France, having pioneered mandatory climate-risk reporting by investment firms, again breaks new ground by requiring biodiversity reporting in the same sector. 

  • France crosses a new frontier with decree requiring biodiversity disclosure
  • Decree incorporates SFDR and updates France’s climate risk reporting rule, article 173
  • Asset managers need to grasp a new metric: mean species abundance

The expectation is enshrined in a decree (executive order) known as article 29 and introduced in May as part of France’s 2019 energy and climate law. At the same time as demanding information on biodiversity risks, the decree incorporates the EU Sustainable Finance Disclosure Regulation (SFDR), while updating sustainability reporting rules in article 173 of the 2016 law on energy transition and green growth. In line with SFDR, another significant new obligation is disclosure of investment exposure to fossil fuels.

Since they must start disclosing in mid-2022, financial firms are scrambling to prepare. To satisfy the regulator, they need to state how they will identify, prioritise and manage climate and biodiversity risks because the decree omits the ‘comply or explain’ principle of article 173. 

Christophe Nijdam, director general of French institutional investor group Af2i, laments its absence: “With article 29, you have to comply with all of it, even if you  can’t comply,” he says. “Compared to article 173, most institutional investors will not be able to comply because this decree is more ambitious.”

Among the organisation’s greatest concerns is the lack of data and cost of obtaining it. “The increase in costs will be significant, especially for institutional investors, who already face extremely constrained budgets,” he says. Part of the cost burden he attributes to an “oligopoly” of “Anglo-Saxon” environmental, social and governance (ESG) data companies that have “cornered the data market”. This is likely to have a particularly weighty effect on France’s many smaller professional retirement funds.

The rest is the result of “onerous” data requirements. “Considerable human resources are required in order to produce the most reliable analysis possible,” Nijdam says. Thus, a more medium-term timeframe for reporting would be preferable, he suggests. 

Objections on data grounds will continue for some time in the financial sector – with some justification. In the next few years, asset managers and corporate issuers will need to grapple with a new metric, mean species abundance (MSA), when determining the net biodiversity gain or loss of a particular investment. That metric will become as common as carbon dioxide emissions are now when they evaluate impacts on climate change.

Biodiversity footprint tools, which generate an MSA score, are evolving as an important method to gauge biodiversity impacts and risks. Among them is the Global Biodiversity Score (GBS) developed for financial sector use by CDC Biodiversité, a research subsidiary of Caisse des Dépôts, France’s public sector investment body. 

“One of the main principles we emphasise about the GBS is that we evaluate pressures on a site and then translate them into impacts,” says Antoine Vallier, an expert at CDC Biodiversité. Pressures on wildlife listed by multilateral advisory body the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) consist of climate change, land use change, pollution, invasive species, and natural resource and exploitation. 

Depending on how granular the disclosure expectations of the regulator are, the data requirements could be massive. Vallier acknowledges this as a considerable challenge at this stage. “Very little biodiversity data exists in the first place; it’s rare to find data already available for particular sites.” However, evaluating sites using information about pressures on wildlife can help build a good picture of the potential impacts of a project, he says. 

Other challenges include, for example, setting a baseline for the appropriate number of species within particular ecosystems, as well as avoiding double-counting impacts in a particular region. A project investigating biodiversity impacts in a river estuary, for instance, might unwittingly include the effects of an installation upstream. 

However, some resources do already exist, such as databases for selecting or avoiding new sites. The International Union for the Conservation of Nature (IUCN), for instance, has constructed a compendium of biodiversity ‘hotspots’ – biologically rich areas. Examples include the entire Indo-Burma region, comprising Cambodia, Laos, Myanmar, Thailand, Vietnam and parts of southern China. 

In addition, investors can turn to broader observations of historical activity to support decision-making and reporting. 

What is more, companies have already started to report, according to a study by the Climate Disclosure Standards Board . Analysing environmental disclosures by the largest listed EU firms in 2020, it found 46% had referenced biodiversity, and 22% had provided disclosure on deforestation. A new European Commission project, entitled Align, which intends to standardise accounting approaches to nature, may help improve disclosure frequency. 

According to Nijdam of Af2i, however, investigations into wildlife are a far cry from the concerns of France’s biggest institutional investors, whose assets amount to more than €3trn. 

Demand for biodiversity information, he suggests, is driven by retail investors in specialist mutual funds. However, if article 29 is intended to alter approaches to investment, he predicts only a gradual response by big insurance companies and pension funds. 

Mean species abundance – the new metric

In 2013 Agence Française de Développement (France’s development agency) set about calculating a new metric for its investments – mean species abundance – to assess wildlife impacts. 

In the early 2000s, management of Wolong lake in Liaoning province, China, had led to an increase in water levels, destroying habitats and causing a significant fall in bird populations. The agency stepped in, funding the Wolong Lake Restoration Project to regenerate habitats at this important migratory stopover site. This meant building a dyke to allow the differentiated management of water levels, developing a water reservoir at the lake’s northern side and a wetland on its southern side. 

Between 2014 and 2018 scientists took direct measurements of biodiversity at the site, providing primary data to obtain a Global Biodiversity Score (GBS), a measurement developed by CDC Biodiversité. The aim was to state the mean species abundance (MSA) before and after the project to assess its impact on wildlife. This involves comparing MSA in the observed ecosystem with MSA in an undisturbed ecosystem to obtain the norms. 

To maintain reasonable costs, scientists restricted themselves to eight keystone bird species that help hold the ecosystem together. By the end of the four-year period, they noted an increase from 2% MSA to 8% MSA, allowing them to evaluate the benefits of expanding the project to the rest of the lake. 

Among limitations they noted in the study are the time lag between ecological restoration project and the recovery of species populations; definition of the 100% undisturbed state; and definition of global population for already endangered species, such as the Siberian crane.

Elisabeth Jeffries