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Why Biodiversity Risk is a Business Risk

Momentum around corporate climate action has snowballed in the past year. From the explosion of net-zero commitments to the US SEC’s release of its proposed climate disclosure rules, greenhouse gas emissions have been the central focus when it comes to climate.

However, carbon reduction is only one part of the equation. Biodiversity loss is a primary driver of climate change – we can’t solve one without addressing the other. That’s because the destruction of nature turns our ecosystems into a carbon source rather than a carbon sink. In fact, the degradation of land for agriculture and other uses accounts for 23% of total GHG emissions. Put simply, emissions reductions must go hand in hand with biodiversity goals if we want to reach net-zero.

Businesses have a considerable way to go in this regard. Few companies are exploring their impact on biodiversity loss, and even fewer have a formalized biodiversity strategy. Of the S&P 500, less than 20% have made any kind of biodiversity commitment.

Read on to learn why your business should start paying attention to biodiversity and how to incorporate nature into your climate action roadmap.

Why Biodiversity Matters

First, what is biodiversity and natural capital? In layman's terms, biodiversity is the variety of life on Earth. Similarly, natural capital is our global bank of natural assets, including soil, water, air, and all living things.

You might be wondering how business and biodiversity are linked. Businesses are more reliant on nature than you might think. Our ecosystems provide crucial economic services, from supplying food, fuel, and medicine to storing carbon and filtering air.

Furthermore, according to the World Economic Forum, more than $44 trillion of economic activity, or over half of global GDP, depends on nature. Put another way, biodiversity provides more than $150 trillion in annual economic value, or nearly double the global GDP. Destroying natural capital, then, is often synonymous to destroying business capital.

This loss of capital impacts a broad range of companies, especially those in nature-reliant industries like agriculture, pharmaceuticals, fashion, tourism, and construction. It’s now estimated that 1 in 5 businesses could face significant operational risks due to collapsing ecosystems.

What if you aren’t in one of these high impact sectors? If your operations aren’t closely connected to nature, biodiversity may not feel relevant. However, even if your business doesn’t directly rely on natural capital, your suppliers and customers could be impacted by biodiversity loss – and their risks are your risks.

Risks aside, biodiversity should also be thought of as an opportunity. No matter what sector you’re in, investing in biodiversity can help you meet your goals faster. For instance, supporting “nature positive” projects like forest and mangrove restoration could offer 30% of emissions reductions needed by 2030 to limit warming to 1.5°C. That should get any climate-friendly business excited! There’s a clear economic benefit, too. The United Nations estimates that every $1 spent on ecosystem restoration will result in between $3 and $75 of economic value.

Biodiversity and Risks to Investors

Biodiversity is being increasingly recognized as an issue of risk and opportunity rather than corporate responsibility. Similar to climate disclosure, investor concern over nature-related risks will be the primary catalyst for corporate action and reporting on biodiversity. Investors are already paying attention.

So, how could biodiversity affect your business, and what has investors worried? Just like climate change, biodiversity has its own set of risks:

  • Supply chain disruptions and material shortages
  • Price volatility due to increased cost of raw materials
  • Smaller crop yields from overused lands and unsustainable farming practices
  • Disrupted business operations and loss of customers in nature-reliant industries
  • Loss of pollinators from destruction of natural habitat and exposure to pesticides
  • Reputational and legal risks around sourcing practices in commodity-based industries like sugarcane, palm oil, and mineral mining

While all sectors have good reason to start mitigating their impact on nature, today’s investors are most concerned about those with large, global supply chains. For an oil and gas company, investors might consider the impact of oil spills. For a food and beverage company, investors might want to know about deforestation risk, one of the biggest threats to biodiversity. Regardless of your sector, investors will at a minimum want to know if you’ve screened your operations and supply chain for biodiversity loss, and what risks you’ve found.

Given the outsized impact nature-related risks pose to investment portfolios, investors will likely start moving capital into nature positive businesses. We’re already seeing signals of this transition.

For example, the Finance for Biodiversity Pledge now convenes nearly 100 signatories managing $14 trillion in assets committed to protecting biodiversity through their investments. Similarly, in 2021 the World Bank published Nature Action 100, a proposal for investor engagement on biodiversity. And of course, during COP26 we saw more than 100 countries and 30 global financial institutions sign on to a commitment to stop forest loss and land degradation by 2030.

Bottom line – preserving nature is becoming part of the social license to operate. As a result, the pressure is on in both the public and private sectors to understand, mitigate, and report on biodiversity. Your business should act now and be ready to respond.

How to Incorporate Biodiversity into Your Climate Action Plan

By incorporating nature into your climate strategy, your business can enjoy cost savings, more stable supply chains, better stakeholder relationships, and long-term resilience. Here’s how to get started:

1) Uncover Your Impact

The first and most important step is to conduct due diligence to determine what your biodiversity risks are. Nature-related risk is a two-way street. Be sure to consider not only how biodiversity loss affects your business but also how you might be contributing to environmental degradation.

While your own operations may not be tied to biodiversity issues, it’s crucial that you engage your suppliers and screen high spend materials for risks. Similar to GHG emissions, it’s likely that your greatest biodiversity impacts are hidden deep within your supply chain.

Of course, these impacts vary by industry, so take a little time to research what risks are relevant to your business. For example, if you’re an airline looking into sustainable aviation fuels, ask yourself where the biomass is coming from and how the land is managed. If you’re a cosmetics company, consider how your sourcing of raw materials impacts the local ecosystem. If you’re a food and beverage company, screen for risks associated with monoculture, deforestation, and water security.

2) Formalize a Commitment

Once you’ve uncovered your nature-related impacts, formalize a biodiversity commitment into your larger ESG or climate strategy. There are three types of biodiversity commitments businesses can make:

  • No net loss: Your negative biodiversity impacts are offset by equivalent nature-related investments or initiatives
  • Net positive: Your biodiversity initiatives are greater than your negative impacts
  • Issue specific pledges: Your business makes specific pledges, such as using certified raw materials or committing to no deforestation

Commodity-specific product certifications are a great place to start. For instance, if you’re concerned about deforestation associated with palm oil production, you could commit to sourcing 100% RSPO certified palm oil by a certain year.

A bolder step would be to tackle deforestation more holistically. Unilever is a noteworthy example – they’ve committed to a deforestation-free supply chain by 2023. This means that all palm oil, paper and board, tea, soy, and cocoa will come from places that are verified as deforestation free.

No matter your commitment, remember to set a target year. Without a time-bound target, you risk undermining your commitments with a lack of accountability.

3) Brainstorm Mitigation Strategies

When it comes to GHG emissions, many businesses have fallen prey to the “say-do” gap. To ensure your biodiversity pledges don’t share the same fate, brainstorm tangible actions you can take to live up to your commitments. Here are some ideas:

  • Invest in ecosystem restoration projects in places where you source raw materials.
  • Change product design to promote circularity or reduce use of hazardous inputs.
  • Offer trainings, incentives, and financial support to suppliers to encourage sustainable production practices.
  • Create systems to measure and monitor risks throughout your entire value chain.
  • Integrate biodiversity considerations into site selection and product design.

Here are a few ways leading businesses are taking action to protect and restore nature:

  • Apple, Gucci, and Procter & Gamble partnered with Conservation International to restore hundreds of thousands of acres of mangrove forests.
  • Danone and General Mills have partnered with their suppliers to restore soils and pollinator habitats through regenerative farming practices.
  • Suzano, a Brazilian paper and pulp company, complies with its strict zero-deforestation policy by only using wood grown from eucalyptus plantations. On top of this, they’ve invested in the protection of more than 900,000 hectares of native forest.

While it may be tempting to rely on carbon offsets (after all, offsets can support tree planting and reforestation), just remember that offsets don’t make up for the destruction of ancient ecosystems. Your focus should be on avoiding and reducing biodiversity loss throughout your value chain.

Emerging Reporting Frameworks

Biodiversity is rapidly moving up the agenda for financial firms. As a business, you’ll soon be expected to disclose how you’re tackling biodiversity challenges alongside your decarbonization efforts.

In fact, nature is already making its way into our reporting frameworks and standards bodies. For instance, this year’s CDP climate questionnaire featured a brand-new section on biodiversity. Overseas, the European Commission is moving to impose non-financial reporting obligations linked to biodiversity. At the international level, the highly anticipated IFRS Sustainability Disclosure Standards are likely to incorporate biodiversity guidance from the Climate Disclosure Standards Board (CDSB).

For companies looking to report on their biodiversity impacts, it may be a bit of a bumpy road to start. Biodiversity is even more of a wild west than ESG and net zero when it comes to industry standards and metrics. That said, help is on the way.

In late June, the Task Force on Nature-Related Financial Disclosures (TNFD) released the second version of its biodiversity disclosure framework. Similar to the TCFD’s climate disclosure recommendations, the TNFD will help businesses understand and disclosure their biodiversity risks and opportunities. The full version is expected in 2023.

Until then, here are a few other resources and initiatives to be aware of:

There may not be one perfect tool or globally agreed upon framework for biodiversity disclosure – at least not yet. But that doesn’t mean you need to wait. Today’s emerging standards support a shift away from nature-negative businesses. You should start working with your suppliers now to evaluate and mitigate your biodiversity impact.

Where We’re Headed

Climate change and biodiversity loss are increasingly being recognized as twin crises. No matter what sector you’re in, biodiversity is the next frontier of corporate environmental action.

While this year has focused heavily on climate disclosure, nature-related risks and opportunities are next up on the docket for investors. It won’t be long before you’ll be asked to share how you’re managing natural capital, including air, water, land, minerals, and forests.

If you need help integrating biodiversity into your larger climate strategy, whether that’s engaging your suppliers or formalizing commitments, our door is always open. Get in touch with our team here.