Climate change and its impacts are increasingly on the radar of corporate boards as a risk that requires integration into short and long term ESG strategies. However, intrinsically related, and often overlooked, are the risks to corporations associated with biodiversity loss.
The establishment of the international Taskforce on Nature-related Financial Disclosures (TNFD), representing financial institutions, corporates and market service providers with US$19.4 trillion in assets, is a move closer to the development of a risk management and disclosure framework for organisations to report and manage evolving nature-related risks. In light of the release by the TNFD of its framework beta version 0.2, we have identified 5 reasons why boards should be thinking about, and acting on biodiversity.
The economic value of biodiversity is clear given that the World Economic Forum’s 2020 Nature Risk Rising Report found that US$ 44 trillion of economic value generation – over half the world’s total gross domestic product – is moderately or highly dependent on nature and its services.
Internationally, there are significant steps being made to embed biodiversity considerations into policy frameworks. US President Joe Biden signed an executive order on 22 April 2022, which seeks to support the development of nature based solutions to combat climate change and to better account for natural capital. There is a high likelihood that there will be steps made by Governments, including in Australia, to increase regulation in this area, including via corporate reporting, disclosure and accountability in respect of biodiversity loss.
With this background, we have identified the top five risks associated with biodiversity loss and management for corporations in Australia.
1. Operational risks arising from dependences on biodiversity
Apart from any impacts a corporation’s activities may have on biodiversity, the corporation will also have dependencies. Many, if not most, companies’ operations depend on a biologically diverse ecosystem to conduct their business in both the short and long term, including within a company’s supply chain. There are the obvious examples such as:
- agriculture industries, which rely on soil health, water and bees for pollination;
- pharmaceutical companies, which often rely on biodiverse ecosystems to develop new products; and
- eco-tourism, which of course relies on biodiversity for its main offering.
As with climate change, as part of an ESG framework, identifying those biodiversity and ecosystem dependencies is crucial to ensuring that a corporation manages any risks into the future.
2. Investor expectations and access to finance
In line with the strong shift towards environmental social governance (ESG) responsibility, investors are increasingly cognisant of the potential effects of biodiversity loss on their investments. For example, BlackRock, an investment management company with operations in Australia, recently stated that its approach in identifying investment opportunities involves trying to “identify companies that embrace good practices around biodiversity given potential environmental and societal benefits and our belief that the value of these companies’ impact is yet to be priced in”.
There is also growing momentum in the sustainable finance sector, with lenders looking to shift their funding allocations to ensure a more ESG-focused portfolio. Many of the major banks now have specialist ESG and sustainable finance teams who assess proposed loans having regard to the sustainability strategy and credentials (or lack thereof) of the companies seeking finance (including whether those companies consider and address their biodiversity impacts). Companies who fall short on these metrics will likely be subject to less flexible terms, less favourable loan pricing, or limitations on accessing funding.
Sustainability linked loans (SLLs) are now common in the market. SLLs are loan facilities where the borrower is incentivised through the loan pricing to achieve pre-agreed sustainability performance targets (SPTs). Where SPTs are achieved, the borrower is rewarded with a decrease in the applicable interest rate (and conversely, a failure to meet SPTs may result in an increased interest premium). We look closer at SLLs in our Insight Sustainability linked loans: key considerations for borrowers and treasurers.
Some financial institutions are going even further, directly calling on governments to urgently halt and reverse biodiversity loss. For example, prior to the first meeting of the Convention on Biological Diversity COP15 (CBD COP15) in October 2021, 78 financial institutions representing over US$10.61 trillion in assets urged the adoption of a more ambitious Global Biodiversity Framework with an expectation for financial institutions and businesses to align financial flows to global biodiversity goals. The pressure from the private sector to take action on biodiversity is akin to what occurred for climate change in 2021 in the lead up to COP 26.
3. Transparency and biodiversity-related disclosures
There are growing expectations from investors, shareholders and other stakeholders for companies to be transparent and financially account for biodiversity-related impacts and dependencies. The expectations coincide with creation of the TNFD. As indicated above, the TNFD is developing a risk management and disclosure framework for organisations to report and manage evolving nature-related risks, with the ultimate aim of supporting a shift in global financial flows away from nature-negative outcomes and toward nature-positive outcomes.
This increasing focus on biodiversity loss risk in corporate disclosures is outlined further in our Insight The latest ESG frontier: biodiversity loss risk disclosures, which includes our reasons for why biodiversity loss risk reporting is likely to infiltrate Australia’s corporate reporting standards within the next five years. In addition, our Insight Over the climate change horizon: corporations must prepare now for biodiversity loss risk disclosures discusses what we know about the TNFD so far and provides practical and proactive steps for how boards can start to prepare themselves to disclose and financially account for biodiversity loss risk.
Since publication of the above Insights, the TNFD has now released its beta version 0.2 Risk and Opportunity Management and Disclosure Framework for consultation, which can be found here.
The proposed framework implements a LEAP approach, being:
- Locate: interface with nature;
- Evaluate: dependencies and impacts;
- Assess: material risks and opportunities; and
- Prepare: to respond and report.
There is an emphasis on integrating biodiversity and climate change reporting and to report not only dependencies on nature, but impacts of business operations on nature.
4. Reputational risks
Given the growing expectation for companies to implement robust ESG frameworks, those who fail to address biodiversity impacts may face serious reputational risk and associated financial risk. Conversely, those who address the issue will likely improve their reputational standing, preserve their social licence to operate and increase their competitiveness.
These risks are particularly acute given increasing consumer preferences towards products and services which are environmentally conscious. Specifically, recent research by The Economist Intelligence Unit, commissioned by the World Wide Fund for Nature, concluded that consumers are changing their behaviour, with searches for sustainable goods increasing globally by 71% since 2016.
Other recent research undertaken by Deloitte found that ethical and sustainability concerns are key considerations for many UK consumers, with 32% of consumers highly engaged with adopting a more sustainable lifestyle and 28% of consumers claiming they have stopped buying certain products due to such concerns.
Accordingly, those companies who fail to address biodiversity concerns and the associated reputational risk will potentially lose customers, and may even be subject to targeted product or natural resources boycotts (as with palm oil and Bluefin tuna) and civil society organisation campaigns. Addressing this risk is also particularly important to those corporations who depend on their reputational standing and social licence to operate in local communities to undertake their key activities (e.g. mining and infrastructure development).
5. Environmental activism and the threat of litigation
Biodiversity litigation, being litigation which is concerned with conservation of, sustainable use of and equitable access to biodiversity, is not yet as prolific as climate change litigation. (See further discussion of climate change litigation in our Insights: Court decisions herald dramatic evolution of climate change litigation; From the courtroom to the boardroom: climate change risks and remedies; and Sharma appeal decision: end of the road for novel duty of care?)
However, it is likely that activists, non-government organisations and even shareholders, will employ litigation as a strategy to secure the protection of biodiversity and to drive change in corporate practices. This new form of ‘biodiversity risk’ or ‘nature risk' litigation will share many similarities with the typical types of climate change litigation and include:
- misleading and deceptive claims against companies who overstate their biodiversity actions and/or credentials (greenwashing) or understate their biodiversity risks;
- actions against directors who fail to address biodiversity or nature related risks and therefore potentially breach their director duties under common law and the Corporations Act 2001 (Cth);
- challenges to project approvals and/or proponent appeals, where biodiversity risks and impacts are inadequately addressed;
- actions based in negligence, particularly given that biodiversity impacts are likely to be more immediate and establishing ‘breach, causation and damage’ is more achievable when compared to climate change cases; and
- product liability claims, where the same issue is potentially causing negative impacts to the health of people and the environment.
Conclusion and emerging opportunities
While there are numerous biodiversity related risks for Australian boards to consider when developing ESG frameworks and setting short and long term strategies, there are also opportunities to demonstrate innovation and leadership in this space and proactively take action to minimise biodiversity loss.
An example of opportunities in Australia is the development of nature markets, including biodiversity and other offset markets. Whether it is through carbon farming, blue carbon projects or biodiversity conservation on private landholdings - the rise of these nature markets will provide businesses (and individuals) with opportunities to develop new income streams and assist with mitigating biodiversity loss impacts.