“Biodiversity: the new playing field for ESG assessment” – A look at the latest Deutsche Bank CIO Special Report

Date: 29 Mar 2022

Silvia Ricciardi

The latest Deutsche Bank CIO Special Report looks at likely future trends in ESG assessment and why biodiversity will be of fundamental importance.

Biodiversity: the new playing field for ESG assessment, the latest Deutsche Bank CIO Special Report, covers topics such as current ESG assessment issues and score sustainability, corporates’ impact on ecosystems and the different types of nature-related risk, the double-materiality of nature loss and how we can measure its impact, the green paradox and making the leap to a sustainable growth path.

The report defines ESG investing as “a conscious decision to take environmental, social and governance criteria into consideration in regards of investment decision-making. One can now say that ESG investing has become mainstream, accounting for more than 36% of total funds under management globally. However, while the concept of ESG spotlights three specific pillars to today’s business, the transition to fully sustainable business practices will require a yet-broader approach to ensure we can support the planet’s health for generations to come”.

“Investors consider ESG in their decision-making for different reasons. Societal expectations (e.g. tangible impact on risks), regulatory requirements, and personal beliefs are amongst the top reasons for considering ESG. From an investor’s point of view, one can say that ESG is perceived as an answer to the fundamental changes in society, regulation, and personal beliefs that we have seen in the last years. However, ESG is still fundamentally an investment concept. This means that “traditional” measurements (e.g. return and risk) are still important.” [more information can be found in the ‘Current ESG perceptions‘ section of the report]

“One of the key enablers for ESG investing is data. There are a number of specialized agencies who aggregate and analyse thousands of data points related to ESG factors, often producing ESG ratings, or scores to compare companies’ ESG performance relative to peers in their sectors. They do this by analysing disclosed data or providing expectations of present and future projections. While the existence of such ESG ratings and scores is critical for creation and assessment of ESG investment solutions, they are not without challenges”. Four issues are summarised in the ‘ESG Assessment Issues‘ section of the report, including improvements needed for rating harmonisation, more weight for “Best in progress” argument, more sustainability concerning ESG scores and special consideration for Exclusion criteria as they may create specific problems.

In section 4, the report offers an analysis of biodiversity, mentioning biodiversity related risks and opportunities. “As research suggests, many industries and sectors are threatened by biodiversity related risks. For example, roughly 38% of large publicly traded companies seem to be at least partially affected by habitat loss (sample size: 5,300 corporations). But investors may still be struggling to factor biodiversity into their ESG strategy. For example, in our 2021 survey, only 23% of SMEs and large corporates strongly agreed that they factored biodiversity into their strategy.” [more information can be found in the ‘Biodiversity adds new opportunities‘ section of the report].

For a comprehensive overview of the latest Deutsche Bank CIO Special Report visit Deutsche Bank website.