While climate change remains the main focus of sustainability concerns, another catastrophe is currently underway, one that is faster and perhaps even more dangerous. Biodiversity is going extinct. Researchers now say we are in the midst of the sixth mass extinction - a short period in which a high percentage of biodiversity dies out -the last one dating back to 65 million years ago when the dinosaurs vanished. Unlike previous extinctions caused by natural phenomena, the sixth mass extinction is due to human activity, primarily (but not solely) unsustainable land, water, and energy use, as well as climate change.
In its latest global assessment report, the IPBES (Intergovernmental Platform on Biodiversity and Ecosystem Services) - the equivalent of the IPCC for biodiversity - released astonishing metrics about the state of biodiversity on our planet.
This figure of indicators shows a dangerous trend of deterioration among all facets of our environmental ecosystems, under pressures caused by our economies. To sum up facts:
- Natural ecosystems have declined by 47% on average;
- 25% of non-human species are already threatened with extinction;
- Abundance of naturally present species has reduced by 23% in terrestrial communities;
- The global wild mammal biomass has fallen on average by 82%;
- 72% of indicators developed by indigenous communities show ongoing deterioration of natural ecosystems.
Unlike climate change which (fortunately) has become a top-priority issue for investors around the world, biodiversity loss hasn’t had this much fame in the last few years. Indeed, ShareAction released in a previous report that none of the world’s 75 largest asset managers had a dedicated policy on biodiversity, and only 11% of asset managers had policies requiring portfolio companies to mitigate harmful impacts on biodiversity.
However, more and more investors are realizing how rich biodiverse ecosystems are primordial to our economies and industries’ durability. Find out why biodiversity loss will soon top the list of challenges facing investors, and what you can do to prepare for this upcoming sustainable investment ecosystem.
Investors are increasingly concerned about biodiversity loss
Peter Harrison (chief executive of Schroders, one of the largest asset managers in the UK) declared in the Financial Times: “I think you’re going to see a very significant amount of money flow into natural capital as people figure out that nature is a considerable proportion of the answer to decarbonization. There is no route to net zero without biodiversity.”. On top of that, GRESB (one of the largest ESG-rating agencies) published the prediction: “that within 3-5 years, reporting biodiversity footprint and goals will become just as mainstream as GHG reporting and stakeholders will expect to see significant progress from all companies”.
Recently, the IPCC and the IPBES called for a joined-up approach to fight climate change and restore biodiversity. There are good chances that this recommendation will become a reality for governments’ sustainability regulations and investors in a few years. Already, climate-related regulations like the TCFD (Task Force on Climate-Related Financial Disclosure) have set high climate-reporting standards around the globe for investors. Similarly, the Taskforce on Nature-related Financial Disclosures (TNFD) was established to address biodiversity and released version 0.1 of its suggested disclosure structure in March 2022. Given the likelihood that the TNFD recommendations will serve as a global framework for biodiversity disclosure, sustainable and ESG investors are now paying increasing attention to biodiversity to be ready when the final draft is released in September 2023.
Investors having understood that such loss in biodiversity would result in one of the biggest challenges humanity has ever faced, the subject ranked up on top of their priorities. In fact, biodiversity is “now the fastest developing ESG theme in global capital markets,” says the chief executive of ShareAction. In no more than a couple of years, biodiversity went from being ignored by all mainstream investors to being “acknowledged by all”.
Now let's turn to the two challenges facing sustainable and ESG investors:
- Placing an increasing amount of money into nature-based systems;
- Developing a standard methodology for measuring a given activity’s biodiversity impacts to better analyze portfolios and investment opportunities.
Why healthy biodiversity is crucial for businesses
Unsurprisingly, there is no doubt that the current erosion of biodiversity is a tragedy. For several years, "biodiversity loss" has been in the top five of perceived risks in the World Economic Forum's annual risk report. Yet, it is still not widely known what the impacts of such a catastrophe on business are, both economically and in human terms. How would healthy biodiversity benefit businesses?
Most businesses highly depend on nature, directly or indirectly. Because of our advanced economies, many companies no longer feel these dependencies. Nevertheless, half the world’s GDP (about $44 trillion) is directly dependent on nature, according to another WEF report from 2020. The three most nature-dependent industries represent roughly twice the size of the German economy (construction, agriculture, and food and beverages). These industries are at the base of our economies and provide countless essential services to businesses and individuals. When natural resources become less abundant, more unstable, and of lower quality, these industries’ activities get highly impacted. Resulting in shortages and inflation, which rapidly compound. As nature's deterioration speeds up, our business environment faces increasing risks of crisis and recessions.
In its 2020’s Nature Economy report, the World Economic Forum summed up material risks for companies in three points:
- When businesses depend directly on nature for operations, supply chain performance, real estate asset values, physical security, and business continuity;
- When the direct and indirect impacts of business activities on nature loss can trigger negative consequences, such as losing customers or entire markets, legal action, and regulatory changes that affect financial performance;
- When nature loss causes disruption to society and the markets within which businesses operate, which can manifest as both physical and market risks.
Biodiversity is defined as “the variability among living organisms from all sources as well as the ecological systems of which they are part; this includes diversity within species, as well as between species and ecosystems”. Biodiversity is a global metric defining the state of nature and its resources. Because of our known dependencies on natural ecosystems, rich biodiversity becomes crucial for businesses to thrive.
On a local level, increasing biodiversity is also showing tremendous positive effects. The Global Risks Report says biodiversity loss has a domino effect, escalating several social risks such as youth disillusionment, forced migration, social cohesion erosion, and more. It shows that humans thrive in a nature-positive environment, which is crucial for business’s success. High-biodiversity places have also shown declines in crime rates.
How to prepare for the future of sustainable reporting
ESG rating agencies and major investors have confirmed that “biodiversity reporting” will quickly become the next focus of ESG reporting. While there are currently no regulations in place, businesses can already learn how to prepare for this upcoming change. More than another reporting burden, it will help companies attract investors’ interest and talents, who have become more eco-aware than ever before.
Following the footsteps of the TCFD, the TFND (Taskforce on Nature-related Financial Disclosure) has recently published tremendous amounts of information about biodiversity reporting, including glossaries, recommendations, a knowledge hub, guidelines, and methodologies. Their website is easy-to-use and valuable since it is likely to become the standard for investors and future regulations.
For people that do want to get deeper into it and build skills in biodiversity reporting, the BDP (Biodiversity Disclosure Project) has already published an entire reporting protocol, covering a large scope of the subject. It is similar to the GHG Protocol, which has been an international carbon accounting reporting standard for decades.
At this point, the information might be a bit overwhelming. Let’s sum up the key points we saw in this article. First, about the context:
- Biodiversity is dying out, and nature’s erosion is speeding up;
- Historically, biodiversity hasn’t been a prevalent concern for investors and regulators;
- Due to increasing risks, investors are paying more attention to the impacts businesses have on natural ecosystems.
According to multiple organizations (e.g., IPBES and WEF), nature’s deterioration and biodiversity loss are already impacting our economies at an exponential rate. Moreover, recent reports show how crucial rich biodiversity is for business success and that restoring it can bring substantial benefits. Therefore, more efforts are being made to include biodiversity in future sustainability reporting standards, ESG investments, and regulations.
Similarly to current climate regulations, future regulations on biodiversity reporting will impact even SMEs down the supply chains since enterprises are pressured to reduce their direct and indirect impacts. In order to anticipate future reporting guidelines and investors’ expectations, businesses can take advantage of free knowledge hubs and protocols. For example: