How to analyse nature-related risks and opportunities
Our second primer in the series explores the challenges of nature data and Schroders’ approach.
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With more than half of global GDP highly dependent on the natural world, the investment industry has acknowledged that nature loss creates significant operational, regulatory, litigation, and reputational risk for companies and investors. On the other hand, nature-related opportunities could unlock significant capital, with the World Economic Forum estimating that shifting to nature-positive practices could unlock $10.1 trillion in business opportunities by 2030. However, identifying and analysing these nature-related risks and opportunities in financial markets presents considerable challenges due to the complexity, variability and availability of nature data.
To address this challenge, Schroders has created a model for publicly listed companies that provides a comprehensive assessment of their nature-related impacts and, in turn, potential for investment-related risks and opportunities. Building on our flagship proprietary model, SustainEx™, NatCapEx quantifies negative and positive externalities on nature (i.e. impacts that have not yet been priced by society) using a dollar value. The output is expressed as a percentage of company sales. The structure of the NatCapEx model, rests on four principal pillars:
- Business Model Contribution. Attributes the global economic cost of nature loss to individual companies based on the activities they undertake.
- Geographic Contribution. Acknowledging the importance of location-specific analysis within the topic of nature-related impacts, attributes a greater portion of the ecosystem service loss cost based on a company’s geographical footprint.
- Management Adjustment. In the case where a company is proactively managing its nature-related impacts through policies and governance, reduces the company’s overall cost to nature.
- Avoided Nature Loss. In the case where a company is providing solutions in the form of products or services that are helping contribute to a nature positive future, provides an uplift based on the societal benefit of the relevant revenue generated.
This analysis can be easily interpreted and integrated into investment contexts, enabling a forward-looking view of companies most exposed to the risks and opportunities of nature loss which could crystalise as investment risk in the future.
Using NatCapEx, we identify ‘Nature Improver’ companies – i.e. those that are currently responsible for the most significant nature-related impacts but managing these impacts more effectively than their peers. We find that, when looking at financial metrics such as total shareholder return (TSR) and earnings growth, these Nature Improver companies outperform the benchmark and ‘Laggard’ peers - those which are highly exposed, but poorly managing their impacts. We believe this picture could be attributable to several factors. Companies which are:
- Managing their most material sustainability-related risks are likely to be better run overall, and therefore able to deliver competitive returns.
- Acting to reduce impacts and dependencies on nature (e.g. using fewer natural resources) can achieve co-benefits such as improved operational efficiency or reduced costs.
- Mitigating nature-related risks through strong management may already be avoiding costs associated with transition risks, such as fines or regulatory restrictions, albeit these market and policy interventions are still nascent.
Analysing these trends in TSR and earnings growth supports our view that considering companies’ nature exposures and proactive management of such exposure, quantified by NatCapEx, can provide a valuable input into investment analysis.
The full paper is attached as a pdf: How to analyse data-related risks and opportunities
For more information about why investors need to pay attention to natural capital and biodiversity, read our first primer here. This primer is accompanied by our Natural Capital & Biodiversity Cheatsheet, which outlines key concepts and frameworks in more detail to support understanding of this topic.
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