Climate, nature risks no longer 'abstract or long dated': ISS STOXX

A new report from ISS STOXX has warned investors may be materially underestimating portfolio risks by assessing climate and nature exposure separately, with biodiversity loss and water stress emerging as growing threats to long term portfolio resilience.

The report, Resilience at Risk: Understanding Climate and Nature Risk Exposures in Investment Portfolios, was developed by the ISS STOXX research institute over 12 months and draws on interviews with more than 20 global investigators and market participants.

Using the firms Biodiversity Impact Assessment Tool and climate risk analytics, the research found nature related risks are already financially material across investment portfolios.

In one test portfolio, more than 55% of portfolio revenue was found to rely on ecosystem services such as freshwater access and raw materials, underscoring the extent to environmental degradation and resource scarcity.

The report also found biodiversity impacts are heavily concentrated upstream in supply chains. More then 99% of biodiversity related impacts in the test portfolio stemmed from land transformation and land occupation linked to commodities including palm oil, timber and rubber.

Water related risks emerged as a major climate and nature nexus issue.

An asset level assessment of 306 farm assets identified water stress, flooding and wildfires as the primary climate hazards affecting financial performance. Under a high emissions scenario, the proportion of farm assets facing medium water stress exposure is projected to rise from 11% to 57% by 2050, with high-risk exposure also increasing sharply.

The report argued investors risk understating portfolio vulnerabilities if climate and biodiversity risks are analysed in isolation, warning fragmented assessments can obscure emerging nonlinear risks and supply chain disruptions.

ISS STOXX Research Institute managing director and global head Mirtha Kastrapeli said nature related risks were no longer theoretical or distant concerns.

"Climate and nature risks are no longer abstract or long-dated, they are already shaping financial outcomes," said Kastrapeli.

She said integrating climate hazards, ecosystems dependencies and biodiversity impacts into a single analytical framework would better position investors to stress test portfolios and identify resilient assets in an increasingly resource constrained environment.

Financial Standard is owned by ISS Market Intelligence, which is part of ISS STOXX.