Should companies care about biodiversity?

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

The COP on biodiversity, which is held every two years, has long been a more discreet sister to its annual climate counterpart. But this year’s event will be the biggest ever, with around 14,000 people expected. Colombian President Gustavo Petro sent almost as many soldiers and police to ensure the security of the event, after the threat of armed rebels in the region.

I will be on the ground to monitor developments throughout the two weeks of the conference. The focus will be on negotiations between governments to advance and implement the historic commitment made at COP15 in Montreal two years ago, where nations agreed to mobilize $200 billion per year in by 2030 to protect 30% of the planet’s lands and oceans.

There will also be an unusually strong presence of the private sector, reflecting the growing attention paid by banks and other large companies to nature-related risks. But as Lee explains in his analysis below, the question of how to assess these risks remains extremely controversial. -Simon Mundy

biodiversity

Will endangered tigers or agricultural pests be factored into corporate balance sheets?

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

However, it is not obvious how to make nature an investable asset. In light of this, corporate social responsibility scholars increasingly argue that businesses should be concerned about biodiversity loss because it is financially significant – that is to say, it could create risks of blowback on the balance sheet. The Nature-Related Financial Reporting Task Force, a leading standards body in the field, says risks arising from nature are not well understood by the market and are therefore undervalued.

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

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

Global investors “certainly have a stake in biodiversity,” said Lindsey Stewart, director of stewardship research at Morningstar Sustainalytics. But while the TNFD has laid the groundwork for corporate disclosure of biodiversity information, he said, “the big question is how much of this information is real financial information, and how much are just simple information? »

Analysts, academics and activists emphasize that the economy is rooted in and dependent on nature. But some are skeptical that individual businesses have everything to gain by stopping the loss of biodiversity. Moreover, some have argued that to the extent that important regulations are obstructed by corporate lobbying, this argument could become a dangerous diversion.

The debate on the financial materiality of biodiversity will take place over the next two weeks in Colombia, at what is expected to be the largest UN conference on biodiversity to date.

The way we value nature is changing

Classic economic models have long treated nature as a free and infinitely extractable resource. This is starting to change, with governments supporting efforts to price natural resources, from fish stocks to complex soil ecosystems.

A 2021 goodbye Written by economist Sir Partha Dasgupta for the UK Treasury, it argues that diverse ecosystems are more stable and that loss of biodiversity “leads to greater volatility and uncertainty”.

Central banks in countries like the Netherlands, France, Brazil and Malaysia have included natural loss in their stress tests. A study Last year, researchers at the European Central Bank found that around 75 percent of euro zone banks’ business loans, worth almost 3.24 trillion euros, are “heavily dependent on at least one ecosystem service”.

And many 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 risks, discovered that Valuations of UK banks could be affected by physical risks linked to nature – and that the loss of natural capital, such as pollinating insects and bees, could lead macro-financial or systemic risk.

But the systemic nature of the challenge could also mean that the biodiversity crisis will be difficult to resolve through uncoordinated action by individual companies. While there are opportunities for businesses to mitigate exposure to biodiversity risks, some economists have argued that these could remain local – far from the multi-pronged efforts needed to reverse the trend. current extinction trends and environmental degradation.

For example, Eli Fenichel, a natural resources economist, studied the issue when he led the White House effort to incorporate the value of nature into government statistics from 2021 to 2023.

There are many ways for governments and businesses to track their exposure to and dependence on biodiversity, Fenichel said. For example, he mentioned research showing that the loss of wetlands in the United States could significantly affect real estate prices. Regional banks could be “seriously” exposed to these impacts, but, he added, “are regional banks in the United States at great risk if the tigers in India become extinct?” Probably not.

“Climate change is a fundamentally global problem. . . emissions in one place have effects everywhere,” he said. “But local extinction of one creature might not carry over into later life.”

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

Disclosure does not guarantee action

Some also argue that disclosing exposure to biodiversity risks would not necessarily incentivize companies that are primarily responsible for nature loss to change their behavior. One reason is that the companies most responsible for nature’s destruction may be different from those exposed to the physical, transition, or other risks associated with that destruction.

Additionally, even when corporate exposures to biodiversity risks can be identified, they may not correspond to areas where solutions are most needed, according to geographers Jessica Dempsey and Audrey Irvine-Broque.

“Clearly, not all ecosystem losses or extinctions pose physical risks to businesses,” Dempsey and Irvine-Broque write in a paper. recent review. “Indeed, not all types of nature facilitate capital accumulation – some make it more difficult (pests) and legally complex (protected species) or are simply considered irrelevant. »

And if banks and companies are pressured to disclose biodiversity risks, the study points out, they may be more likely to address them by lobbying against regulation rather than changing their behavior. Indeed, according to an analysis by Reclaim Finance, at least seven members of the TNFD pressures against the European taxonomy of polluting activities.

None of the views cited above mean that nature loss should be ignored – or that businesses 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 into artificial intelligence-based medical therapies.

But efforts to highlight the material threat the biodiversity crisis poses to businesses and to announce big numbers on this exposure may backfire.

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

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