Getting to grips with nature and biodiversity
Barely a week has gone by in the past two months without the launch of another nature-related initiative or milestone.
Most notably, the Taskforce on Nature-related Financial Disclosures (TNFD) released its final recommendations in September. It laid out 14 core disclosures that entities should make to demonstrate how they are assessing and managing their nature-related risks and impacts.
TNFD is based on the Taskforce on Climate-related Finance Disclosures, which was created by the Financial Stability Board in 2015 and has become a global standard for reporting on climate risks. In fact, the two frameworks are so closely aligned that many expect them to eventually merge into a single set of disclosure expectations.
This model of taking what’s worked in the climate space and creating an equivalent for nature has underpinned most of the other launches from the past two months.
There are two collaborative engagement initiatives based on Climate Action 100+: Spring, launched this month, and Nature Action 100, which has just announced its list of target companies. Between them, they will mobilise hundreds of investors around a shared set of expectations about how portfolio companies should manage issues like deforestation, biodiversity and lobbying.
Science-based Targets for Nature are also being rolled out, mirroring the Science-Based Targets initiative that’s become the go-to framework for firms wanting to demonstrate their commitment to a credible climate transition.
Biodiversity credits and nature-related disclosure rules are also being developed based on their climate equivalents.
“But nature has the potential to move much more quickly than we’ve moved on climate,” says John Willis, director of research at Planet Tracker, a London-based think tank specialising in capital markets and planetary boundaries.
This is because, as well as being able to learn from the successes (and mistakes) of the climate movement, it may be easier to finance nature-related opportunities, he explains. While decarbonisation projects are often large and global, those related to biodiversity objectives, for example, are usually small and localised, with tangible results and easily-identifiable beneficiaries.
“You can also get a sort of two-for-the-price-of-one deal with nature,” adds Willis, referring to the fact that nature-based solutions like reforestation often contribute to climate goals, too.
Buy-in from companies is still patchy, though.
Research from MSCI last month found that, while more than 80% of the firms it assessed in diversified chemicals, construction materials, oil and gas refining, paper and forest products and beverages industries referred to biodiversity risks in their latest annual reports, there was only “limited references” from companies in other high-risk industries like biotechnology, semiconductor equipment, oil and gas exploration and commodity chemicals.
When non-profit CDP analysed the data firms disclosed to its platform last year, it concluded that more than half were “failing to take action to progress their biodiversity commitments in the past year”.
But many companies are about to have their hands forced, especially in Europe.
Entities in scope of the EU’s Corporate Sustainability Reporting Directive (CSRD) will soon be required to assess the significance of nature to their businesses and, if found to be material, provide detailed disclosures on related risks and impacts.
Even companies not directly covered by the law may find themselves having to comply, to keep up with peers and satisfy shareholders and lenders.
“We tend to advise clients that, if they’re covered by CSRD, [it should be] the number one focus for now,” says Caitlin Brown, a managing consultant for corporate sustainability and head of nature at environmental consultancy ERM.
“The compliance driver is hard enough, so prioritise that and then look for alignment with any additional voluntary disclosures after.”
Brown says that companies should also “get familiar” with the TNFD framework, because it’s likely to become mandatory in many jurisdictions over time (the UK Government has already come out in support of the recommendations). “But also because it’s a great methodology to follow for meeting the ESRS environmental standard requirements.”
The European Sustainability Reporting Standards are the rules that underpin the CSRD, and the specific standard that relates to biodiversity is known as E4.
As with all the ESRS, E4 doesn’t specify how a company should generate its disclosures – it just describes the information that should ultimately be provided to stakeholders.
And that’s where TNFD’s methodologies can come in.
“When it comes to biodiversity, E4 tells you what cake to bake, but TNFD provides the recipe,” explains Brown.
The two frameworks have some differences – TNFD doesn’t require transition plans for biodiversity, for example – but Brown estimates there is about 80% overlap in expectations, and E4 namechecks TNFD in its standard.
What to disclose
At the moment, the EU hasn’t provided companies with any thresholds or advice on how to decide when a nature-related issues becomes material enough to warrant disclosures under ESRS. Its advisory body, EFRAG, has drafted some guidance and will shortly put it out for consultation.
In the meantime, James Hulse, an expert in deforestation and nature, and director of Hindsight Consultancy, says companies should start by identifying the risks that nature poses to their business – although this can be more nuanced that simply finding revenue streams that rely on natural resources.
“You might not have any significant dependencies on nature, so there are no direct material risks to the business,” he says. “But you could be a significant driver of impact, and eventually, most impacts become risks.”
Consumer goods giant Unilever, for example, is one of the biggest corporate buyers of the world’s palm oil.
“It may not be very significant in terms of their overall business,” says Hulse, “but in terms of their influence on global palm oil production, it makes them a key player. And, for a brand that relies on retail consumers, that makes it a material business risk because it creates reputational issues.”
For companies wanting to disclose nature-related information that isn’t required by legislation, Brown says “it’s all about working out what your stakeholders want”.
“In reality, the people using all this information are limited to a handful of investors, civil society groups and consumers, so listen to what matters to them,” she says. “Otherwise you can end up creating a massive data output into the market that no one reads and no one understands.”
Planet Tracker’s Willis says some companies are already doing good work on nature in the voluntary space.
He points to Nestle, which has explained how it is managing key commodities, and Coca Cola, which outlines how water stress in different locations could impact its revenues.
Assets vs. Supply chains
There is a growing list of tools to help companies get to grips with their impact on, and exposure to, nature and biodiversity. At the time of writing, the TNFD had identified 138 of them in its ‘tools catalogue’.
For companies wanting to satisfy lenders’ often stringent environmental rules, there are frameworks like ‘Performance Standard 6’ from the IFC. Many financial institutions themselves have started using Encore, an open-source tool to help identify portfolio-level risks stemming from nature.
The UN’s Integrated Biodiversity Assessment Tool (IBAT) is another popular option, allowing companies to see if their operations are in high-risk areas using global data sets for protected land and species.
“There is data out there that will enable a company to map the risks associated with its assets,” says Hulse. “But if you’re a company with a complex supply chain, the data becomes much more problematic.”
Even if a firm was able to identify all the businesses and small holdings it worked with and sourced from, and map them against real-time nature loss, it still couldn't confidently interpret the relationship between the two, he says.
And the sense of urgency around supply chains and nature is only set to grow with the introduction of the EU’s Corporate Sustainability Due Diligence Directive.
Currently still under negotiation, the law plans to hold companies accountable for environmental abuses taking place in their supply chains, regardless of whether those supply chains are in Europe or elsewhere.
“These kind of legislative interventions could have serious legal and financial ramifications for companies,” Hulse believes.
“When I started working on deforestation 12 years ago, the companies that were involved were interested because they believed that cutting down trees wasn’t a cool thing to do, but no one was kidding themselves that there were economic consequences, or that it was directly material to the business. That’s not the case anymore.”