Why biodiversity matters for finance

I’ve been so encouraged in recent months by how the public conversation on climate has grown louder and louder.

But amid all the encouraging noise, biodiversity has too often been sidelined.

That’s why this month’s launch of the Taskforce on Nature-related Financial Disclosures (TNFD) is so important. It aims to develop and build on voluntary, consistent disclosures to help corporates, investors and lenders manage nature-related risks. And we’re talking about risks that are diverse and far reaching, from covering systemic loss of soil fertility to managing new legal responsibilities.

As we all work to transition towards a low-carbon economy, TNFD is building on the work of Mike Bloomberg and Mark Carney’s Taskforce on Climate-related Financial Disclosures (TCFD). The TCFD has helped increase corporate executives’ focus on climate change-related financial risks and encouraged uniform disclosure of climate action plans and performance.

Global leaders are catching up fast. “With the TCFD, we managed to shift private finance … we need to do the same with TNFD,” Emmanuel Macron said just recently. The French President is right. Put simply, investors and corporations must recognise that accounting for biodiversity-related impacts is critical, and with a final framework coming down the line in 2023, companies must start preparing for the new impending reality of nature-related disclosure.

Why should Finance care?

Let’s start with the numbers. As many as 1 million species of animals and plants face extinction, with over-consumption, deforestation, and pollution resulting in a severe decline in wildlife populations. Given more than half of global economic output – $44 trillion – is either moderately or highly dependent on nature, it’s an existential challenge for investors

That means the decline of biodiversity is a risk requiring investor management. While rapidly declining insect populations and collapsing fish stocks may seem far-removed concerns for an insurer in Geneva or banker in Shanghai, destruction of the natural world could result in defaults and lower returns – environmental catastrophes also bring with them increasing insurance liabilities.

But how do you cost the loss of biodiversity? One study by De Nederlandsche Bank NV, the Dutch central bank, revealed that the country’s financial institutions held €510 billion (£437 billion) of investments that were highly or very highly dependent on one or more “ecosystem services”[1]. The loss of these services would lead to substantial disruption of business processes and financial losses.

Targeting Biodiversity

How, then, can investors and corporations align their business models and asset portfolios with the goals of achieving a Net Zerofuture?

Firstly, the TNFD framework will incorporate the concept of double materiality, meaning corporations and investors will need to report on their short, medium, and long-term biodiversity impacts and dependencies.

Investors will be expected to implement a process for identifying developments in biodiversity loss and revisit the topic periodically to remain abreast of changing and increasing risks and opportunities.

But boards and investors need to investigate the current biodiversity impacts and dependencies in their value chain, too, and think about appropriate internal reporting mechanisms, metrics, targets, and viable risk mitigation strategies. Of course it’s not simple. But the decisions investors make at this early stage will help to determine how biodiversity loss risk is integrated into existing ESG frameworks.

There’s still a lack of robust, standardised metrics and targets for measuring biodiversity impacts. As a consequence, there is a lack of data that can be properly utilised for decision-making from an investor’s perspective. That is where the beauty of TNFD comes in: it will work on closing data gaps linked to biodiversity.

Investors like Brunel are keen to explore how we can shift towards a economy and financial system which places nature at the heart of things.

And you can’t do that without factoring in biodiversity.

[1] The benefits that nature provides to society and the economy