Why biodiversity loss is a financial risk – and what your business can do about it
The World Economic Forum 2021 Global Risk Report identified biodiversity loss, ecosystem collapse and human-made environmental damage as top risks in terms of likelihood and impact in the next decade.
Simply put, biodiversity refers to the variety of life on Earth and can be measured at the genetic, species and ecosystem level. Today, humans and the global economy are putting increasing pressure on the planet. We are using and consuming more resources than ever before, causing ecosystem disturbance and losing biodiversity. The leading causes of biodiversity loss include habitat loss and destruction, land and sea use change, invasive species, natural resource use and exploitation, pollution and climate change.
New global framework puts biodiversity on the agenda
Biodiversity is high on the agenda of policymakers and regulators. Governments are expected to agree on a new global target, similar to the 1.5-degree target of the Paris Agreement, when the UN Convention on Biological Diversity holds its fifteenth COP meeting later this year. The EU has published a 2030 Biodiversity Strategy to reverse biodiversity loss and integrate biodiversity considerations into EU policies. The business community is also taking an active approach. Major investors like Blackrock and the Norwegian Government Pension Fund Global have recently outlined their approach and expectations regarding biodiversity and ecosystems.
Regulation related to sustainability is moving fast, and biodiversity is quickly becoming a need to have, rather than a nice to have. The CSRD, SFRD and the EU Taxonomy will all require reporting related to biodiversity. The four remaining environmental objectives of the EU Taxonomy, including protection and restoration of biodiversity and ecosystems, are planned to be adopted in 2022 and enter into force in 2023. The first set of draft standards for the CSRD was published in April 2022, including a draft standard on biodiversity and ecosystems. Financial market participants will also have to report according to the Sustainable Finance Disclosure Regulation (SFRD), which has specific points related to biodiversity.
Sustainability reporting frameworks are also developing quickly in response to the growing understanding of the need to consider nature in financial and business decisions. Initiatives such as the TNFD (Task Force on Nature-related Financial Disclosures) framework and additional questions in the CDP (Carbon Disclosure Project) Climate Questionnaire have been developed to meet the needs of investors and other stakeholders.
Why businesses should care about biodiversity
Businesses depend on and impact natural capital, which can be defined as resources that combine to yield a flow of benefits to people. Like the financial world, where assets exist that give rise to a flow of revenue, nature consists of ecosystem services that give rise to flows of benefits to the economy.
More than half of the world’s economic output – an estimated US$44 trillion of economic value generation – is highly or moderately dependent on ecosystem services, according to the World Economic Forum (WEF). Biodiversity loss and damage to ecosystems can, therefore, have a significant negative impact on a company’s bottom line.
There are three main ways in which biodiversity loss can become material to a business:
1. When businesses depend directly on biodiversity for operations, supply chain performance, asset values (e.g. real estate) and business continuity. Sectors that rely on either extraction of resources from forests or oceans, such as the construction, pharmaceutical, agriculture and fisheries sectors, or sectors that are indirectly dependent on the provision of ecosystem services (e.g. healthy soils, a stable climate, pollination, freshwater) can suffer significant financial losses as nature loses its capability to provide these services.
2. When the impact of business operations can create direct and indirect risks in terms of regulatory, legal, reputational and market risks. For example, dependence on commodities linked to deforestation (e.g. soy, palm oil, beef, pulp and paper) can drive market and reputational risks in which some sectors are particularly exposed, such as the aquaculture, agriculture and forestry sectors.
3. When biodiversity loss contributes to enhanced geopolitical risk and market disturbances, such as poor health outcomes and disruptions to global peace. The risk of emergence and spread of infectious disease increases as biodiversity is lost. For example, the emergence and spread of COVID-19 has been linked to a complex interplay of ecosystem disturbance, urbanization, international travel and climate change. The importance of protecting nature to avoid outbreaks similar to that of COVID-19 has been emphasized in the EUs 2030 Biodiversity Strategy. The strategy also highlights the importance of investing in nature to ensure economic recovery from the pandemic.
The dependency on biodiversity varies by industry, with the agricultural, food and beverage, and construction sectors being particularly exposed. Other sectors, such as chemicals and materials, travel and tourism, real estate, and consumer goods, depend on nature throughout the value chain. As such, biodiversity loss should be considered a risk to all businesses.
Despite this, most companies and investors inadequately account for nature-related risks and opportunities in their decision-making. Going forward, businesses will need to include nature-related risk and opportunity as essential components of their risk assessment, alongside climate-related risk, and integrate these considerations into their risk management, strategies and governance processes.
3 ways to help tackle the biodiversity crisis
1. Assess material risks and opportunities to inform decision-making
A company should start to assess where its highest impact and dependency on nature lie in its operations and across the value chain. Several frameworks are available that can help get your business started with assessments. For example, the TNFD has made available a ‘how to guide’ for integrated nature-related risk and opportunity assessment processes to support assessments, which should inform strategy, governance, capital allocation and risk management decisions. The assessment will allow you to prioritize your efforts and set relevant metrics and targets for monitoring material risks.
2. Set targets and KPIs
Tracking and reporting on targets and KPIs require measurability, which is a complex field in relation to biodiversity. It requires large amounts of ecological data, which is challenging to collect. Geospatial data is expected to become key to measuring biodiversity, and there are several other initiatives underway to ensure data quality. The Science Based Target Network, which is most known for its work with climate targets, is at the forefront of this development and their framework, Science Based Targets for Nature: Initial Guidance for Business, presents a process for how companies can set, work towards and follow-up on science-based targets for nature.
3. Start reporting
While you may not have all the answers at once, start with what you know and can assess today. Start reporting on biodiversity to be transparent with your stakeholders about your businesses’ impact on nature. More and more companies have started to report, but an overwhelming majority of the largest businesses in Europe don’t mention biodiversity in their strategies or performance reporting.
