What boards and executives should know about biodiversity

As with climate change, it is likely that investors will act to get ahead of the regulatory curve to provide confidence that they are not exposed to stranded assets created by progressive biodiversity regulation. The difference is that, while it was a couple of decades before companies and markets took climate change risk seriously, the imperative to understand and mitigate against biodiversity risk could race ahead on an accelerated track.

The TNFD is already in the process of developing a measurement and reporting framework for companies, which is expected to catalyze investor action in a similar way to the Task Force on Climate-Related Disclosures (TCFD). Soon, capital could be diverted away from businesses that directly and indirectly cause adverse biodiversity impacts and into those that are “nature-positive.”

A variety of new regulatory approaches are also anticipated, including strict rules on the commercial use of specific land areas, subsidy reforms, taxes and fines, implementation of science-based targets and trade directives. Many regions, especially Europe, have already started this journey.

According to the World Economic Forum (WEF), more than half of the global gross domestic product depends on nature. The United Nations Environment Programme Finance Initiative found that 13 of the 18 sectors that comprise the FTSE 100 – representing US$1.6t in market capitalisation – are associated with production processes with high or very high material dependence on nature.⁶

To put that in context, one in five companies could face significant operational risks as a result of collapsing ecosystems⁷. These material nature risks can typically be in the following areas:

• Dependency – When a business directly depends on nature (i.e., for fresh water, pollination or productive soils) as part of its business model. For example, beverage companies should have a reliable supply of fresh water, food companies rely on the stability of crops and arable land, and biopharma companies rely on ecosystems to derive novel sources of medicines.
• Impact – Where business activities either directly or indirectly negatively impact nature, which in turn can impact the business through reputational damage, legal action or financial losses. Increasingly, employees, consumers, investors, policy makers and communities expect companies to manage their biodiversity impact to preserve their social license to operate.
• Disruption – Where the loss or impacts on nature disrupts societies or markets, such as in 2019 when the encroachment on natural habitats created a zoonotic disease that led to a global pandemic.

Also, at a high level, risks in relation to biodiversity can be calculated in the same way as those for climate change, thinking in terms of:

• Physical risks – Damage to physical assets or the loss of ecosystem services necessary for production processes. Examples include local and regional financial losses in the agricultural sector from reduced pollination from insects (between US$235b and US$577b of annual global food production relies on pollinators⁸) and global financial losses in the medicine and technology sectors from reduced genetic biodiversity inhibiting research and development.
• Transition risks – With several stakeholders calling for the UN’s Convention of Biological Diversity (CBD) to announce the adoption of a global nature net-positive goal by 2030 and the full recovery of nature by 2050⁹ at CBD COP15 in Spring 2022, these risks are looking increasingly likely to materialise. The latest draft goals¹⁰ released in July 2021 are consistent with this anticipated direction of travel, suggesting that transition risks such as policy changes, legal developments, and technology change may emerge, with businesses that currently have a negative impact on nature most likely to be affected.

That said, climate change is more mature and understood as a business risk. Previously, climate change was viewed as an environmental externality, but this shifted over the past decade to an environmental risk, and now a financial one. Biodiversity is arguably a fair way behind climate change on this curve.

Partly as a result of this immaturity, despite its similarities with climate change risk, understanding and managing biodiversity risk is different.

• No single metric – While it is relatively simple for companies to calculate carbon emissions, measuring biodiversity is hugely complex and multi-faceted. We can and do calculate the value of pollinators to agriculture or ongoing clean river flows to a chemical manufacturer. But how do you assess the worth of an entire ecosystem in a wetland, a rainforest or even a city park?
  
  The TNFD is currently working on a biodiversity risk management and disclosure framework to shift global financial flows to nature-positive outcomes. While parallels with the TCFD are appropriate, organisations shouldn’t immediately expect the same level of guidance and precision in the tools that will be provided. A full market release of the framework is expected in the second half of 2023.
  
  
• Offsets aren’t like for like – No offset can make up for the loss of destroying ancient ecosystems containing rare species. Some biodiversity will always be lost in offset exchanges as no two areas of habitat or species populations are identical. Also, making biodiversity offsets meaningful can involve a long-term commitment to take full account of direct, indirect and cumulative impacts, geographically and over time. When it comes to managing biodiversity risk, offsets should only be considered as a last resort.
  
  
• The need to take into account multiple values – Landscapes should be managed for productive, wilderness and cultural values. Protecting biodiversity doesn’t have to involve locking up land as wilderness. We can look into the deep knowledge of Indigenous peoples to understand how these values can coexist.
  
  
• The skill set – Biodiversity is an enormously multi-disciplinary area, requiring companies to engage with a new type of capability – usually outside their comfort zone. Many of the conservationists corporates should bring on board today are former activists from the ‘other side’. We require emotional maturity to overcome historical hostility and recognise that corporates and activists will have to work together to protect biodiversity. NGOs and philanthropists typically work where there is market failure. We should work with these stakeholders to understand the nature of the failure, so that we can help to not introduce distortions as we develop markets.

To this final point, we should accept that there are a few simple straightforward answers. For example, we should not just stop using pesticides if that means humans will starve. We should look to farm in a more biodiversity-supporting way – not just on hobby farms, but across big agriculture – replacing monoculture with polyculture farming practices. This will likely require collaboration from diverse stakeholders on an unprecedented level. Companies should welcome former adversaries into their boardrooms and earn their trust. Activists should stop demonising corporates and become part of the solution.

While biodiversity considerations can seem arduous, they can also lead to dramatically better outcomes. For example, with careful planning and management of a greenfield residential property development, the work done to avoid the risks of fragmented landscapes and keep biodiversity systems intact can also help improve property valuations. As a simple example, higher tree cover can help reduce urban heat and combat some of the physical effects of climate change.

In a similar example, a chemical company valuing the river its operations depended on takes that value into account in capital decisions – benefits flow to multiple stakeholders. Investing in the biodiversity of the areas surrounding the river can provide confidence that the water is of the required quality and quantity the company needs to sustain and grow its operations, but this same action can also lift the quality of live in local communities, help farms be more productive and enrich local ecosystems.

Biodiversity impact exists beyond rural areas, but in farms and cities. There are important roles for local governments, town planners and developers to incorporate nature-related opportunities into their strategic planning, risk management and asset allocation decisions.

As the world transitions to a low-carbon economy, companies could be increasingly expected to demonstrate not just their decarbonisation strategies, but also how they are minimising negative impacts on (and ideally enhancing) biodiversity.

This is likely to include disclosing how they have adopted or plan to incorporate business practices consistent with the sustainable use and management of natural capital, including air, water, land, minerals and forests. Just as companies are striving to embed a carbon price in their decision making, they should also now create formal natural capital accounts to support innovation, conservation and planning for environmental shocks. Aggregate diverse natural resource data will soon be just as important as environmental, social and economic data.

Organisations should not wait for globally agreed frameworks or perfect tools to be available. They should act now.

To get started, companies should:

1. Educate – Familiarise leaders across the business with biodiversity concepts, tools and frameworks.
2. Enlist – Get involved in biodiversity think tanks and initiatives, such as the TNFD or the Science-Based Targets Network, or local organisations.
3. Estimate – Bring in new skills to help map biodiversity risks up and down the value chain. 
4. Enforce – Set science-based targets and build internal accountability for biodiversity across the business. 
5. Explain – Disclose what they are doing to identify, measure and manage biodiversity risk.