Nature-related financial risks in corporate bonds : a case study | Insight Investment

• Nature-related risks are many and diverse, and could present meaningful risks for investment portfolios. The TNFD has set out recommendations, backed by a wide range of stakeholders, for assessing nature-related risks and opportunities. We put this framework to the test using a sample of corporate bonds.
  
  
• Identifying potential exposures within a portfolio is now possible, given the extensive information available. We were able to identify the key risks across our sample of corporate bonds based on their sectoral allocations and the locations of specific assets. Water risks were consistently the most material sources of nature risk across the sample, albeit heavily influenced by asset location.
  
  
• Measuring these risks and setting targets for them is hampered by significant data gaps. Analysts must rely heavily on averages or proxy data; and for companies seeking to set nature-related targets, there is only enough data to do so for a handful of metrics.
  
  
• Our case study demonstrates that it will be some time before investors can fully recognise nature risks and respond to them in their corporate bond portfolios – but the trajectory towards greater disclosures of nature-related risks is clear. Some activities are already possible but their scope and practicality is set to grow: these include enhanced investment-risk screening for nature risks, the integration of nature risks and opportunities into investment-stewardship activities, and positive impact allocations within portfolios.
  
  
• We plan to use this research as the basis for deep-dive engagements with corporates over the coming year on nature risk, including deciding on target companies for engagement on key natural capital risks.
  

Figure 1: Why nature risks matter for investment portfolios

Adapted from Nature-related Financial Risks: a Conceptual Framework to guide Action by Central Banks and Supervisors (PDF), September 2023, NGFS.