Assessing Biodiversity-Related Risks in APAC

From COP15 in Montreal to COP28 in Dubai, the link between biodiversity and climate change has become increasingly apparent, with the focus now on determining methodologies for identifying and quantifying biodiversity risks.

Investors and companies can start measuring such risks by drawing insights from the approach taken in climate-change assessments, with one important difference. While greenhouse gases can contribute to climate change wherever they’re emitted, location matters for biodiversity. Companies with operations or assets located in biodiversity-rich areas may find themselves subject to heightened scrutiny. As with climate-change analysis, for biodiversity we can start by looking at a company’s direct operations.

Key sources of risk: land use, pollution and water stress

We analyzed companies in the MSCI AC APAC Investable Markets Index (IMI) to pinpoint those with direct operations in biodiversity-sensitive areas (BSA). We then looked at three sources of biodiversity-related risk for these companies: land use, pollution and water stress. For land use, we considered business activities that may involve clearing of forests or other biodiversity-rich ecosystems to make way for agricultural, mining or infrastructure expansion, for example. For pollution, we asked whether the company’s activities may result in land degradation or threaten endangered species due to their toxicity, particularly in areas considered prime for conservation. And for water stress, we looked at businesses requiring large quantities of water in water-stressed regions.

We found that 10% of those index constituents that had a presence in BSA were also engaged in activities with the potential to directly impact nature, with the materials, consumer-staples, energy, industrials and utilities sectors featuring most prominently. Over a quarter of the companies in the materials and energy sectors were inclined to disturb or affect biodiversity due to their land utilization and the discharge of harmful substances. Similarly, a third of the companies in the consumer-staples sector, characterized by high freshwater consumption, operated in areas highly significant for biodiversity.