Last week, I wrote about the ECB’s warning that nature-related risks are flying under the radar for financial institutions. A recent report from ISS STOXX corroborates this notion, finding that nature-related risks are underpriced. The report analyzed risk exposure in a test portfolio. The authors summarize their takeaways from the portfolio analysis, stating:
“1. Nature is financially material today, not just in the long term. Within the analyzed universe of companies, more than half of revenue exposure depends on provisioning ecosystem services such as freshwater and raw materials. When these systems deteriorate, operational disruptions, asset damage, and rising mitigation costs can rapidly translate into financial losses.
2. Biodiversity impacts are highly concentrated in land-use activities. Over 99% of the assessed biodiversity impact stems from land transformation and land occupation. This extensive biodiversity impact from land transformation and occupation reveals significant upstream risks embedded in supply chains for commodities such as palm oil, timber, and rubber.
3. An asset-level analysis of 306 major farm assets demonstrated that water stress, flooding, and wildfires are the three major climate- related hazards that could generate financial risk in the test portfolio. This finding, in conjunction with the nature assessment, creates notable concern, as the test portfolio companies’ revenues highly depend on water ecosystem services.”
Despite growing calls to incorporate nature-related risk management into sustainability reporting. The ISSB recently declined to develop standalone nature-related risk reporting standards. As nature risks continue to manifest more frequently, we’ll see if the ISSB revisits its position.
Our members can learn more about nature-related disclosures here.
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