencies in biodiversity investment decision tools
Despite the proliferation of biodiversity impact assessment metrics and tools for investors, there is currently no industry standard or formal guidance for selecting between or applying these tools.
Franklin Templeton has released an independent review of existing biodiversity impact assessment tools, conducted in partnership with the Melbourne Biodiversity Institute, University of Melbourne.
Despite the proliferation of biodiversity impact assessment metrics and tools for investors, there is currently no industry standard or formal guidance for selecting between or applying these tools. Titled Making money talk nicely: Biodiversity impact assessment for investors, the paper evaluated eight leading tools[1] tailored for financial institutions to examine the practical value of these metrics for investment decision-making, and to assess their capacity to meaningfully represent real-world biodiversity impacts. Below are key highlights from the paper:
Limitations of biodiversity impact assessment tools:
- The research found low overall agreement among tool outputs when assessing biodiversity impacts for companies in the S&P 500.
- When determining which ten companies in the S&P 500 had the greatest impact on nature, the tools did not agree on the ten most impactful firms, let alone their rank order.
- This was further compounded by a general lack of transparency in the methodologies used, providing limited opportunity for reproducibility, making it difficult to independently verify the reasons behind variations in results.
- Despite drawing on many publicly available datasets, methods are generally proprietary, hindering the capacity for peer review, independent validation, and sector-wide improvement.
- Unlike greenhouse gas emissions and impacts on climate, biodiversity is multi-dimensional and location specific. Tools generally lack sufficient spatial mapping of the direct operations and supply chains of companies needed to confidently quantify the biodiversity impacts of companies.
- Many tools rely on Life Cycle Impact Assessment (LCIA) methods to translate environmental pressures into expected reductions in species diversity and abundance, but these methods often rely on overly simplified cause-effect pathways and are not adequately spatially resolved to assess the impact of specific companies.
Pathways for improvement:
- There is an urgent need for increased transparency, reproducibility, peer-review, and standardisation of tool methodologies.
- Eventually, a finance sector standard and certification of biodiversity impact assessment tools is warranted.
- While gaining access to spatially mapped business activity data will remain challenging, there is a role for the International Sustainability Standards Board to set disclosure standards.
- A detailed, up-close analysis of firm-level risks and opportunities remains the most reliable approach, incorporating multiple dimensions such as company specific spatial data and mitigation efforts where available. Ideally, this approach should be supported by guidance from independent nature experts.
Implications for asset managers:
- There is currently limited ability to determine which tool provides the most accurate or “true” assessment because there has been no evidence of rigorous peer review of methodologies or skill-testing, in the way that climate models are tested by the scientific community.
- Substantial discrepancies between tools means that use of any individual tool to support investment decisions comes with uncertainty. Reliance on any single tool may lead to investment decisions that fail to adequately mitigate nature-related impacts and risks, or to appropriately reflect investor preferences.
- A holistic approach is recommended, making use of the various types of data that are available, ideally augmented with company-specific investigations, rather than relying on a single metric.
Jennifer Willetts, Head of Investment Sustainability Solutions, Franklin Templeton, commented: “Protecting biodiversity is fundamental to sustainable growth. We are proud to partner with the University of Melbourne to raise awareness on the limitations of current biodiversity impact assessment tools offered to the asset management industry. We hope this research highlights the potential risks associated with using a single metric to drive decision making or make claims about the biodiversity impact of a product. Our review uncovers that many of the existing tools lack the transparency and spatial precision required to effectively support investment decisions.”
She added, “Asset managers can play a pivotal role in shaping a financial system that consistently assesses biodiversity-related risks and impacts. By embedding biodiversity considerations into investment processes, we can better manage risks and opportunities, whilst building potential to help drive nature-positive outcomes. At Franklin Templeton, our Investment Sustainability Solutions Team is committed to equipping our investment teams with the insights and tools needed to navigate evolving sustainability priorities.”
“The analyses we were able to do with Franklin Templeton highlights the need for caution in utilising off-the-shelf tools and datasets for understanding companies’ impacts on nature. These findings also present an enormous opportunity for leadership towards nature-positive growth with integrity in the sector. Nature, finance and business experts now have the data available to understand why they need to work together to build scientifically credible, and ideally peer-reviewed tools, datasets and processes for understanding nature impacts of companies at high spatial resolution” said Brendan Wintle, Director of the Melbourne Biodiversity Institute, University of Melbourne.
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