The natural world underpins half of the global economy—its demise presents a potentially devastating risk to the global economy.
Conversations about biodiversity have often been relegated to a mere footnote during climate-focused conferences. But firms are starting to understand that the long-term ramifications of a threadbare planet directly correlate with their bottom lines.
The World Economic Forum estimates that roughly half of the world’s total GDP, or about $44trn of economic value, depends on the natural world in some way, making its demise extremely costly. Scientists believe that unless transformative measures are taken to stem biodiversity loss, many of the near-one million species that are currently on the brink of extinction may disappear in the coming decades.
By overlooking the role nature plays in economic activity, economists underestimate the risks from environmental damage to growth and human welfare, wrote Partha Dasgupta in a landmark 2021 report on the economics of biodiversity. If extracting exceeds nature’s capacity to repair itself, the stock of natural capital shrinks and, with it, valuable environmental services.
“Nature and natural capital is the most precious asset that we in our economies have for life on Earth. Period,” Brian Kernohan, chief sustainability officer at Manulife Investment Management explained during Economist Impact’s Sustainability Week, Asia in March. “We, and therefore our economies, are embedded in nature, not external to it.”
Investors fret that nature-related risks might emerge in their portfolios. The degradation of natural ecosystems would disrupt the supply chains for many companies increasing the risk of default, Mr Dasgupta assesses in his review.
Moody’s Investors Service, a financial credit rating firm, reckons that there are eight sectors with almost $1.6trn in rated debt that have “high” or “very high” inherent exposure to natural capital. The industries considered most at risk include mining, some oil and gas sub-sectors, environmental services and waste management, building materials, steel and protein and agriculture, according to its environment heat map.
“Many will seek to reduce the negative impact of their investments,” says Lucia Lopez, vice-president and senior credit officer at Moody's Ratings, “which will entail shifting the focus from simply ‘doing no harm’ to ‘actively doing good’, such as financing activities and companies that preserve, protect and enhance nature over the long term, and create positive biodiversity outcomes.”
In an attempt to shepherd firms towards managing natural resources responsibly and prevent further biodiversity loss, the Taskforce for Nature-related Financial Disclosures (TNFD) published a set of recommendations in September that provide companies and financial institutions of all sizes with a risk-management and disclosure framework to identify, assess, manage and disclose nature-related issues.
The body in January announced the first 320 publicly listed companies—a third of which are financial institutions—from over 46 countries that have signed up as early adopters, including Olam food ingredients (ofi), an agri-firm supplying cocoa beans, coffee, dairy, nuts and spices worldwide.
“Nature-related risks, physical, transitional and systemic risks, motivated this decision,” says Rishi Kalra, group chief finance officer at ofi. The firm has identified the decline in pollinator populations as a risk to adequate crop production. “For a business like ours pollination is among the most visible and important ecosystem services,” Mr Kalra says.
The recommendations arrive with the gradual tightening of environmental regulations, influenced by the Kunming-Montreal protocol, an agreement by governments to protect 30% of the planet by 2030 featuring 23 non-legally binding targets for states. Shareholder scrutiny is almost certainly set to increase across all industries.
“We expect that policymakers will focus on establishing regulatory frameworks to push companies toward disclosure and enable investors to value and account for their use of natural capital,” says Ms Lopez.
Companies failing to align with these norms face not only reputational damage driven by campaign groups and legal challenges, but also financial penalties and barriers to market access. The EU’s Regulation on Deforestation Free Products (EUDR), for instance, will be applied from the end of this year to ensure that the products its citizens consume do not contribute to deforestation or environmental degradation.
Most investors and businesses are only beginning to include nature-related risks in their assessments. Some will likely drag their feet. Disclosures are not mandatory, uptake varies and reporting is selective, unaudited and rarely forward-looking. While some companies disclose nature-related targets, they don’t spell out the financial implications, says Ms Lopez.
Folding nature-related risks into financial decision-making “may require a shift in mindset”, acknowledges Mr Kalra. Ofi was one of the first to publish a natural capital profit and loss statement and balance sheet.
“Through measuring natural, human and social capital, not covered within conventional financial statements, we are ensuring sustainability and finance teams talk a common numerical language that everyone can understand, evaluate and articulate,” explains Mr Kalra. “The need for CFOs and finance professionals to help bring the rigour of finance and accounts to sustainability concepts is incredibly important.”
Indeed, investors and companies complain about a lack of data and the complexity of the exercise. Unlike measuring greenhouse-gas emissions, which uses the single key metric of a tonne of carbon dioxide—which already boggles some business minds—there is no ready way of gauging the value complex biomes have on balance sheets. Third-party supply chains that sprawl multiple countries add to the confusion.
“Many of the relevant factors for understanding nature-related risks are local and particular to the different biomes, which makes the measurement of nature-related risks and opportunities especially challenging,” says Ms Lopez.
Still, the TNFD based its framework on the existing and established Taskforce for Carbon-related Financial Disclosures, which spurred corporate reporting on climate risk and with which business and finance are familiar.
As the TNFD framework gains traction and with tighter regulations on the horizon, those who shift from passive compliance to proactive preservation will likely lead the market. For the rest, the cost of inaction will be measured in lost dollars and damaged reputations.
“Society requires us to get this right alongside climate change,” charges Mr Kernohan. “The fact of the matter is, if we exceed planetary boundaries, it won’t do any good that we’re not emitting, because nature will have been destroyed.”
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