Just as companies and investors have wrapped their heads around the complexities of climate change and we begin to see mandatory reporting take hold across the globe, an even more complicated issue is gaining traction. Biodiversity has long been on the agenda for certain industries in terms of land reclamation or protecting vulnerable species. However, only in the last few years has the issue broadly picked up the pace, given the world’s increased understanding of the interdependence of business and biological systems that sustain us and the economy.

This growing interest culminated in the Global Biodiversity Framework, an international agreement to protect 30% of land and oceans by 2030, which was agreed to by 190 states in December 2022. In parallel, a global framework for how companies could report on their dependencies and the risks of biodiversity to their business is being developed and expected to be finalized in September 2023. If you are familiar with the Task Force on Climate-Related Financial Disclosure (TCFD), you will recognize the structure of this new framework, conveniently named the Taskforce on Nature-Related Financial Disclosure or TNFD.

Biodiversity through the Lens of Investment

Ultimately, biodiversity is about systems and how they interact with one another. Traditionally we tend to think of our economic system as quite distinct from natural systems when, in fact, they are highly interdependent. Economic prosperity requires a functioning ecosystem and the evidence tell us that many of these systems are not flourishing.  

Consider a few facts. According to Bloomberg New Energy Finance (BNEF), 50% of all land worldwide is used for agriculture while 55% of oceans are industrially fished. In addition, 70%-84% of fresh water is withdrawn for use in agriculture, depending on the region. If the natural resources of land and water are degraded and no longer able to produce healthy products, what happens to the industries that rely on these resources? Yields will clearly suffer, and profits will shrink. Agriculture is one sector facing these challenges but there are others.

This is why investors are waking up to the risks of biodiversity. Biodiversity can be thought of as a systemic risk for investors when you acknowledge the interdependencies between the economic and biological systems. If you are invested in the broad economy your portfolio will be impacted by biodiversity when systems are degraded.

Investors also need to consider regulatory action following the establishment of the Global Biodiversity Framework. Governments are looking to implement the framework through various policy tools that will affect business, such as removing subsidies considered harmful to biodiversity or setting aside more land for conservation.

Enter the TNFD Framework

If you are struggling to understand how your business is impacted by or affects biodiversity, the pilot framework from TNFD provides a useful approach: Locate; Evaluate; Assess; and Prepare. The first step involves taking location-specific data related to assets or facilities and overlaying ecosystem information to identify priority issues such as water scarcity or critical natural habitats that might be impacted by your business.

Then your business is in a position to evaluate the specific dependencies and impacts. This allows you to gain a full understanding of the ecosystem services on which the business may depend, as well as the impacts it may have on priority areas of concern. Similar to enterprise risk management (ERM), the next step involves identifying which of the risks and/or opportunities are, in fact, material to the business. This may involve qualitative and quantitative metrics and identifying corresponding mitigation action for those considered material. Finally, the previous three steps put you in a position to provide a comprehensive assessment to the market of the most material risks and opportunities related to biodiversity using the TNFD framework.

The framework has now been through several rounds of consultations, and I cannot sugarcoat the reality of how complex it is. While it may be relatively easy to assess regulatory risk in this area, attempting to measure and value natural ecosystems is in its infancy. Climate change is clearly a global issue, but biodiversity is very location-specific, making solutions more nuanced and, for investors, so far lacking the same price signals.

For institutional investors with large, diversified portfolios, the topic becomes that much harder as you start to analyze how company-level data rolls up to a total portfolio view. We may be familiar with some biodiversity concepts through exposure to the Sustainable Development Goals or broad sustainability reporting to date. However, digging into this issue will be a learning process for the investor community.    

What’s Next?

Investors and companies can look forward to the TNFD framework being finalized by September of this year. The TNFD has a variety of resources and guidance available on its website that allows some early exploration. At the same time, the International Sustainability Standards Board has signalled that biodiversity will be one of the topics it tackles following the launch of its climate reporting standard and general requirements standard in mid-2023.

The bottom line is that this topic is gaining steam quickly and should be on your company’s radar. How much do you already know about your biodiversity impacts and dependencies? My guess is, more than you think. If you have physical assets, you have likely already done work on biodiversity implications. If you don’t, some of the risks may be hidden in your supply chain. There may even be associated business opportunities to pursue, as technology will play a key role in assessing and measuring biodiversity in the future. Regardless of your industry, be prepared to tackle biodiversity in the not-too-distant future.

Jennifer Coulson is Vice President, ESG, Public Markets, at BCI.