Do businesses need to care about biodiversity? #NewsMarket

Hello from the Colombian city of Cali, where the UN COP16 conference on biodiversity begins today.

The biodiversity COP, held every two years, has long been a lower-profile sister to its annual climate counterpart. But this year’s event will be the biggest yet, with about 14,000 people expected to attend. Colombian President Gustavo Petro has sent nearly as many soldiers and police to guarantee the security of the event, after a threat from armed rebels in the region.

I’ll be on the ground to track developments throughout the two weeks of the conference. The central focus will be negotiations between governments to advance and implement the landmark commitment made at COP15 in Montreal two years ago, where nations agreed on a push to mobilise $200bn a year by 2030 to protect 30 per cent of the world’s land and oceans.

There will also be an unusually strong private sector presence, reflecting the growing attention paid by banks and other big corporations to nature-related risks. But, as Lee explains in her analysis below, the question of how to assess those risks is still hugely contested. — Simon Mundy

biodiversity

Will endangered tigers or farm pests factor into corporate balance sheets?

The world’s biggest lenders are biodiversity-curious. JPMorgan and Standard Chartered are among the banks sending representatives for the first time this year to the UN’s biennial biodiversity summit. The niche world of biodiversity-themed funds is growing too.

It’s not obvious, though, how to make nature an investable asset. In light of this, corporate social responsibility specialists have increasingly made the case that businesses should care about biodiversity loss because it is financially material — that is, it could create risks with balance sheet blowback. The Taskforce on Nature-related Financial Disclosures, a prominent standard-setter in the space, argues that risks stemming from nature are not well understood by the market, and are therefore underpriced.

TNFD executive director Tony Goldner told me that, with greater disclosure, investors could reward companies that are good for nature, and raise borrowing costs for bad actors. That argument underpins a suite of new products, such as biodiversity credits.

But some financial analysts and business executives argue that the idea is far-fetched.

Global investors “definitely have an interest in biodiversity”, said Lindsey Stewart, director of stewardship research at Morningstar Sustainalytics. But while the TNFD has laid the groundwork for corporate disclosure on biodiversity, he said, “the big question is, how much of these are truly financial disclosures, and how much of it is just disclosures?”

Analysts, academics and campaigners point out that the economy is embedded in, and depends on, nature. But some are sceptical that individual businesses stand to profit from halting biodiversity loss. What’s more, some have argued, with major regulations obstructed by business lobbying, this line of argument could become a dangerous distraction.

The debate on biodiversity’s financial materiality will play out over the next two weeks in Colombia, at what is expected to be the UN’s biggest biodiversity conference to date.

How we value nature is evolving

Classic economic models have long treated nature as a free, infinitely extractable resource. That’s starting to change, with governments backing efforts to price natural resources, from fish stocks to complex soil ecosystems.

A 2021 review written by economist Sir Partha Dasgupta for the UK Treasury argues that diverse ecosystems are more stable, and biodiversity loss “results in greater volatility and uncertainty”.

The central banks of countries including the Netherlands, France, Brazil and Malaysia have included nature loss in stress tests. A study last year by European Central Bank researchers found that about 75 per cent of euro area banks’ corporate loans, representing nearly €3.24tn, are “highly dependent on at least one ecosystem service”.

And multiple studies have argued that the uncertainties inherent in nature loss suggest that central banks should take precautionary measures. For example, physicist Nicola Ranger, who works on climate-related financial risk, has found that UK banks’ valuations could be hit by physical nature-related risks — and that loss of natural capital, such as pollinating insects and bees, could cause macro-financial or systemic risk.

But the systemic nature of the challenge could also mean that the biodiversity crisis will be hard to tackle through individual businesses’ uncoordinated action. While there are opportunities for businesses to mitigate biodiversity risk exposure, some economists have argued, these may remain local — far from the multi-front effort needed to reverse existing trends in extinction and environmental degradation.

For example, Eli Fenichel, an economist specialising in natural resources, studied the issue when he led the White House’s effort to integrate the value of nature into government statistics from 2021 to 2023.

There are numerous ways governments and businesses should track their exposures to, and dependencies on, biodiversity, Fenichel said. For example, he referred to research showing that wetland loss in the US could substantially affect housing prices. Regional banks could have “serious” exposure to those impacts but, he added, “do regional banks in the US have a lot of risk to tigers going extinct in India? Probably not.”

“Climate change is a fundamentally global problem . . . emissions in one place have effects everywhere,” he said. “But extinction of a critter locally might not actually transmit further down the line.”

Businesses do need more visibility into the nature and biodiversity risks in their supply chains, Fenichel argued. However, he cautioned, “I think the marginal shifts are much smaller than folks are hoping for”.

Disclosure doesn’t guarantee action

Some also argue that disclosing exposure to biodiversity risk would not necessarily provide an incentive to businesses that are the biggest drivers of nature loss to change their behaviour. One reason is that the businesses most responsible for destroying nature might be different from the ones exposed to physical, transition or other forms of risk from that destruction.

Plus, even where business exposures to biodiversity risk can be identified, those may not map on to the areas where solutions are most needed, according to geographers Jessica Dempsey and Audrey Irvine-Broque.

“Clearly, not all ecosystem loss or extinctions pose physical risks to business,” Dempsey and Irvine-Broque write in a recent review. “This is because not all types of nature facilitate capital accumulation — some make it more challenging (pests) and legally complex (protected species) or are simply considered irrelevant.”

And, if banks and businesses are pushed to disclose biodiversity risk, the review points out, they may be more likely to deal with it by lobbying against regulation than by changing their behaviour. Indeed, according to a Reclaim Finance analysis, at least seven members of TNFD lobbied against the EU taxonomy for polluting activities.

None of the viewpoints cited above means that nature loss should ignored — or that business cannot find ways to profit from biodiversity. As Moral Money recently reported, for example, genetic code derived from the world’s plants and animals is in high demand for research in artificial intelligence-powered medical therapeutics.

But the all-out effort to emphasise the material threat to business from the biodiversity crisis, and to announce big headline numbers for that exposure, could fail to make much headway.

“The entire economy is dependent on nature,” TNFD’s Goldner told me. However, he acknowledged, “clearly, disclosure is only effective if investors act on it”. (Lee Harris)

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