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- Why companies are waking up to nature’s value
- Land use change and the exploitation of resources and species, in terms of fishing, logging, and hunting, are estimated to account for more than 50% of biodiversity loss across terrestrial, freshwater and marine ecosystems.
- Companies with a high dependency and impact on nature, both directly and in their supply chains, are exposed to physical and transition risks which may hit corporate profitability. These, in turn, present market and credit risks for investors.
- To assess these risks, investors need to start by examining the specific locations of an investee companies’ operations. Tools, such as the WWF Biodiversity Risk Filter , can therefore provide valuable insights into where the physical and reputational risks relating to biodiversity exist.
- The sectors which typically have a high direct dependency on nature include fishing and aquaculture and agricultural products. Meanwhile. the sectors which are found to have a high direct impact on nature include not just those in the food sector but also companies operating in the materials and energy sectors .
- A variety of initiatives and frameworks have been developed, which should help to improve investor visibility towards biodiversity risk.
- These include reporting under the Taskforce on Nature-related Financial Disclosures (TNFD), sector-specific guidance from the Business for Nature consortium and the setting of SMART targets under the Science Based Targets Network (SBTN).
Introduction
Nature degradation and biodiversity loss present financial hazards to investors. A Banque de France study[1] found that 42% of the total value of securities held by French institutions were issued by companies highly or very highly dependent on at least one ecosystem service.[2] Another study[3] assessing nature risks in the Dutch financial system found the equivalent figure was 36%. Similarly high levels of financial sector exposure to physical, as well as transition risk to nature were discovered in an analysis examining the financial markets of Brazil, Malaysia and Mexico.[4] With increasing nature-related regulation,[5] the financial materiality of these risks for investors is only likely to grow in importance.
This paper is organized in four sections. The first examines the drivers of biodiversity loss across terrestrial, freshwater and marine ecosystems. The second section assesses the steps to uncover the financial materiality of biodiversity loss from a sector perspective. The third section investigates how biodiversity loss has an impact on a company’s bottom line and the final section assesses some of the initiatives companies can adopt to assist in mitigating or eliminating the negative externalities of their activities on nature.
1 / The drivers of biodiversity loss
Biodiversity is defined[6] as the variability among living organisms from all sources including terrestrial, marine and other aquatic ecosystems. Biodiversity is an output of our natural capital (“the stocks”) just as the natural capital is an input factor for biodiversity in complex ecosystems which in turn deliver ecosystem services (“the flows”) to our economies and societies.[7]
Biodiversity is declining exponetially with wildlife populations down 69% by 1970.[8] The drivers:[9] of biodiversity are:
- Change in land and sea use and specifically the expansion of agricultural land at the expense of forests and grasslands
- Species and resource over-exploitation since one-third of the world’s fisheries are overfished[10] and more than 1,200 mining sites lie within key biodiversity areas.[11]
- Pollution This includes pesticide and fertilizer run-off, leading to the build-up of algae blooms and dead zones at sea. Microplastic pollution is also negatively impacting marine and terrestrial species’ populations.
- Climate change and the increasing concentration of carbon dioxide in the atmosphere. This is leading oceans to become warmer and more acidic. This in turn is causing marine heatwaves and coral bleaching[12]. Rising temperatures on land are also triggering droughts and forest fires further weakening the carbon sink capacity of forests[13].
- Invasive species and disease in the form of plants or animals which have been brought there by humans, for example, through the illegal wildlife trade.
The drivers of biodiversity loss can be illustrated in the following areas:
- Terrestrial: A third of the world’s forest area has been destroyed,[14] a third of the world’s topsoil has been degraded, and more than 85% of wetlands have been lost since 1970.
- Freshwater: 80% of the world’s wastewater is returned to the environment untreated[15].
- Marine: One third of the world’s assessed fisheries are overfished.[16]
When it comes to attribution, land use change and the exploitation of species, in terms of fishing, logging and hunting, account for more than 50% of biodiversity loss across terrestrial, freshwater and marine systems, with pollution the third most important driver followed by climate change.[17]
