Abstract

This paper seeks to measure biodiversity risk. It does so in several ways:

- Via a news based measure 
- textual analysis of corporate disclosures 
- a survey of finance professionals, regulators and academics 

The authors then apply their measures in an asset pricing and portfolio context and find that markets are pricing biodiversity risk to some degree but their survey respondents believe that market pricing of biodiversity risk is incomplete. 

Summary Measures

We asked evaluators to give some overall assessments, in addition to ratings across a range of criteria. See the evaluation summary “metrics” for a more detailed breakdown of this. See these ratings in the context of all Unjournal ratings, with some analysis, in our data presentation here.1

Overall assessment: We asked evaluators to rank this paper “heuristically” as a percentile “relative to all serious research in the same area that you have encountered in the last three years.” We requested they “consider all aspects of quality, credibility, importance to knowledge production, and importance to practice.”

Journal rank tier, normative rating (0-5): “On a ‘scale of journals’, what ‘quality of journal’ should this be published in? (See ranking tiers discussed here)” Note: 0= lowest/none, 5= highest/best”.

See here for the full evaluator guidelines, including further explanation of the requested ratings.

Written report

As might be expected from this prominent team, this is extremely well executed research within the confines of what counts as research within the finance discipline. I believe, however, there is a better but harder way to go which involves much more interdisciplinary research and using actual measures of biodiversity loss as opposed to measures that are largely extracted from either news or expert opinion, with experts largely being members of the finance industry or academic finance researchers. 

What surprises me the most, is that in this attempt to measure biodiversity risk there has been no deep reflection on potential measurement validity issues that could arise from this exercise and perhaps learning from the many lessons that are emerging from trying to measure ESG risks generally and climate risk in particular. From Berg at al. (2022, Review of Finance)[1] we know that such top-down aggregate measures are very problematic. Nguyen et al. (2023, PLOS Climate)[2] highlights that even in the case of climate transition risk2 scope 3 emissions there is very high divergence between measures from different data providers. 

All this should make us very cautious about aggregate measures in the biodiversity context given how multifaceted it is and how complex measurement is. There are what I would call “internal” attempts to validate the measures that the authors have developed relative to other measures they developed. However, none of these really provide a test of external validity and all the measures could be subject to some degree of impression management or fad, as opposed to measuring actual biodiversity risk.

Other comments:

• It feels like the paper is perhaps doing too much and is perhaps more than one paper. I think purely focusing on measurement is a task big enough for one paper. Doing measurement and really nailing some form of external validity based on actual biodiversity measures would be a paper in its own right that could perhaps more strongly validate the aggregate measures that the authors have developed.

• As we know from the climate context, transition risk3 and physical risk4 are very different and have very different measures and impacts. I would encourage the authors to think more deeply about this distinction between physical and transition risks in the biodiversity risk and develop the related discussion in the paper (which was light). In this context, the pricing and portfolio analyses seem premature.

• Page 4 and page 13 - the sectors that are identified as having high biodiversity risk are not the ones commonly characterised as having biodiversity risk5. Despite the author's best effort to convince us that this is not a not another proxy for climate risk, the sectors look suspiciously like climate sectors. The statement on page 13 that the energy sector uses a lot of land is patently untrue.

• In a related point to the above, the authors undertake a correlation of climate and biodiversity measures from the data on Figure 3. However, it seems clear to me that there is a long-term trend between the measures that is not captured by the higher frequency correlations undertaken by the authors. Perhaps a cointegration test might be revealing in this context.

• I did not see mention of the authors obtaining ethical approval to do the survey, perhaps I missed it.

Overall, this is an interesting paper and I suspect the measures that the authors develop will ultimately be widely used. They will lead to a  greater focus in the area of biodiversity risk and future research will further refine these measures. However, I suspect that true measurement and true progress will come from bottom-up approaches that distinguish transition, physical and liability risk in the context and where actual physical measures of biodiversity risk are used.

References

[1]Berg, F., Kölbel, J. F., & Rigobon, R. (2022). Aggregate Confusion: The Divergence of ESG Ratings. Review of Finance, 26(6), 1315–1344. https://doi.org/10.1093/rof/rfac033

[2]Nguyen, Q., Diaz-Rainey, I., Kitto, A., McNeil, B. I., Pittman, N. A., & Zhang, R. (2023). Scope 3 emissions: Data quality and machine learning prediction accuracy. PLOS Climate, 2(11), e0000208. https://doi.org/10.1371/journal.pclm.0000208

Evaluator details

1. How long have you been in this field?

   • Over 20 years in sustainable/climate finance.