Rebuilding the Living World: How to Act on Nature Related Risk

The widespread destruction and despoliation of nature is increasingly recognised as a global risk. Humans are reliant on clean water, air and the natural world to support our way of life. Arable land, oceans teeming with fish and forests full of life are just some of the things we take for granted but are under threat through massive overuse.

Since the industrial revolution in the nineteenth century economic development has accelerated across the globe. The global human population has risen at a stunning rate from just under 2 billion a hundred years ago to close to 8 billion people today.

Each new town, farm and factory built to accommodate these people and the increasingly intensive economic activities that support them has taken a devastating toll on the natural world.  Now this assault on the natural world is coming back to haunt us.

Over the last century a stunning 83 percent of mammal life and half of all plants have been driven to extinction and two thirds of all marine environments have been severely altered. The destruction of the natural world is clear, but now it has now gone so far it poses a major threat to humans.

Former Governor of the Bank of England Mark Carney said: “we have been trading off the planet against profit for far too long, living for today and leaving it to others to pay tomorrow. This has depleted our natural capital, had a devastating effect on the planet’s biodiversity and is causing unprecedented changes to our climate.”

Repairing Nature

This has prompted many business and political leaders to consider how the damage to the natural world can be measured and reversed. The time has passed for just charities and civil society groups lead on biodiversity. In the age where Environmental, Social and Governance (ESG) indicators are the norm we increasingly expect private companies to take the lead on these issues.

The World Economic Forum 2020 report placed biodiversity loss as one of the top five risks of the next decade. The World Economic Forum also estimated that nature positive transitions, in other words restoring and protection the natural world could create US$10 trillion in business value and 390 million jobs worldwide. Some would argue that you cannot put a price on nature and that this rationalises the destruction of nature – if the price is right.

Nature’s contribution to business is at once strikingly obvious yet usually completely ignored or taken for granted. Clean air, potable water and farm land are just some of the necessities that the private sector gains from natural capital. If these are damaged or disappear then companies are put at risk as they cannot produce goods and services that rely on nature.

Taskforce on Nature Related Financial Disclosures

While the risks may appear obvious, there is the problem of measuring them. Currently organisations lack data on how their activities depend upon nature and therefore find it difficult to measure the nature related risks they face. The Task force for Climate Related Financial Disclosures (TCFD) created a framework for Banks and others to identify how they are exposed to climate risk.

The TCFD which is still being implemented has given rise to the  Task Force on Nature Related Financial Disclosures (TNFD). Since 2020 an informal working group drawn from civil society, government and private business has been working with a technical expert group and a partner group with the objective of delivering a framework by 2023. The TNFD will complement the TCFD so organisations have a full picture of their environmental risks.

These risks are often difficult to measure, many companies rely on complex supply chains which provide much of the raw materials, minerals, commodities, metals, oil and agri-produce which both rely on the natural world and whose extraction can so often devastate it.

These risks can them impact on companies disrupting supply chains, change the price of raw materials, destroying capital. This in turn creates the financial risk for banks and insurance firms which until now has not been recognised.

Sustainability Leadership

While the TNFD is working hard to develop a new framework much as been done already. The University of Cambridge Institute for Sustainability Leadership (CISL) published a handbook which aims to identify and understand nature related risks. The handbook also wants to connect the natural and financial world in terms of risk and plot financial risk exposures.

Nature related risks can be divided into the physical such as climate change, pollution, land use change and invasive species. These can manifest through loss of air quality, water scarcity and food production. The other type of risk is transition risk which can manifest through new legislation, regulation or consumer sentiment around the protection of nature which forces change upon companies.

The TNFD is still in its infancy but the scale of the problem suggests that companies will have to incorporate it into their corporate risk framework and start measuring and reporting on how exposed they are to nature related risks.

Opportunities for Firms to Reverse the Decline

There are also opportunities for companies to positively contribute to nature. A World Economic Forum Report identifies 15 areas of transition where firms can contribute to so called nature positive activities. For example scaling circular and resource efficient models of production will reduce the amount of new resources needed to be extracted. Ecosystem restoration and regenerative agriculture will allow the natural world to flourish, increase biodiversity while still producing food. Sustainable management of forests would allow these spaces to flourish while still extracting timber.

Measuring Impact

How have we got to this point? For years companies have promised to clear up their supply chains such as deforestation causing beef, palm oil and soy production. But in reality most have failed to clean up their acts.

One problem lies in the profit motive – companies might want to stop deforestation but their first instinct is make money. Improving regulation and pushing companies to take social responsibilities more seriously may push them into change. Secondly there is a lack of transparency and data, it is difficult for firms to understand their own supply chains which are often are opaque and complex.

But now tools are emerging using new technologies which help firms track and map deforestation and other nature based risks. Mapping supply chains and measuring nature related risks is becoming easier thanks to advances in satellite technology and artificial intelligence.

Encore maps how businesses might be exposed to natural related risks depending on the industry and activity type. Firms from various different sectors can map their geographical footprint to potential risks. Trace Finance tracks commodity traders and financial institutions most exposed to deforestation risk. These new tools will hopefully create a leap in understanding around nature related risks.

The Dasgupta Review

Another landmark for biodiversity was The Dasgupta Review which was commissioned by the UK Government. The report calls on society to “change how we think, act and measure success” to “protect and restore natural capital and use that capital sustainably”. It recognises that we have collectively failed to engage with nature sustainably. The result is extinction rates 1000 times the normal rate as well as degrading pretty much every ecosystem on the planet. It also makes the point that our economies are ultimately dependent on nature not detached from it.

The report also recognises that much of the responsibility to act falls on the global financial system. Dasgupta recommends among other measures removing the numerous subsidies that governments provide that harm nature. For example his might mean ending subsidises for pesticide reliant agriculture which does so much to destroy insect life.

The report goes on to recommend that restoration and preservation of nature or increasingly the “supply” of nature in the dry economic language of the report. This means restoring degraded parts of the environment and better protecting remaining natural areas.

Climate Change

Biodiversity loss is intrinsically linked to climate change and the two issues need to be dealt with together. Accelerating climate change is devastating for biodiversity as species struggle to cope with a fast warming planet. Protecting biodiversity and natural areas acts as a brake on climate change. Deforestation is one of the biggest emitters of carbon, stopping that and planting more forests helps both biodiversity and climate change.

The challenge of stopping biodiversity loss is not to be underestimated. Changing the habits and assumptions of hundreds of years on a global scale is no easy task. Much of the world is so used to taking nature and the natural world for granted for so long, its no surprise that it has been trashed so comprehensively.

Changing these attitudes and getting firms to understand the risks around biodiversity and natural capital loss is akin to turning a supertanker around. However, the risks at stake concerning natural capital are so fundamental that failure should not be an option.