Integrating Nature and Biodiversity Metrics into Portfolio Construction

The World Economic Forum estimates that approximately half of the world’s GDP, almost $44 trillion, is directly or indirectly dependent on nature. Forests regulate water cycles. Bees pollinate crops. Healthy soils underpin global food security. These ecosystem functions, often taken for granted, are not just environmental services; they are the foundation of economic activity and stability.

Despite this deep reliance, biodiversity risk rarely appears on investor dashboards. Portfolios are routinely screened for carbon footprint, yet frequently overlook risks linked to deforestation, overfishing, water stress, and habitat destruction. This is a critical blind spot. As regulation tightens and consumer scrutiny grows, ignoring biodiversity metrics exposes investors to significant financial, regulatory, and reputational risks.

For financial institutions, the stakes are clear. Integrating biodiversity measurements into ESG portfolio construction is essential—not just for risk management, but to unlock new market opportunities and support a genuinely sustainable financial system.

Sustainable finance discussions today have long centered on climate change. However, loss of biodiversity and the climate crisis are fundamentally interconnected. As ecologies degrade, financial consequences are passed down the value chain:

• Agriculture becomes unprofitable under drought and soil erosion.
• Deforestation destabilizes rainfall, impacting hydropower and food production.
• Overfishing undermines coastal economies and food security.

This is not just philanthropy; it is about protecting portfolio value. Companies in sectors like agriculture, forestry, mining, and textiles, heavily reliant on ecosystems, risk becoming “stranded assets” as natural resources dwindle or policy changes force new standards. Conversely, the move toward nature-positive solutions, regenerative agriculture, water technology, habitat restoration, is creating new investment opportunities, supported by frameworks such as the Kunming-Montreal Global Biodiversity Framework (“the Paris Agreement for nature”).

Read more: Biodiversity Controversies Screening

While carbon accounting is now standard, biodiversity’s complexity has made robust measurement harder. Nature extends across many dimensions: species diversity, habitat health, and ecosystem resilience. Recent years have seen rapid progress in establishing frameworks and metrics for investors:

• TNFD (Taskforce on Nature-related Financial Disclosures): Offers a structured approach for assessing and disclosing nature-related risks and opportunities.
• SBTN (Science Based Targets for Nature): Helps companies and investors set and track quantifiable goals for biodiversity impact.
• ENCORE: Links economic sectors’ dependencies and impacts to natural capital, useful for exposure mapping.

Technology is making a difference. Satellite imaging, AI-powered ecological analysis, and geospatial data are making biodiversity data richer and more actionable. Like early carbon measurement, current biodiversity metrics are imperfect, but the sophistication and coverage are rapidly improving.

So what does biodiversity risk look like in financial terms?

• Operational & Supply Chain Exposure: Sectors reliant on nature (agriculture, forestry, food, textiles) face cost spikes and volatility when ecosystem services are degraded.
• Stranded Asset Risk: Policy changes or market shifts can quickly devalue assets—e.g., palm oil plantations tied to illegal deforestation, which become uninvestable.
• Reputational Risk: Linking to harmful practices like overfishing or habitat destruction can trigger consumer backlash and damage brand value.
• Regulatory & Reporting Risk: Biodiversity-related disclosure mandates are tightening. The EU’s Corporate Sustainability Reporting Directive (CSRD) and the TNFD framework require investors to detail portfolio impacts and dependencies on nature.

Cases abound of “ESG leaders” having ratings downgraded after being linked to deforestation or similar controversies. For investors, these events translate directly into portfolio value loss.

Read more: Biodiversity Disclosures in the Financial Sector: Emerging Trends

How can financial institutions proactively build biodiversity risks and opportunities into their portfolios?

Begin by incorporating biodiversity data into existing risk models alongside carbon and governance metrics.

Analyze which portfolio companies are most dependent on healthy ecosystems and which present risk of ecosystem harm. Location-specific analysis is increasingly feasible with geospatial data and ESG datasets, enhancing understanding of risks, especially in sensitive regions (e.g., Amazon basin mining).

Develop biodiversity screens, excluding companies linked to illegal deforestation, habitat loss, or unsustainable resource extraction. Similar to fossil fuel and tobacco screens, these reduce direct exposure to nature-related risks.

Use biodiversity metrics as a basis for constructive engagement with investees. Push for adoption of biodiversity reporting and science-based targets; encourage suppliers to avoid deforestation; request annual impact disclosure aligned with TNFD or similar standards.

Actively allocate capital to nature-positive solutions: sustainable agriculture, reforestation, biodiversity credits, green infrastructure, and innovations in natural resource management. These represent both risk mitigation and growth opportunities.

Biodiversity is often framed mainly as a risk, but it is also a major investment frontier. The shift from carbon-only to comprehensive nature metrics creates new value drivers:

• Sustainable agriculture tech: Boost yields while preserving ecosystems.
• Water efficiency: Address water scarcity as populations and regulation increase.
• Reforestation: Dual climate and biodiversity benefits.
• Nature-based bonds and credits: Emerging instruments mobilizing capital for restoration.

A portfolio-wide biodiversity impact assessment enables investors to redirect capital away from high-risk sectors and towards leaders in regenerative business models, transforming compliance into competitive advantage.

Read more: Biodiversity Restoration: A Business and Climate Imperative

The arc seen with carbon accounting will repeat for biodiversity. What began as voluntary reporting is now shaped by market expectation and heading towards mandatory disclosure. TNFD pilots with leading banks show momentum, while policy links between finance and biodiversity are strengthening globally.

Institutions that take early action and integrate biodiversity metrics today will be better positioned for future regulation, more attractive to ESG-focused investors, and more competitive as sustainable finance moves mainstream.

Nature is not just a compliance issue—it’s a strategic asset. Biodiversity metrics are becoming essential for investors to understand risk, seize new opportunities, and deliver sustainable value. For financial institutions, integrating robust biodiversity data and analysis into portfolio construction transforms this historic blind spot into a source of innovation and market leadership.

1. What are biodiversity metrics in sustainable finance?

They are tools and data points measuring a company’s or portfolio’s impact and dependency on nature, helping investors assess and manage biodiversity risks and opportunities.

2. Why are biodiversity metrics important for financial institutions?

They reveal hidden exposures (e.g., deforestation, water scarcity) and support proactive management of risks and opportunities tied to nature.

3. How do biodiversity metrics differ from carbon metrics?

Carbon metrics focus primarily on CO₂ emissions; biodiversity metrics track multiple dimensions like species richness and ecosystem resilience, requiring more complex and location-specific data.

4. How can biodiversity metrics be used in ESG portfolio construction?

By screening investments, performing impact assessments, engaging with companies, and positively reallocating capital towards nature-positive assets.