Biodiversity debt: candriam develops a quantitative model to assess ecological impact and biodiversity risk

What is biodiversity debt? The question, once asked, already requires clarification. “The notion of biodiversity debt is very particular, and depending on certain perspectives, it may not even be called debt,” warns Elouan Heurard, Biodiversity Analyst at Candriam.

Because it is not a financial debt in the macroeconomic sense, but an attempt to provide an accounting translation of what has been taken — or destroyed — from nature. Whether or not we call it a debt, it represents the charge that a company would have to pay if it wanted to repair what it has destroyed. This translation of biodiversity impacts into economic value should not only serve for potential restoration actions; it can also be a very interesting management tool for companies to give a value to possible negative impacts and avoid them. And therefore, on the investor side, a powerful tool for analysis and engagement.

From ecological intuition to an analytical method usable in asset management
To move from ecological intuition to a usable analysis method in asset management, Candriam has designed an evaluation system based on the real flows of companies: quantity produced, raw materials used, country of operation, etc. “For each company, we analyze physical production: kilograms of paper, number of pairs of shoes. These productions have an impact on biodiversity depending on the country and the production method.”

Trying to quantify impacts and biodiversity transition risk
These data are then fed into models that translate the impacts into degraded surfaces — in equivalent m², in MSA/km² (Mean Species Abundance) or in PDF·m² (Potentially Disappeared Fraction). The next step is to convert this affected surface into economic cost. “We look today at the restoration policy of the country. If the company has contributed to the degradation of X msa/km² due to its leather production in Brazil, and the restoration of 10 km² in Brazil costs Y, we can calculate the restoration cost associated with the impact that the company has had at that precise location.”

But the limitations are numerous: highly variable costs depending on the country, lack of public investment, absence of precise data in certain sectors… This can create significant biases in the analysis, which must be identified and, when relevant, adjusted.

Despite these uncertainties, the approach makes it possible to set out a robust and above all evolving methodological framework for the economic quantification of biodiversity impacts. “If tomorrow new studies are published, providing more details, more information on restoration costs, we can integrate them very easily into our system.”

This system also supports responsible investment decisions.
It allows Candriam to compare companies with each other, and to integrate biodiversity risk by taking into account their potential exposure to future biodiversity regulations. “We associate this with a transition risk: if regulation were to change by imposing, for example, a biodiversity-related tax, to what extent could this impact their activities and their future profits?”

This approach also opens new levers of shareholder engagement. “Reducing leather consumption will have much more impact than sustainable rubber. We can prioritize our engagement efforts, and for example guide companies by saying: ‘Here are the actions that will most reduce the damage to biodiversity.’”

An innovative model, but already facing methodological challenges
The real advance of this model is its anchoring in physical flows, which makes it possible to draw improvement trajectories, similar to carbon trajectories. “Here is where we can arrive in T+1 by activating these levers. This was not possible with the global indicators that existed until now and which were based on average revenues by economic activity.”

But ambition is still limited by the quality of available data. Few companies publish their life cycle analyses. “For some companies, we have precise information on the quantity of cotton consumed in kilograms by country. For others, we only have more global estimates.”

Candriam is therefore developing its own models — for example, to estimate the impact of an average T-shirt — while keeping a flexible structure. “The objective is to build a system sufficiently open so that if tomorrow Adidas publishes a life cycle analysis of its T-shirt, we can easily integrate it to refine the biodiversity footprint of the company.”

Finally, in the absence of a more relevant and commonly established evaluation method, the quantification of biodiversity-related impacts and risks here is based on restoration costs, which remain an imperfect measure from both a philosophical and practical point of view. The main objective for investors and companies is indeed to avoid and reduce negative impacts on biodiversity, with restoration serving only to address residual impacts. Restoration costs are here used as quantification tools, inherently incomplete, which should ideally be used to integrate the reduction of biodiversity impacts upstream of economic decisions, and not for compensation purposes. And this method of quantifying biodiversity impact costs may, if applicable, evolve towards other more comprehensive approaches.