Integrating finance and biodiversity for a nature positive future (BIO-ESG) Phase II

Summary

BIO-ESG Phase II focuses on developing a comprehensive measure of biodiversity risk, broadening the scope of the relationship between biodiversity exposure and capital markets to a global perspective, and integrating various types of nature-based risks into a unified framework to examine their interactions and different effects on capital markets.

Dates
2024-2025

Academic lead
Ben Groom

Funder
Natural Environment Research Council (NERC) UKRI

More information

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.

The BIO-ESG Phase I explored the gaps between the financial system and biodiversity, and the emerging outcomes of this work have prompted NERC to provide further support for Phase II. This Phase II project aims to offer methodological advances in textual analysis to create a novel biodiversity exposure metric at a worldwide level, explore the relationship and mechanisms between biodiversity and the financial system, and further put climate change, biodiversity, and natural disasters into a unified framework to see the interactions between nature-based risks. The work is critical in advancing our understanding of how to align economic activities with the urgent need for biodiversity conservation and sustainable resource management in the face of global environmental challenges.

See IFB news story here

Figure 1.

Why it matters

The growing awareness of climate change and biodiversity conservation among policymakers and researchers has led to increased commitments and actions to protect and restore global ecosystems (e.g., the Kunming-Montreal Global Biodiversity Framework (GBF); EU’s Sustainable Finance Action Plan (SFAP); the Taskforce on Nature-related Financial Disclosures (TNFD)). However, existing literature shows little evidence on to what extent biodiversity risk, both transitional and physical, is really taken into account in the day-to-day decision-making of firms, and how nature-based risks affect measures of financial risk and return. By developing a novel, global biodiversity exposure metric, we address a critical gap in the current literature and provide a more accurate tool for assessing corporate biodiversity risks. This metric will enable researchers, investors, and policymakers to better understand how biodiversity concerns are reflected in corporate strategies and financial markets across different regions and sectors. Besides, exploring the relationship and mechanisms between biodiversity and the financial system is crucial for developing effective strategies to align financial flows with biodiversity conservation goals and for identifying potential market inefficiencies or mispricing of biodiversity exposure. Furthermore, by integrating climate change, biodiversity, and natural disasters into a unified framework, this project will provide a more holistic view of nature-based risks and their interactions. It is essential to comprehend the complex interplay between various environmental challenges and their cumulative impact on financial systems and corporate performance.

 

 

 

KEY PAPER: Biodiversity Confusion: The Impact of ESG Biodiversity Ratings on Asset Prices

Working paper (2023)

View paper

Project team

Ben Groom
Dragon Capital Chair

Chunying Guo
Postdoctoral Research Fellow

Lewis Grant
Federated Hermes

Wei Xin
Assistant Professor in Finance

Chendi Zhang
Professor of Finance

Partners and funders