Integrating Natural Capital and Biodiversity in the Investment Process
Six Recommendations for the Global Investment Industry
New York City, United States 01 Nov 2022
A new report published today by CFA Institute, the global association of investment professionals, aims to introduce investment professionals to the key concepts of natural capital and biodiversity in the investment process.
The report, Integrating Natural Capital and Biodiversity in the Investment Process, reviews economic, investor, and societal implications of natural capital issues, and, through four case studies on diverse natural capital issues, illustrates some of the wide-ranging facets that investors will need to understand to properly integrate an understanding of natural capital issues in their decision making.
Andres Vinelli, Chief Economist, CFA Institute comments:
“Natural capital issues such as climate change, mineral use, and water rights are often hard to hedge or diversify away. Investment professionals need to understand how to value natural capital if we are to fully take account of the risks and opportunities that are affected by natural systems. We are likely to see policy makers put in place standards and regulations that place a greater emphasis on disclosing natural capital issues. Investors must be ready with a good understanding of the issues and methods for measuring and managing these natural resources if they are to develop their own frameworks for properly integrating natural capital and biodiversity risks in the investment process.”
The report’s case studies consider the Ocean as a provider of ecosystem services; the Cattle Industry as it pertains to land use; Vultures as a natural resource in the management of pathogens; and Carbon Capture, Utilization, and Storage Power Plants as an emerging technology. The report also discusses the challenges of “green growth,” the emerging issue of degrowth, and highlights key educational resources available to help investment professionals begin to develop their own decision frameworks for properly integrating natural capital into the investment process.
The report concludes with six recommendations for the investment industry:
- Increase education. Natural capital is a new topic to many investors. CFA Institute calls on the investment management industry to support staff training and development in systems thinking and natural capital issues. Financial professionals will need to understand the broader implications of an interconnected world for estimating and managing risks.
- Enhance natural capital expectations in analyst reports. Natural capital touches every sector and every industry in the market. CFA Institute recommends that investment professionals account for natural capital in their risk analysis. The more that value is reflected in analyst reports, the more investors can place a proper value on natural capital.
- Increase development and disclosure of natural capital metrics. Natural capital covers many natural systems and ecosystem services. Specialized data for each of these areas already exist to some extent but often are not presented in investor-friendly ways or do not lend themselves to easy inclusion in a valuation model. CFA Institute encourages investors to work with standard setters and policymakers to expeditiously develop standard disclosures for natural capital to better assess investment risk and opportunity.
- Bring in experts. The ecosystem services that make up the natural capital landscape have been well researched for decades by scientists and professionals around the world. CFA Institute recommends that investment managers partner with these experts and bring them into the analysis process where appropriate and practical. Such expertise cannot be expeditiously replicated in house by investment managers or analysts and can offer a fresh perspective on what is practical and possible when evaluating natural capital investments.
- Engage with companies on physical and transition risks around natural capital issues. CFA Institute believes investors should engage with issuers to ensure that climate data, scenario analysis, and related disclosures are sufficiently thorough to support robust climate risk analysis in the investment process.
- Advocate for policy that complements investor efforts. CFA Institute believes investors need to continue to meet with policymakers to ensure that they have the tools and data they need to support the efficient allocation of capital and that they can account for natural capital concerns.
Notes to Editors
The CFA Institute Certificate in ESG Investing supports individuals who are interested to learn how to analyze and integrate material ESG factors into their daily investment analysis practice, as well as individuals interested to improve their understanding of ESG issues more broadly. To date, more than 25,000 individuals have registered to study for the certificate.
About CFA Institute
CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials. The organization is a champion of ethical behavior in investment markets and a respected source of knowledge in the global financial community. Our aim is to create an environment where investors’ interests come first, markets function at their best, and economics grow. There are more than 190,000 CFA charterholders worldwide in more than 160 markets. CFA Institute has nine offices worldwide and 160 local societies. For more information, visit www.cfainstitute.org or follow us on Linkedin and Twitter at @CFAInstitute.