The rate of biodiversity loss and ecosystem degradation is at its highest in history. An estimated $44trn, which amounts to more than half of the world’s GDP, is moderately or highly dependent on nature. Hence the need for corporates and financial institutions to take a credible, quantitative approach to understand their impact on nature.
“What the markets are going to realise is you can’t have net zero without nature-positive,” says Lauren Smart, chief commercial officer at S&P Global Sustainable1. “Nature provides vital services – but is generally used as a free resource when actually it’s anything but.
“By measuring the value of nature to business, you begin to evaluate correctly, and when you do that you’re able to make better decisions as businesses and as investors. Establishing those values, however, remains a big blind spot.”
While initiatives such as the Task Force on Climate Related Disclosures (TCFD) have helped create common metrics and reporting standards in relation to climate change, progress has been slower on nature. This has led to a lack of focus on the part of businesses and clarity for investors. Under 20% of S&P 500 companies had made commitments to protect biodiversity and natural capital, according to the S&P’s 2021 Corporate Sustainability Assessment.
Even of those that have made pledges, 40% have failed to identify a target year. A lack of accountability and transparency lies at the heart of many of these failures, but that situation looks as though it may be in the process of changing.
Putting biodiversity into numbers
The Taskforce on Nature-related Financial Disclosures (TNFD) has been established to help create a risk management and disclosure framework for organisations to report and act on evolving nature-related risks, with the ultimate aim of supporting a shift in global financial flows away from nature-negative outcomes and towards nature-positive outcomes.
The TNFD, which consists of 34 senior executives representing financial institutions, corporates and market service providers that together have $19.4trn in assets, is in the process of testing and refining its framework, ahead of publishing its final proposals in September of this year. Version 0.3 of its beta framework was released for market consultation in November of last year, with v.04 scheduled for this March. Its potential to change this space is significant.
“The TCFD has had huge traction, and the TNFD is a fast follow,” remarks Smart. “We now have a broader lens, meaning we won’t take a myopic approach to solving one problem, and perhaps creating another problem at the same time.
“It’s not easy,” she adds. “Nature is a much harder issue to tackle. It’s not as obvious as it is with climate, but there’s been some incredible work, some great progress, and the guidance and the frameworks that are coming from the TNFD, which we are working to support, are all really valuable.”
A number of financial institutions are already beginning to examine the process of reporting in line with the provisional recommendations that the TNFD has made.
“That process of experimentation moves the whole market forward,” says Smart. “So it is a very hot space to watch, and there is a huge amount of innovation, which also makes it very exciting.”
As part of that process of innovation, S&P Global Sustainable1 has launched a pilot programme with the UN Environment Programme World Conservation Monitoring Centre (UNEP-WCMC). Thought leaders representing investment management, banking, insurance, business and non-profits are invited to join the pilot programme, focused on “supporting global efforts to accelerate a shift of capital towards nature-positive outcomes through the universal lens of the TNFD framework”.
The pilot delivered its final report in January, announcing the Nature Risk Profile, a new methodology for analysing companies’ impacts and dependencies on nature.
The programme’s overarching ambition has been to drive the development of better data intelligence in this space, using geospatial biodiversity datasets curated by UNEP-WCMC, combined with S&P Global’s in-depth information about local business activities.
The new methodology outlines metrics and data that enable companies and investors to identify and quantify nature-related exposure. It covers several key areas, including risks arising from companies’ impacts on biodiversity, risks arising from companies’ dependencies on biodiversity and potential risks via proximity to biodiverse areas.
“For example, we overlaid the locations of power lines with the locations of key biodiversity areas,” Smart says of the work. “We did this analysis in North America and you could see that state-level policy makes a huge difference.
“On the east coast and west coast, you see power lines going around key biodiversity areas,” she adds. “In other states, they crisscross right the way through. Perhaps more interesting, though, is the location of renewable assets and key assets for the transition to a low-carbon economy, like lithium. We found some key commodities for the low-carbon transition and their mine sites are actually located in key areas of biodiversity.”
With 14% of renewable assets in Europe also located in key biodiversity areas, the implication is that their extraction for carbon reduction purposes must be carefully balanced with the challenge of preserving the surrounding environment.
First steps on a fruitful journey
The success in creating regulatory frameworks for carbon reporting hopefully feeds the momentum for conducting similar work in the field of biodiversity, laying some of the groundwork for putting climate change and nature at the heart of a clear and workable system for financial reporting.
“We now have to stretch those efforts out beyond just carbon,” says Smart. “We need to make sure that we’re taking into account all of nature, all of the ecosystem services on which businesses in our economy depend.”
As with carbon, change will be incremental and take time, but the huge task of tackling the biodiversity challenge has begun.
“One of the really good things that the TNFD has done is to not be too prescriptive about what the metrics are,” Smart remarks. “What we’ve learned from over the many years of carbon and climate reporting is that we need to have metrics and targets that are practical and methodologies that are viable.
“If companies can’t do it, you get a paralysis in the system,” she adds. “Creativity and innovation are extremely important, but so is making sure that progress is grounded in practical examples.”
