Money managers need to become more literate in what biodiversity loss may cost them, and get ahead of new nature-related financial disclosure requirements.
The climate crisis has made us rethink our relationship with the natural world. While we can already quantify many of the direct impacts of climate change – from forest fires to flooding – the loss of biodiversity is leaving a subtler, but equally devastating, impact on life on Earth. Today, more than 75% of global food crop types rely on natural pollination – all of which are fast disappearing. Humans represent just 0.01% of the biomass of all living things, yet have already caused the loss of over 80% of all wild animals and nearly half of all plants since the dawn of civilisation!
Global institutions, including the World Wildlife Fund (WWF), the Biodiversity Finance Initiative (BIOFIN), and Finance 4 Biodiversity (F4B), are among many sounding the alarm and pushing for ways to redirect financial flows towards activities that safeguard and enhance nature rather than destroy it. Such nature-based solutions (NbS) aim to “protect, sustainably manage, and restore natural or modified ecosystems", while providing valuable benefits for people and the planet alike.
An important milestone in the process of establishing a method to protect and nourish biodiversity is the ability to attribute value to natural capital. Classical economic models have discounted, if not wholly ignored, the value of the environment and nature, resulting in its overexploitation and systemic failure. In trying to solve this issue, it is useful to determine how nature is impacted by economic activities or, conversely, impacts economic activities.
The aspect of regionality with regards to the impact on nature means that different players along the value chain will have a different relationship with nature and the environment.
One of the best ways to do this would be via the roll out and implementation of nature-related disclosures, which would essentially encourage businesses to disclose the positive or negative impact of their activity on biodiversity and nature.
F4B, an initiative that aims to increase the materiality of biodiversity in financial decision making, is working to channel investments into 'nature positive markets' that support vulnerable ecosystems. It builds nature-focused investment platforms and open source databases to share knowledge and risk assessment methodologies.
Others, like the WWF, are publishing indices such as the Climate and Nature Sovereign Index that help evaluate the impact of sovereign debt on nature. Financial institutions have also built a Partnership for Biodiversity Accounting Financials (PBAF) to standardise the measurement and reporting of the impact of the financial sector on biodiversity.
The most significant development in nature-related financial disclosures is the Task Force on Nature-related Financial Disclosures (TNFD ), which aims to encourage investors to quantify and disclose the relationship between investee companies and nature. Building on the success of the TCFD, the TNFD framework will “provide a framework for corporates and financial institutions to assess, manage and report on their dependencies and impacts on nature".
Ultimately, the goal is to begin shifting financial flows towards an economy that works with nature instead of against it by pushing businesses to disclose nature-related risks, and allowing financial investors to make more informed decisions.
The design and development of the TNFD framework ensures that transparent data about the impact and the dependency on biodiversity and nature by organisations is reported. This form of double materiality – impact and dependency – is the newest methodology when it comes to climate and biodiversity-related financial data. The French government, one of the frontrunners in the development of the TNFD, has already updated its legislation to include this concept.
As of September 2021, 100 institutions across various sectors have signed up to be a part of the TNFD Forum, to provide expert advice on the development and design of the framework, while 30 executives from financial institutions, companies and consultancies will constitute the taskforce responsible for designing the framework via five working groups.
A beta version of the framework will be ready by early 2022, and open to public review before its official release in 2023.
While it will not develop a concrete standard, the TNFD Taskforce expects its findings and input to be integrated into existing reporting standards, like the GRI or SASB. Standardised reporting and disclosure have helped businesses align their operations to become more climate aware with the TCFD. Having a similar disclosure for nature-related risks will push the development of policies and investments in this area.
However, there are still a few key differences to keep in mind with the two disclosures:
All in all, however, the TCFD and TNFD will be highly complementary to each other. What makes this particularly relevant is that now there is a precedent for financial institutions engaged with the TCFD to also adopt other non-financial disclosure practices in the future, potentially heralding the adoption of other non-financial disclosure practices across the ESG landscape.
According to research made by Credit Suisse, biodiversity will become a topic of paramount importance in the next 10 years. It is clearly a topic of central importance for forested countries like Brazil, Indonesia and the DRC, but even the Saudi Green Initiative is focusing on biodiversity. Nevertheless, fewer than 5% of companies are addressing the issue. In part this may be a lack of awareness, but it can also be due to the many barriers precluding the involvement of investors – scarce information, lack of data and metrics, and a lack of methodologies to quantify natural capital.
In order to start mobilising capital towards the protection of biodiversity, it is necessary to develop international standards, clear policies, and industry-wide awareness. Thankfully, this is already underway around the world. The UN Biodiversity Convention (also called the CBD COP 15 Conference) in April/May 2022, will bring together governments from around the world to set goals for nature in the following years – much like a 'Paris Agreement for Biodiversity'.
The UN has also launched the UN Decade on Ecosystem restoration to maximise efforts to conserve and recover ecosystems to achieve the Sustainable Development Goals on time. And finally, GIS tools and other programs will be increasingly used to analyse the real impact on biodiversity on the ground by, for example, detecting species and tracking animals and plants in hard-to-reach areas.
Despite existing challenges, research shows that understanding and measuring biodiversity risk will become one of the most important topics for investors over the next decade. The TNFD will play a key role in documenting this risk. What we need now is awareness and acceptance of the terrible consequences of our current activities to urgently mobilise capital for biodiversity conservation. If we are to avoid financing ourselves into extinction, international cooperation and technology development will be crucial, if not compulsory.
South Pole is an award-winning project developer with deep expertise on biodiversity conservation across projects and products. The company helps leading organisations in the financial sector measure and analyse their impact across the environmental focused SDG's, including life on land and water. South Pole also acts as platform coordinator for the Coalition for Private Investment in Conservation (CPIC), an organisation that develops 'blueprints' for delivering risk-adjusted returns from investments in natural capital.
“If you’re in the financial sector and interested in knowing more about nature-related financial disclosures, reach out today.”