Businesses need to take immediate action to assess and lessen their impact on biodiversity.
The effects of biodiversity loss can be severe and frequently go unnoticed, disrupting supply chains, raising the cost of regulatory compliance, and possibly undermining social acceptance. However, a lot of businesses have only recently started to investigate their impact on biodiversity loss, and very few innovative businesses have released reliable biodiversity strategies with ambitious biodiversity targets in line with the Science-Based Targets Network.
Investors are also increasingly thinking about how to account for biodiversity in their evaluations and how they allocate funds to businesses that can clearly articulate and document their biodiversity strategy. Additionally, the Taskforce on Nature-related Financial Disclosures (TNFD) has just released the beta version of the TNFD framework, which is meant to assist businesses in understanding their biodiversity-related risks and opportunities as well as how to disclose their performance. In a manner similar to that of the Task Force on Climate-Related Disclosures (TCFD), this is anticipated to spur investor action.
It is simple to assume that sectors with significant environmental impact, like mining, forestry, and agriculture, are the only ones where biodiversity risks exist. Unsustainable business practises in these sectors can result in environmental damage, supply-chain disruptions, price fluctuations, lower crop yields from overused land, and the extinction of pollinators.
However, a lot of businesses probably rely on natural resources, so this could have an effect on them. Business should therefore think about incorporating biodiversity and natural capital into their main risk register.
1. Investors are moving to redirect capital
Businesses that have a negative impact on biodiversity might have a harder time getting financing.
Similar to how they did with climate change, investors are likely to take proactive steps to get ahead of the regulatory curve so they can be sure they won’t be exposed to stranded assets brought on by forward-thinking biodiversity regulations. The imperative to understand and mitigate against biodiversity risk could advance on an accelerated track, whereas it took businesses and markets a few decades to take climate change risk seriously. Capital may soon be moved away from companies that directly or indirectly have a negative impact on biodiversity and towards those that are “nature-positive.”
Numerous new regulatory strategies are also expected, such as stringent guidelines for the commercial use of particular land areas, changes to subsidies, taxes, and fines, the adoption of science-based targets, and trade directives. This journey has already been begun by numerous nations and regions, particularly in Europe.
2. How biodiversity could affect your business
A collapse of the ecosystem could pose serious operational risks.
The World Economic Forum (WEF) estimates that more than half of the world’s GDP is dependent on nature.3 According to the United Nations Environment Programme Finance Initiative, 13 of the 18 sectors that make up the FTSE 100, with a market capitalization of US$1.6 trillion, are linked to production processes that have a high or very high material dependence on the environment.
Accordingly, one in five businesses may experience material operational risks as a result of ecosystem collapse. Typically, these material nature risks are connected to the following:
- Dependency — When a company’s operations are directly dependent on nature (for example, for clean water, pollination, or productive soils), this could have an effect on how well the company performs financially. Companies that make beverages, like those that make food, need a steady supply of fresh water, while those that make agricultural products and biopharmaceutical products depend on ecosystems to find new sources of medicines.
- Impact — When a company’s operations have a negative impact on the environment, whether directly or indirectly, this can have an effect on the company financially, negatively on its reputation, or both. Employees, customers, investors, policymakers, and communities are increasingly expecting businesses to manage their impact on biodiversity to maintain their social licence to operate.
3. Similarities between biodiversity and climate change risks
Physical and transitional risks can be applied to both biodiversity and climate change.
Climate change and biodiversity are closely related. Forests and ecosystems, including mangroves, marshes, and coral reefs, can act as carbon sinks by reducing greenhouse gas emissions, but they can also provide crucial natural defences against climate change effects like protection from coastal erosion and flood prevention. The TNFD framework will include identifying priority locations based on where organisations interface and ecosystems that have been assessed as being under high or extreme levels of stress. Biodiversity, like climate, is not the same in all areas or locations. We frequently associate biodiversity with pristine rainforests, but urban landscapes must also take it into account.
Climate change and biodiversity risks have a number of things in common. Both have a wide scope and a large impact, and they both have turning points past which it might be impossible to turn things around. They both have an uncertain but foreseeable outcome, and their impact might be influenced by immediate actions.
Risks associated with biodiversity can be calculated at a high level in a manner akin to that used for climate change risks. The following methods can be used to pinpoint these risks:
Physical risks
These include harm to tangible assets or the loss of ecosystem services required for business operations. Examples include local and regional economic losses in the agricultural sector due to reduced insect pollination (between US$235 billion and US$577 billion of the world’s annual food production depends on pollinators6) and international economic losses in the medical and technological sectors due to impeded genetic research and development.
Transition risks
These include adjustments to laws, regulations, and technology. These risks are more likely to occur given that a number of stakeholders want the UN’s Convention on Biological Diversity (CBD) to declare the adoption of a global nature net-positive goal by 2030 and the full recovery of nature by 2057 at CBD COP15 in 2022. The most recent draught goals, which were unveiled in July 2021, are in line with this anticipated course of action, indicating that such risks may materialise, with companies that currently have a negative impact on nature being most likely to be impacted.
Disruption risks
These risks include situations where the destruction of nature or its effects on markets or societies result in an epidemic of a zoonotic disease, for example.
4. The difference between biodiversity and climate change risks
For businesses, biodiversity now poses a greater financial risk.
More people are aware of the risk that climate change poses to businesses. Previously, climate change was thought of as an environmental externality; however, over the past ten years, it has come to be seen as an environmental risk and, more recently, as a financial risk. On this curve, biodiversity is arguably far behind climate change.
Understanding and managing biodiversity risk is different from understanding and managing climate change risk, in part due to this immaturity.
No single metric
While calculating carbon emissions for businesses is generally straightforward, assessing biodiversity can be challenging and multifaceted. Two components are present:
- The methods for evaluating ecosystems’ value in terms of biodiversity by counting the number of threatened species or other suitable metrics.
- Utilise this evaluation to determine how your actions have an impact on biodiversity, such as the quantity of pollinators used in agriculture or ongoing clean river flows. These can be evaluated on various scales, including the corporate, site, and project levels.
The TNFD framework should assist businesses in comprehending their opportunities and risks related to biodiversity as well as how to disclose their performance. This could assist in rerouting financial flows globally towards outcomes that benefit nature. Although there should be comparisons to the TCFD, organisations shouldn’t immediately expect the same level of precision and guidance in the tools that will be offered. In the second half of 2023, the framework is anticipated to be fully released to the market.
Offsets are not “like for like”
The harm caused by destroying rare species-rich, ancient ecosystems cannot be made up for by offsets. Due to the diversity of habitat types and species populations, there will always be a loss of some biodiversity in offset exchanges. Additionally, a long-term commitment to fully account for direct, indirect, and cumulative impacts, both geographically and over time, can be necessary to make biodiversity offsets meaningful. Priority should be placed on preventing and lessening the impact of biodiversity loss when managing biodiversity risk, with offsets being a last resort.
The need to take into account multiple values
The management of landscapes should prioritise cultural, wild, and productive values. Land doesn’t necessarily need to be set aside as wilderness in order to protect biodiversity. For insight into how these values can coexist, we can examine the extensive knowledge of indigenous people.
The skill set
The vast multidisciplinary field of biodiversity necessitates that businesses develop new types of capabilities, often outside of their comfort zones. Many of the conservationists that corporations are hiring now were once activists on the “other side.” To overcome historical animosity and acknowledge that corporations and activists will need to cooperate to protect biodiversity, one needs emotional maturity. Where there is a market failure, Non-Governmental Organisations (NGOs) and philanthropists typically work. To prevent introducing distortions as markets develop, businesses should collaborate with these stakeholders to understand the nature of the failure.
Business should acknowledge that there aren’t many clear-cut, easy solutions to this last issue. Pesticides cannot, for instance, simply stop being used in agriculture if doing so could result in human starvation. Instead, the industry should be pushed to adopt farming practises that support biodiversity more broadly, not just on hobby farms but also in large-scale agriculture, by switching from monoculture to polyculture farming methods. This will probably call for unprecedented levels of cooperation from various stakeholders. Former rivals should be welcomed into boardrooms, and trust should be earned. Instead of attacking corporations, activists should work to solve problems.
5. The benefits of getting biodiversity right
Taking into account biodiversity can have additional advantageous effects.
Although taking into account biodiversity may seem difficult, doing so can produce better results and strengthen the value chain. For instance, the work done to avoid the risks of fragmented landscapes and keep biodiversity systems intact can also help improve property valuations with careful planning and management of a greenfield residential property development. As a straightforward illustration, more trees can help reduce urban heat and mitigate some of climate change’s physical effects.
Similar to the previous example, a chemical company that values the river on which its operations depend can factor that value into capital decisions, with benefits to numerous stakeholders. Gaining assurance that the water is of the quality and quantity the business requires to maintain and expand operations can be accomplished by investing in the biodiversity of the areas near the river. But the same action can also improve local communities’ quality of life, make farms more productive, and improve regional ecosystems.
Beyond rural areas, towns and cities are also affected by biodiversity. Local governments, town planners, and developers have important roles to play in integrating opportunities related to nature into their strategic planning, risk management, and asset allocation decisions.
6. Next steps towards managing biodiversity risk
Companies need to take immediate action to lessen biodiversity’s negative effects.
Companies may face increased pressure to show not only their decarbonization plans but also how they are minimising adverse effects on (and ideally enhancing) biodiversity as the world transitions to a low-carbon economy.
This will probably involve explaining the business practises they have implemented or intend to implement to ensure the sustainable use and management of natural resources, such as air, water, land, minerals, and forests. Companies should establish formal natural capital accounts to support innovation, conservation, and planning for environmental shocks, just as they are attempting to integrate a carbon price into decision-making. Investors anticipate that aggregate data on a variety of natural resources will soon be just as significant as environmental, social, and economic data.
Organisations shouldn’t hold off until there are universally accepted frameworks or ideal tools. In order to protect biodiversity along their value chain and lessen their impact, they should start cooperating with their suppliers right away.
To begin, businesses should:
Educate and enlist
Get your organisation involved in biodiversity think tanks and initiatives, like the TNFD or the Science-Based Targets Network or local organisations, and familiarise the C-suite with biodiversity concepts, tools, and frameworks.
Enroll and enforce
Set science-based goals and create internal accountability for biodiversity across your business by aligning with standardised frameworks, such as the TNFD and SBTi. This will help you map biodiversity risks throughout your value chain and reduce their impact.
Embed and explain
Then, consistently disclose how you are identifying, measuring, and managing biodiversity risk and opportunities. Develop a common strategy that addresses both climate and biodiversity challenges.
Summary
Businesses may experience direct effects from biodiversity loss due to supply chain disruption, rising costs associated with regulatory compliance, and loss of social acceptance. Investors are already thinking about how to incorporate biodiversity into their evaluations and how to allocate capital towards businesses that can more convincingly present a nature-positive strategy supported by solid, science-based targets. Businesses need to be prepared to react.
