Biodiversity as systemic risk: Game-changers for capital markets

The Challenge

Historically ignored by business strategy and investment stewardship, biodiversity is increasingly recognised as core to the task of long term sustainable value creation; and biodiversity loss understood as both a firm-specific and systemic risk.

Some aspects of the economic value of biodiversity and nature are obvious (e.g. fish stocks, forest resources, genetic material for developing medicines). But for centuries abundance has made these resources seem inexhaustible, and therefore of little interest to fiduciaries beyond the prospects of a select number of natural resource-dependent companies. For society as a whole, not just fiduciaries, few understood our economic reliance on ecosystem services and that the lack of payment for these services was unsustainable and a prime generator of investment risk. Our economic prosperity has not reflected nature’s true value and the benefits it has provided.

Other aspects of biodiversity and its economic value are only recently becoming understood by capital markets. For example, investment fiduciaries are beginning to understand how biodiversity underpins critical natural systems such as recycling nutrients in soils, pollination, and purifying water. We also now know how the loss of nature can trigger pandemics caused by zoonotic pathogens that for a time find a ‘reservoir’ in mammals but then cross over to infect humans. The complex, dynamic, and inter-related connections between biodiversity loss and climate change are also confirmed. In a landmark joint report, the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) and the Intergovernmental Panel on Climate Change (IPCC) concludes that unprecedented changes in climate and biodiversity, driven by human activities, have combined and increasingly threaten nature, human lives, livelihoods and well-being around the world. Business as usual is not a viable long-term strategy.

In this context it is easy to feel overwhelmed, left searching for viable plans of action. Fortunately, scientists, economists, public policy-makers, business leaders, and investors have been developing the strategies and solutions that can allow us to get a handle on the biodiversity challenge. In a recent Viewpoint ICGN advanced 10 “game-changers”: concepts, processes, strategies, frameworks, legal regimes that will fundamentally change how the economy and capital markets interact with the environment. For this article, let’s have a look at a couple of key game-changers aimed at corporates and and investors.

Disclosure Frameworks to be Finalised in 2023 

Two corporate biodiversity disclosure frameworks will be finalised this year. The first is the framework now promulgated by the Taskforce for Nature-Related Financial Disclosure (TNFD). Modelled on the Taskforce for Climate-Related Financial Disclosures (TCFD), but adjusted for the unique challenges of reporting on risks and opportunities associated with biodiversity and nature,  the TNFD aims to develop and deliver a risk management and disclosure framework for organisations to report and act on evolving nature-related risks. The ultimate aim is to support a shift in global financial flows away from nature-negative outcomes and toward nature-positive outcomes.

The TNFD framework uses the four main disclosure categories of the TCFD: governance, strategy, risk and impact management and metrics and targets. While boards will wish to become familiar with the main features of the framework and the nomenclature of biodiversity metrics, directors should also note that the TNFD calls for disclosure of the board’s oversight role. Critically, the TNFD advances disclosure of how stakeholders are engaged in the risk assessment process.

Relatedly, in December 2022, the International Sustainability Standards Board (ISSB), clarified that a company’s ability to deliver value for its investors is inextricably linked to the stakeholders it works with and serves, the society it operates in, and the natural resources it draws on. Sustainability will be described in the ISSB’s General Sustainability-related Disclosures Standard (S1) as the ability for a company to sustainably maintain resources and relationships with and manage its dependencies and impacts within its whole business ecosystem over the short, medium, and long term.

The ISSB has also recognised the connection between climate and biodiversity. The ISSB will now research incremental enhancements that complement the Climate-related Disclosures Standard (S2), including relating to natural ecosystems and the human capital aspects of the just transition to a low carbon economy. To deliver this, consistent with its approach of building upon the work of market-led initiatives grounded in current-best practice and thinking, the ISSB will consider the work of the TNFD and other existing nature-related standards and disclosures where they relate to the information needs of investors.

The TNFD has promulgated beta version 0.4 for trial and comment. The final version will be released in September 2023. ISSB standards will also be finalised in 2023. Corporate directors should ensure that management is putting in place the people and procedures necessary to ensure compliance.

Finance for Biodiversity Pledge and Nature Action 100

The Finance for Biodiversity Pledge commits financial institutions to call on global leaders to protect and restore biodiversity through their financial activities and investments. The pledge consists of five steps:

1.  Collaborate and share knowledge on assessment methodologies, biodiversity-related metrics, targets and financing approaches for positive impact.

2.  Incorporate biodiversity into environmental, social and governance (ESG) policies and engage companies to reduce their negative and increase their positive impacts on biodiversity.

3.  Assess financing activities and investments for significant positive and negative impacts on biodiversity and identify drivers of its loss.

4.  Monitor opportunities to set and disclose targets based on best available science to increase significant positive and reduce significant negative impacts on biodiversity.

5.  Report annually and be transparent about the significant positive and negative contributions to global biodiversity goals linked to financing activities and investment portfolios.

As of March 2023, the pledge includes 126 financial institutions in 21 countries representing 18.8 trillion euros.

In December 2022, Finance for Biodiversity partnered with other key groups to launch Nature Action 100, a new global engagement initiative created to drive urgent investor action on the nature-related risks and dependencies in the companies they own. The initiative will engage companies in key sectors that are deemed to be systemically important in reversing nature and biodiversity loss by 2030.

Modelled on Climate Action 100+, Nature Action 100 aims to drive greater corporate ambition and action on tackling nature loss and biodiversity decline, complementing the UN Global Biodiversity Framework. The initiative will identify the actions companies need to take to protect and restore nature. Stewardship teams should assess the value of joining the initiative. Board directors should maintain watch on the sectors and companies that will be prioritised for engagement and take heed of the solution-sets that the investor initiative will propose.

One Last Word

TNFD, reinforced by the standards advanced by the ISSB, and the stewardship action undertaken by Nature Action 100 are key features of a rapidly expanding network of nature-related disclosure frameworks and investor initiatives.  Disclosure requirements combined with shareholder demands will prompt companies to allocate the resources necessary to assess their risks and take the steps necessary to avoid negative impacts, minimise where they can't avoid, and begin the process of restoration.

Five years ago biodiversity loss did not feature prominently in discussions of investment risk. But, along with climate change, this challenge has now jumped to the top of the global agenda, presenting potentially existential threats to the economy, society and capital markets. It is difficult to discuss the risks presented without sounding alarmist. But the reality is that the  world has now entered an era where humanity has become the dominant evolutionary force and is triggering the greatest extinction of species we have known. Action is required. Happily, opportunities for taking action are rolling out right now.

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By Robert Walker, Sustainability Policy Manager at ICGN and current Chair of the Nominations and Governance Committee of the International Institute for Sustainable Development.

To read further articles on Biodiversity, click here

If you would like to read further articles in the 'Governance and Climate Change' series, click here

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