Pressure switch: why corporates should disclose their contribution to pressures on biodiversity, not aggregated outcome metrics

Central banks, financial regulators and supervisors increasingly recognise that biodiversity loss creates financial risks. Their growing interest in these risks has expanded the market for commercial providers of biodiversity footprints, which are designed to measure potential impacts on nature through a single aggregated metric. However, current biodiversity footprinting methods are highly model-dependent and often unable to distinguish between the best- and worst-performing companies in the same sector. This new paper in the Land and Ocean series explores the challenges of relying on aggregated biodiversity footprints, arguing that practitioners and policymakers should be cautious in using and interpreting them.

Policy implications

There is a broad scientific consensus that no single metric can capture the multiple dimensions of biodiversity. Aggregated biodiversity footprints are limited by the metrics they are expressed in, the underlying models they rely on, and the modelled company and financial actor pressure data that are often fed into footprinting tools. As a result, greater use of aggregated biodiversity footprints threatens to produce misleading signals for financial practitioners, who sometimes treat these metrics as proxies for nature-related transition risks.

Instead of waiting for improved metrics, policymakers should require more easily understandable, verifiable and actionable pressure disclosures. These disclosures would address companies’ contributions to the direct drivers (pressures) of biodiversity loss: land-/sea-use change, greenhouse gas emissions, direct exploitation of organisms, pollution and the introduction of invasive species.

Nonetheless, improved disclosures and the successful management and supervision of nature-related financial risks are far from sufficient by themselves. Addressing biodiversity loss and environmental degradation will require moving beyond the risk paradigm. Rather than focusing solely on risk identification and risk management, practitioners and policymakers should incorporate environmental objectives more directly into financial policy and financial decision-making processes.

This paper is part of the CETEx Discussion Paper Series: Land and Ocean, which aims to support financial and economic policymakers as they contend with and make considerations for environmental degradation issues, in addition to climate change. The papers have been written and peer-reviewed by leading experts from academia, think tanks and central banks and are based on cutting-edge research. Check here for details of other papers in this series.

DOI: 10.21953/researchonline.lse.ac.uk.00138285