Biodiversity tools disagree: What Melbourne research means for adviser due diligence

Biodiversity is moving quickly from an amorphous label to a set of numbers that appear in fund reports, ratings and client presentations. Before those numbers become embedded in advice processes, it is worth knowing how much weight they can really carry.

A team from the University of Melbourne’s Melbourne Biodiversity Institute, working with Franklin Templeton, has produced a detailed review of the main biodiversity impact tools being sold to investors. Their paper, Making money talk nicely: Biodiversity impact assessment for investors, looks at how these tools perform when used on a large, real-world universe of companies.

The work responds to a practical gap the authors describe bluntly: there is “no industry standard or formal guidance for selecting between or applying” biodiversity impact tools, despite rapid growth in their use. For advisers, that gap sits uncomfortably with the strength of some biodiversity marketing claims now appearing in the market.

The core finding is that the tools often disagree. The team notes that “the research found low overall agreement among tool outputs when assessing biodiversity impacts for companies in the S&P 500,” and the academic abstract reports that rankings of company impact “exhibit low correlation between most tools.”

When the researchers asked a seemingly simple question, ‘Which ten S&P 500 companies have the greatest impact on nature?’ the tools produced different answers. For any adviser relying on those lists to guide product selection or client reporting, that lack of alignment is directly relevant.

One driver of the divergence is methodological opacity. The review points to “a general lack of transparency in the methodologies used, providing limited opportunity for reproducibility,” which in turn makes it hard to verify why tools give different results. Although many tools draw on public data, their methods are mostly proprietary, which “hinders the capacity for peer review, independent validation, and sector-wide improvement.”

A second driver is the nature of biodiversity itself. The authors underline that, “unlike greenhouse gas emissions and impacts on climate, biodiversity is multi-dimensional and location-specific.” The tools generally lack detailed mapping of where company operations and supply chains interact with specific ecosystems, even though that location detail is critical to understanding real-world impacts.

Many of the reviewed products use Life Cycle Impact Assessment approaches to translate environmental pressures into expected changes in species diversity and abundance. The paper notes that these methods “often rely on overly simplified cause-effect pathways and are not adequately spatially resolved to assess the impact of specific companies.” For advisers, that means portfolio-level biodiversity scores can look precise while still being built on broad assumptions rather than asset-level reality.

The authors are explicit about what needs to change. They argue that “there is an urgent need for increased transparency, reproducibility, peer-review and standardisation of tool methodologies,” and go further to say that “a finance sector standard and certification of biodiversity impact assessment tools is warranted.” They also highlight a role for standard-setters, including the International Sustainability Standards Board (ISSB), in shaping more consistent nature-related disclosures.

From the asset manager side, Franklin Templeton’s head of investment sustainability solutions, Jennifer Willetts, links the issue directly to portfolio construction. “Protecting biodiversity is fundamental to sustainable growth,” she says, adding that “we hope this research highlights the potential risks associated with using a single metric to drive decision-making.” She also notes that “asset managers can play a pivotal role in shaping a financial system that consistently assesses biodiversity-related risks and impacts.”

Professor Brendan Wintle, director of the Melbourne Biodiversity Institute, emphasises both caution and opportunity. He comments that “the analyses we were able to do with Franklin Templeton highlights the need for caution in utilising off-the-shelf tools and datasets” for understanding company impacts on nature. At the same time, he stresses that the findings “present an enormous opportunity for leadership towards nature-positive growth with integrity in the sector.”

Importantly for advisers, the paper is clear that the current landscape offers no obvious “best” tool. The authors state that “there is currently limited ability to determine which tool provides the most accurate or ‘true’ assessment” because methodologies have “not yet been peer-tested in the way that climate models have.” They go on to warn that “substantial discrepancies between tools means that use of any individual tool to support investment decisions comes with uncertainty.”

For client portfolios, that uncertainty translates into practical risks. Two products sold as biodiversity-aware may hold very different companies, depending on which tool informs their process. As the release notes, “reliance on any single tool may lead to investment decisions that fail to adequately mitigate nature-related impacts and risks, or to appropriately reflect investor preferences.” That statement goes directly to advisers’ obligations around suitability and alignment with stated client values.

The authors do not recommend abandoning biodiversity data. Instead, they “recommend a holistic approach,” making use of multiple types of information and “company-specific investigations, rather than relying on a single metric.” They conclude that “a detailed, up-close analysis of firm-level risks and opportunities remains the most reliable approach,” ideally backed by “guidance from independent nature experts.”

For advisers, that points to very concrete due diligence questions. Does a manager use more than one biodiversity dataset? Can they explain the differences between the tools? How do they respond when those tools conflict? Do they supplement the scores with their own research on where a company operates, which ecosystems are involved, and what mitigation is in place? The Melbourne-led research suggests that affirmative, specific answers to those questions may be more meaningful than the presence of a single biodiversity score in a brochure.

The full paper, Making money talk nicely: Biodiversity impact assessment for investors, is available for advisers to read on SSRN at: https://ssrn.com/abstract=5283115

James Dunn

James is an experienced senior journalist and editor of The Inside Network's publications.