The United Nations Environment Program (UNEP) and S&P Global announced the Nature Risk Profile, a methodology to analyze companies’ impacts and dependencies on nature, at the World Economic Forum annual meeting in Davos, Switzerland, on Tuesday. It comes on the heels of the agreement made in December at the U.N. Biodiversity Conference (COP15) held in Montreal.
The idea behind the movement to include nature or biodiversity risk in financial disclosures is largely due to the fact that roughly half of the world’s GDP is either highly or moderately dependent on nature. Should we see significant biodiversity loss in the near future, as has been projected, that puts a lot of businesses and investments at risk. Having companies disclose their nature-related risk is not just a measure to promote environmental responsibility, but also to ensure investors and asset managers that all financial risks are accounted for.
Business is highly dependent on nature. A lumber company relies heavily on the trees it cuts down to generate revenue. Generally, these companies aren’t sourcing trees from natural forests, but managed plots where they grow and harvest their trees. Still, a drought, flood, fire or significant soil degradation would be harmful to their activities. That is a nature-related risk.
Likewise, a mining company is heavily reliant on access to a water source for mineral processing and cooling the temperature of cutting instruments. If all of a sudden a company's water source dried up or was blocked somewhere upstream, it would be detrimental — another nature-related risk.
These risks also apply to companies that source their materials or products from suppliers with significant nature-related risks. An electronics company, for example, is reliant on the raw materials that mining companies produce. That water-related mining risk would also affect companies like Samsung, Apple and Tesla.
It’s unlikely that we'll see any obligations for companies to report on their nature-related risk coming out this year. Even if the U.S. Securities and Exchange Commission (SEC) decided to fast track this component of financial disclosure, we are still likely a couple years down the road from mandatory disclosures.
The concept of nature-based reporting is not entirely new. Launched in 2021, the Taskforce on Nature-related Financial Disclosures (TNFD) provides reporting frameworks for businesses to evaluate their nature-related risk. In fact, this framework is expected to have a strong influence on the Nature Risk Profile in development. Businesses that want to get a head start on the matter should explore the TNFD to familiarize themselves with potential reporting requirements.
Small businesses that don’t have significant public investment will unlikely be legally required to disclose their nature-related risk, but that doesn’t mean they won’t be affected by it. Large companies that have to report will require specific information from their suppliers related to nature risk, and if small businesses are suppliers to any of these larger companies, they will need to have that information on hand.
If we think about it similarly to the way that Scope 3 emissions are calculated, where a company has to calculate the emissions created by its entire supply chain, suppliers with fewer nature-related risk factors will be much more attractive to large companies that want to minimize their risk. Avoiding potential supply chain disruptions, as well as being a more appealing option for environmentally-conscious investors, will steer large companies to suppliers with low nature-related risk.
In terms of developing regulations to require nature-related risk disclosure, it’s important that the terminology is clear. Various reporting standards, all requiring slightly altered versions of the same thing, would only create confusion — much like the criticism that the ESG movement has seen.
As well, a cohesive accountability mechanism needs to be developed to avoid greenwashing. That could come in the form of external auditors to confirm corporate claims or strong financial penalties that eliminate the incentive to greenwash.
It’s encouraging to see the way that the business world is moving as we acknowledge the severity of the climate crisis and the urgency to change the way we do business. Slowly but surely, the sustainability movement is entering the mainstream financial sector.
Image credit: Pexels/mali maeder and Unsplash/Boudhayan Bardhan
Andrew Kaminsky is a freelance writer with no fixed location. He travels all corners of the globe learning about the different groups that call this planet home, seeing natural wonders, and sharing laughs with the people he finds along the way. An alum of the University of Winnipeg's International Development program, Andrew is particularly interested in international relations and sustainable development. In his spare time you are likely to find Andrew engaging in anything sport-related, or finding common ground with new friends over a craft beer.