Q&A with Christian O’Dwyer, Sustainable Finance Solutions Product Manager at Bloomberg
More and more investors seek to consider nature-related risks in their investment decisions. And as reporting demands rise in tandem with the adoption of new disclosure standards, financial market participants are on the hunt for increasingly specific and consistent biodiversity and nature-related data. Christian O’Dwyer, who focuses on natural capital and biodiversity in his role as Sustainable Finance Solutions Product Manager at Bloomberg, explains the complexities of gathering the data investors need.
Responsible Investor: What are investors looking for regarding biodiversity and nature-related data?
The market wants to understand if a company is operating in high-risk sectors, high-risk locations or sourcing high-risk materials through its supply chains, and if so, whether traceability and certification are in place. It also wants to know what companies are reporting in terms of their own governance processes, metrics and targets. Asset managers want to distribute this information throughout their organisation so that it doesn’t just sit within the ESG team, and is integrated into investment decision-making, risk management practices and product creation, where focus is intensifying.
Investors are calling for transparency, particularly in source data and methodology. If an ESG analyst suggests to an equity portfolio management team that they divest from a company, it’s more difÏcult to unpack why that should be executed if the recommendation is based on information drawn from multiple layers of modelling.
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RI: Why is it so complicated to collect and measure biodiversity-related data?
Looking at climate as an indicator of how complex data collection can be, there’s Scope 1, 2 and 3 data. Even with the focus on climate in recent years, of the more than 15,000 companies on which Bloomberg holds ESG reported data, in fiscal year 2022, just less than a third reported Scope 3 emissions. Then there are emissions reduction targets, which can be absolute or intensity-based.
Investors also need to examine how a business intends to achieve its targets through its transition plan and ask whether it is on track to reduce its emissions.
When considering nature, issues like land use, water-stress and plastic waste also potentially need to be assessed in the same level of detail. Investors must therefore multiply their data gathering efforts to generate the level of high-quality information they need to arrive at robust conclusions.
The available data sets covering nature-related issues can be sparsely populated. Managers often need to rely on proxies, estimates and other types of data to fill the gaps. However, understanding what a specific company is doing in a specific place is important and requires not just location-based data, but other metadata particular to those assets.
The market is realising the difÏculties of using one-size-fits-all metrics that pinpoint hotspots.
RI: How are the nature-related data sets available to investors evolving?
The market is realising the difÏculties of using one-size-fits-all metrics, such as biodiversity footprints like Mean Species Abundance or Potentially Disappeared Fraction that pinpoint hotspots.
It is moving toward getting as close as possible to company and issuer-level data around assets and supply chains – this allows investors to differentiate between businesses conducting similar activities in similar locations.
Investors want specific data encompassing, for example, product composition, asset location and supply chain. We’re seeing a shift away from relying on heavily modelled data, which, as I mentioned, can lack transparency.
Overall, high-quality, investment- grade data should be based on sector-specific risks, location-specific risks, supply chain-based risks and risk mitigation.
RI: What will help facilitate access to quality data?
The finance and data industries must collaborate with partners they perhaps haven’t traditionally worked with – such as non-governmental organisations, academic institutions and the public sector – and combine data sets.
Bloomberg’s collaboration with the Natural History Museum with the objective to combine the Biodiversity Intactness Index developed by the museum with Bloomberg data sets offers an example of this sort of initiative.
Simultaneously, asset managers must convey the importance of disclosure and nature-related risk to their portfolio companies. Increasingly, they are applying a financial materiality lens to the topic.
The more tangible examples there are of poorly managed risk leading to controversies, fines and impacts on the share price, the more likely it is the market will pay attention and act. And there have been some high-profile case studies. BloombergNEF highlighted 10 examples in the report When the Bee Stings: Counting the Cost of Nature-Related Risks where leading companies have incurred serious financial impacts.
RI: What impact has the TNFD had on reporting, and how is the regulatory landscape evolving to support the collection of high-quality data?
As a result of the Task Force on Nature-related Financial Disclosures, financial institutions are now actively engaging in risk management, reporting and disclosure. The TNFD framework was launched in 2023, a year of broader sustainability standard setting. Investor-led engagement initiative Nature Action 100 gathered momentum and the EU passed the EU Deforestation Regulation.
This year, early adopters of TNFD are starting to report and the implementation of the EU’s Corporate Sustainability Reporting Directive, which mandates reporting, and International Sustainability Standards Board standards are encouraging related disclosures.
Increased regulation in the biodiversity space has contributed further to the market demand for high-quality investment-grade data sets, and various standards are collaborating with the goal of interoperability.
RI: How does Bloomberg use data from the Biodiversity Intactness Index?
The Natural History Museum has built a geospatial data layer that maps the world’s landmass and estimates biodiversity intactness on a percentage scale, where 100 percent represents fully intact natural biodiversity. In a nutshell, the BII measures the degree to which human activity has impacted terrestrial biodiversity in a specific area. It uses the museum’s proprietary PREDICTS database as an input and provides scientifically tested, peer-reviewed data.
Bloomberg has combined BII with Bloomberg data sets on corporate structures and asset locations, to allow users to see which companies are operating in proximity to intact ecosystems, or operating in areas where biodiversity is being lost over time.
We’re currently focused on integrating the data within existing analytics, and to enable asset managers and banks to combine it with other data sets to answer more detailed questions about a company’s nature-related risk profile and assist their own TNFD reporting. Future use cases might also include identifying companies operating in locations where the index has improved over time, and potentially areas where a business is intentionally helping to restore biodiversity.
Increased regulation in the biodiversity space has contributed to the market demand for high-quality investment-grade data sets.
RI: Looking ahead, where should the industry focus?
Issuer-specific data collection, transparency and engagement from the buyside and the sellside to drive disclosure will be key to providing investors with access to reliable data and insights to account for climate-related risks and opportunities.
This article was reproduced from Responsible Investor.