Flora, Fauna, and Financial Fallacies: Investigating the ESG Biodiversity Gap

Abstract

This thesis investigates the limitations of conventional ESG (Environmental, Social, and Governance) ratings in capturing biodiversity-related risks and proposes an alternative screening approach for investment portfolios. While ESG scores are widely used in sustainable finance, they often overlook companies’ impacts and dependencies on ecosystem services. Using the ENCORE framework and MSCI ESG data, this study identifies gaps in biodiversity impact coverage at the GICS sub-industry level. A Data Envelopment Analysis (DEA) is then applied to integrate ENCORE’s biodiversity-specific data into portfolio screening. The resulting biodiversity portfolio is compared with a conventional ESG-screened portfolio to assess differences in company inclusion and sectoral exposure. While the enhanced screening produces a significantly more inclusive portfolio, this outcome is largely driven by methodological limitations in the DEA approach. Despite this, the study highlights critical data and modeling challenges in biodiversity integration and offers a replicable, exploratory framework for future biodiversity-aware investment analysis.