Biodiversity and Nature-related Disclosures

BIODIVERSITY AND NATURE-RELATED DISCLOSURES

3. WHAT’S NEXT FOR COMPANIES AND INVESTORS?

T he loss of biodiversity and ecosystem services impact businesses, investors, and countries through transition, physical, regulatory, and systemic-wide risks which, just as climate change related risks, have the potential to impact the investment value in the short, medium, and long term. Not having a clear understanding of the potential impacts of these risks or exposure to those sectors heavily relying on biodiversity, could lead to stranded assets and revenue losses. The equivalent of the net-zero emissions climate goal for biodiversity is to become Net Positive, whichmeans, firstly, halting further damage to ecosystems, and then facilitating the restoration of nature, thereby generating positive value. Yet, in the absence of specific methodologies and standards to set net positive targets, companies are leveraging upon the existing ESG reporting frameworks to disclose their biodiversity risks. Nonetheless, methodologies and frameworks to manage the latter are still scarce or non-existent. Companies and investors are currently relying on CDP (formerly known as the Carbon Disclosure Project) and will rely on TNFD to disclose their KPIs moving forward. In that sense, there are a few actions investors can take to minimize their exposure to biodiversity risks: Negative screening. Negative screening is the process of finding companies that score poorly on biodiversity metrics or targets but also on ESG factors, relative to their peers. These companies can then be avoided when constructing a portfolio. It is the opposite of positive screening, which seeks to include top performers in a portfolio. Capital allocation. Based on the different frameworks and biodiversity KPIs reported, investors should allocate capital to sectors or business models that avoid and reduce biodiversity loss and ecosystem degradation. For investors, nature degradation and biodiversity loss represent a long-term financial material risk that requires to be monitored both at the portfolio- as well as the investee-level. As such, apart from climate, biodiversity-related risks are increasingly factored into investment decisions to minimize financial impact, but also to pinpoint opportunities to diversify investments and increase profits. Because of this, biodiversity is the fastest growing ESG theme in global capital markets. Catherine Howarth, CEO at ShareAction, points out that, “In just three years, the issue (of biodiversity) has moved from being virtually ignored by mainstream institutional investors to being acknowledged by all.” 9

9Agnew, H., “Biodiversity quickly rises up the ESG investing agenda”. FT (2022): Link.

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February 2023