Investment portfolios are carrying hidden vulnerabilities that standard risk models are failing to capture, according to new research from the ISS STOXX Research Institute, which argues that the industry's tendency to treat climate and nature risks as separate problems is creating dangerous blind spots.
The report is the product of 12 months of research drawing on more than 20 interviews with global investors, asset managers, insurers, NGOs, and academics, as well as two detailed case studies using ISS STOXX's proprietary biodiversity and climate risk tools.
Its central finding is that while the financial costs of climate change have become broadly accepted, the risks flowing from ecosystem and biodiversity loss remain largely unpriced in financial models and business decision-making.
That gap, the report argues, is not merely an analytical inconvenience, but a source of growing material financial exposure that is already playing out.
"Climate and nature risks are no longer abstract or long-dated — they are already shaping financial outcomes," said Mirtha Kastrapeli, Managing Director and Global Head of the ISS STOXX Research Institute. "Our research shows that by including nature-related data in investment analysis, investors can broaden their view and avoid missing a critical part of the risk picture. Nature loss can potentially amplify climate impacts, disrupt supply chains, and erode portfolio resilience, potentially much faster than expected. Integrating climate and nature analytics is essential for understanding long-term value and building portfolios that are fit for an increasingly uncertain future."
The research makes the case that more than half of the revenue exposure within its test portfolio made up of 26 publicly listed companies, predominantly in consumer staples, depends on provisioning ecosystem services such as freshwater availability and raw material supply. When those natural systems degrade, the knock-on effects for earnings, operating costs, and asset values can be swift and severe.
Biodiversity impact within the same portfolio was found to be concentrated almost entirely in land-use activities, with land transformation and occupation accounting for 99.8% of the total assessed impact.
That figure reflects a dynamic the report is at pains to make clear: companies can appear to have a modest direct environmental footprint while simultaneously carrying enormous upstream risk through the commodities they source — palm oil, rubber, timber, and other agricultural products among them.
The challenge of incorporating nature risk into investment decision-making is not lost on the professionals the Research Institute spoke with. Interview respondents pointed to data fragmentation, immature valuation models, regulatory patchwork, and what one APAC-based asset owner described as cognitive saturation from climate-related demands already overwhelming investment teams.
The second case study zooms into the physical climate hazards facing the same portfolio's 306 farm-level assets under a high emissions scenario.
It finds that water stress, flooding, and wildfire are the three primary climate hazards with the potential to generate financial risk at the asset level — a finding that compounds the nature dependency assessment, given how heavily portfolio revenues rely on water ecosystem services.
The water exposure trajectory is particularly striking. Under the high emissions scenario, the share of farm assets facing medium-level water stress rises from 11% in 2030 to 57% by 2050.
The number of assets classified as high-risk over the same period climbs from one to seventeen. Geospatially, the highest-risk assets are concentrated in Southeast Asia, where an Indonesia-based palm oil producer's asset is projected to see structural damage increase by 26.4% and business interruption rise by 21.5% between the current baseline and 2050, primarily driven by flooding.
The report stops short of claiming that current tools can fully quantify nature-related risks with precision. It acknowledges that meaningful gaps remain, particularly around supply chain transmission channels and landscape-level risk assessment — frameworks that would allow investors to map how ecosystem deterioration moves through corporate value chains and local infrastructure to become balance sheet events. Those methodologies, the authors note, are still in early stages of development.
What the report does assert firmly is that assessing climate and nature risks in isolation consistently underestimates the combined threat to portfolio resilience.
As ecosystems weaken, the effects can escalate non-linearly — risks that appear manageable in the near term can tip into operational disruption and asset stranding within a single investment cycle.
The implication for advisors and investors is that portfolio resilience assessments anchored solely in climate metrics are increasingly insufficient. Integrating nature-related dependencies alongside climate hazard exposure, the report argues, is not an ESG box-ticking exercise but a sharper lens for identifying which assets and business models are genuinely built to last.
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