COP16 – The role of geospatial data in pricing biodiversity risk

Executive summary

  • Biodiversity loss poses significant risks to asset value, and COP16 highlights the need for tools to better manage these impacts.
  • Geospatial data allows investors to pinpoint environmental risks around assets, enabling proactive management of biodiversity impacts.
  • Mapping tools help investors assess how climate and ecosystem changes affect asset stability, supporting informed investment decisions.

As global investors face an increasingly complex landscape, the importance of biodiversity loss as a material risk to portfolios is becoming ever more apparent. Over $44 trillion of global economic output is moderately or highly dependent on nature. However, the impact of biodiversity loss on these assets is often underexplored and inadequately managed.

The UN Biodiversity Conference (COP16), held from 21 October to 1 November 2024, in Cali, Colombia, serves as a key moment for governments, businesses, and society in agreeing upon actionable strategies to address biodiversity risk. However, for progress to be made, methods and tools to measure biodiversity will be necessary to monitor and quantify the risk posed to societies and portfolios.

This is why at Russell Investments we are expanding our capabilities in the use of geospatial analysis, to help investors better understand and manage biodiversity risks and ultimately support the long-term value of their portfolios.

What is geospatial analysis and how is it useful?

Geospatial analysis uses data, often from satellite imagery, company reports, and governmental agencies, to assess environmental conditions surrounding assets, companies, and regions. By pinpointing the location of assets, it helps identify risks like deforestation or water scarcity, making it valuable for screening projects for environmental risks before committing capital.

This method offers deeper insights compared to traditional biodiversity ratings by focusing on site-specific impacts. It enables more frequent monitoring, allowing investors to respond quickly to emerging risks across sectors and regions, making it an effective tool for managing biodiversity-related risks.

What does geospatial analysis look like?

Looking at Figures 1 and 2 as examples, geospatial analysis displays how U.S.-based real estate assets in an example portfolio are positioned across the United States alongside extreme heat and tropical cyclone exposure.

Figure 1: Map of Extreme Heat of U.S.-Based Real Estate Portfolio

Map of extreme heat of U.S.-based real estate portfolio 

Sources: WWF Biodiversity Risk Filter, Russell Investments. Data as of 11 October 2024.

Geospatial analysis of Figure 1 highlights how there are particularly high risks along the East and Southeast coasts of the U.S., with extreme heat also extending into the Midwest and Southwest. For instance, the very high-risk classification for extreme heat in cities like Dallas, TX, and Little Rock, AR, indicate that these areas experience daily maximum temperatures of 32°C or higher on a five-year return cycle. This can impact an investor's real estate assets because heat from extreme temperatures accelerates the expansion of building materials and rusting of metal, which affects the integrity of concrete structures. Additionally, high temperatures cause soil shrinkage, which makes buildings more vulnerable, undermining long-term property maintenance.

However, structural concerns are not the only issue that is significant here; extreme heat may lead to long term environmental instability. High temperatures can accelerate the degradation of ecosystems by disrupting natural processes such as pollination, water cycling, and plant growth, which are essential for maintaining biodiversity. As ecosystems degrade, so do the services they provide, making businesses and real assets more vulnerable to long-term operational disruptions.

Figure 2: Map of Tropical Cyclone Exposure of U.S.-Based Real Estate Portfolio

Map of tropical cyclone exposure of U.S.-based real estate portfolio 

Sources: WWF Biodiversity Risk Filter, Russell Investments. Data as of 11 October 2024.

Similarly, assets can also be mapped against other risk factors such as tropical cyclones. Figure 2 highlights how very high-risk areas for tropical cyclones are projected to experience wind speeds exceeding 120 mph on a 50-year return cycle. These storms lead to habitat destruction, flooding, and soil erosion, which further exacerbate biodiversity loss by damaging critical habitats for flora and fauna. The resulting changes in the structure and composition of marine, terrestrial, and freshwater habitats significantly affect the availability of ecosystem goods and services. For real assets in these regions, the risk is not only physical damage to buildings but also the broader impact of degraded ecosystems, which could reduce property values and increase maintenance costs over time.

The bottom line

These examples only scratch the surface of what is possible with geospatial analysis and how it can be incorporated into investors' investment processes. The ability to visualise and quantify risks allow institutional investors to make informed decisions that consider both financial performance and ecological sustainability, as well as pricing in the risk.

 

As COP16 sets the stage for rising awareness around biodiversity, institutional investors have the opportunity to review their investment toolkit and whether they feel it appropriately captures the environmental risk factors highlighted at the conference. If you wish to learn more about Russell Investments' capabilities in this regard, please don't hesitate to get in touch.


Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.