Finance

This project is part of the Integrating Finance and Biodiversity (IFB) Programme, funded by the Natural Environment Research Council (NERC) and Innovate UK. The vision is to build national capability bridging scientific, finance, policy and third sector communities, harnessing and catalysing world-leading science to enable the greening of finance for nature, and mobilisation of capital for nature recovery. This aligns with the goals of the 2023 UK Green Finance Strategy and Environmental Improvement Plan and helps set the global agenda.

This project evaluates the extent to which Environmental and Social Governance can act as a positive force for managing the double materiality of biodiversity related risks: 1) risks that nature poses for returns in the financial sector and 2) the risk of negative impact on biodiversity from movements of capital. The is providing guidance, evidence and analysis of ESG dataset, especially its biodiversity key issue at multiple levels: key issue construction; the role of biodiversity key issue in ESG structure; investors’ decision making based on their ESG preference; the predictability on future stock returns of biodiversity in ESG; the reaction of other financial market participants including institutional investor and sell-side analysts, to discuss whether ESG can contribute to the management of biodiversity-related risk and whether it drives capitals to correct area regarding biodiversity matters.

The Dasgupta Review (Dasgupta 2021) shows that the economy and the financial sector are embedded in and dependent upon the biosphere: nature and biodiversity. To be sustainable and respect planetary boundaries, economic development and the allocations of capital facilitated by the financial sector must therefore reflect this embeddedness and account for the comprehensive (including natural capital) wealth. With this ultimate purpose in mind, many mechanisms have been deployed in the financial sector. For example, the Taskforce on Nature-related Financial Disclosures (TNFD) is now being developed to guide the disclosure of information on the financial implications of nature-related risks. Analysts and investors who want to avoid biodiversity and other nature-based risks or engage in environmental conservation use ESG as a key resource to evaluate portfolios. However, past research, including our own, shows evidence that ESG does not appear to achieve its purpose.