• Deforestation risks span physical, transition, and systemic categories, posing financial vulnerabilities to investment portfolios.
• Institutional investors face increasing regulatory pressures, such as the EU Deforestation Regulation (EUDR), which mandates transparency in supply chains.
• Nature-based solutions and data advancements provide opportunities to address deforestation risks while promoting sustainability and resilience.

ISS ESG’s First Natural Capital Report:

ISS ESG, the sustainable investment arm of ISS STOXX, released its inaugural report from the Natural Capital Research Institute: The Root Cause of Nature Loss: Forests, Why They Matter, and How to Assess Deforestation Risk in Investment Portfolios through Nature-Related Data.

Founded in 2024, the institute’s mission is to deepen the understanding of nature-related risks and help institutional investors incorporate these considerations into decision-making.

Why Forests Matter:

Tropical forests play a critical role in carbon sequestration and biodiversity, housing 70% of the world’s forest carbon sinks and 67% of land-based biodiversity.

Deforestation disrupts these ecosystems, creating a cycle of soil degradation, water stress, and further deforestation, exacerbating biodiversity loss and increasing carbon emissions.

Mirtha Kastrapeli, Global Head of Natural Capital at ISS STOXX, noted: “This flagship study shows that mitigating deforestation risks in public equity portfolios will be a dynamic journey. Data around nature-related dependencies and performance are expanding, alongside practices like regenerative agriculture and sustainable land management.”

Investment Risks from Deforestation:

Deforestation risks mirror climate risks and are divided into three categories:

1. Physical risk: Adverse environmental changes, such as land degradation.
2. Transition risk: Misalignment between regulatory actions and business practices, such as reputational or market risks.
3. Systemic risk: Events leading to destabilization of critical systems, e.g., desertification.

Transition risk is especially urgent due to regulatory shifts, such as the EU Deforestation Regulation (EUDR), which mandates stricter sourcing disclosures by 2025 for large enterprises.

Related Article: ESG Reporting Intelligence Launches ESG Asset Management Platform

Nature-Related Data for Risk Assessment:

ISS ESG emphasizes the need for robust data to assess deforestation-related risks in investment portfolios. Key data categories include:

• Dependencies Data: Measures companies’ reliance on forests and ecosystem services for operations and profitability.
• Impact Data: Evaluates companies’ activities that contribute to forest degradation.
• Performance Data: Assesses policies and mitigation measures, highlighting innovations that support regeneration and sustainable practices.

Kastrapeli added: “Nature data architecture at the asset level is advancing, enabling investors to make informed decisions.”

Case Studies on Deforestation Risk Analysis:

• Nature Action 100 Portfolio:
  • Dependencies Analysis: Over 50% of portfolio revenue depends on climate regulation and erosion control, with 33% reliant on surface water.
  • Impact Analysis: Land transformation drives over 90% of biodiversity loss, with the food and beverage sectors showing the highest biodiversity impact.
• Funnel Approach for Engagement: This method helps investors identify high-risk companies by sector, region, and activities, informing their engagement strategies.

Outlook for Investors:

The report underscores the growing importance of nature-related disclosures and technological advancements, such as geospatial data, in assessing supply chains and investment risks.

ISS ESG’s Biodiversity Impact Assessment Tool offers a way for investors to evaluate the impacts of portfolio activities on biodiversity, while its Corporate Rating identifies ESG risks and investment opportunities.

With improved data and disclosure practices, institutional investors are better positioned to mitigate deforestation risks and capitalize on nature-based solutions.

Kastrapeli concluded: “This report serves as a guide for investors ready to embark on the journey of incorporating nature-related data into their investment frameworks.”

Read the full report here.

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