While there is no standard market approach to biodiversity footprinting, the Potentially Disappeared Fraction of Species (PDF) is a commonly used metric that indicates a company’s potential contribution to global species loss, [1] and could be used for reporting on the TNFD’s Core Disclosure Metrics.[2] We calculated the PDF for each company within each index based on the pressure caused by a company related to its land use, greenhouse gas (GHG) emissions and water consumption from its direct operations.[3] It’s important to note that a company’s contribution to global species loss is driven not just by the extent of the pressures but also where the pressures occur. In biodiversity-sensitive regions, land use and water consumption tended to have higher impacts on biodiversity. We factored these location-specific conditions into our biodiversity footprint metrics.
We found that the constituents of the MSCI Emerging Markets Latin America Index had the highest biodiversity footprint per enterprise value including cash (EVIC),[4] and clearly exceeded the global benchmark of the MSCI ACWI IMI. In contrast, biodiversity loss by the constituents of the MSCI USA and MSCI Europe Indexes was relatively low.[5]
Total global PDF per total EVIC
What is driving biodiversity loss?
The drivers of biodiversity footprints differed by region. We found that land use was the dominant pressure category in Latin America (47% of total PDF on average), while GHG emissions dominated in Asia Pacific (78%) and water consumption in the U.S. and Europe. These finding resonate with the biodiversity sensitive nature of many Latin American regions. Operating factories or plantations in the species-rich Amazon or Cerrado regions, for example, creates greater pressures on biodiversity than physical assets in urbanized areas in Europe or the U.S. Investors who want to engage with companies in their portfolios might focus on related pressure categories as they seek to lower negative impacts from their investments.
Intensity-based PDF analysis
Normalizing biodiversity footprints by revenues could provide further insights on a company’s relative contribution to species loss, focusing on the company fundamentals rather than market valuation. How many species might be at extinction risk for every USD of revenue generated by the constituents in each index? As shown in the exhibit below, companies in Latin America had the highest average footprint intensity (0.15 PDF/USDm revenues), followed by those in Asia Pacific (ex. Japan), both exceeding the global benchmark (MSCI ACWI IMI). Conversely, companies in the U.S. and Europe were less exposed to causing species loss in relation to their revenues generated, according to our PDF metric.
What is the biodiversity footprint per USD generated?
Sector-specific PDF analysis
Our analysis showed the contribution to potential species extinction also varied significantly by sector. Across all indexes, we identified the materials, utilities, energy and consumer-staples sectors as key drivers of high biodiversity footprints.[6] The land-use-, energy- and water-intensive operations of companies in these sectors generally caused greater impacts.
The interactive exhibit below compares index representation (number of sector peers vs. total index constituents) with total contribution to potential species loss by sector. While only 16% of index constituents in Latin America were in the materials sector, they accounted for 70% of the total index footprint. We found comparable results for materials companies in other indexes. The utilities sector’s footprint also stood out across indexes. For instance, utilities companies in Asia Pacific (ex. Japan) contributed to 35% of the index footprint while representing only 5% of index constituents. In contrast, sectors such as financials, information technology and health care showed lower contribution to species loss compared to their sector representation. This may be associated with lower GHG emissions and resource use within direct operations and limited presence in biodiversity-sensitive areas.
Index representation vs. biodiversity footprint by sector
Biodiversity footprinting is a novel concept for investors, yet promising metrics are emerging that can help them identify which companies, sectors or regions contribute most to biodiversity loss, and which drivers are most attributable to these impacts. These tools are expected to further improve as more robust data becomes available and modeling innovation takes place, providing more data to use for benchmarking, reporting or identifying key sectors or companies for engagement.