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Introduction: What is Biodiversity?
‘Biodiversity’ means the variability among living organisms arising from all sources including terrestrial, marine, and other aquatic ecosystems and the ecological complexes of which they are part and includes diversity within species, between species, and of ecosystems; (EU Taxonomy, 2020)
Biodiversity is the variability among living organisms. It includes diversity within species, between species, and in ecosystems. Biodiversity not only has intrinsic value, but is also vital to human health, food security, economic prosperity, and mitigation of climate change and adaptation to its impacts. (Global Reporting Initiative GRI, 2022)
According to International Capital Market Association (ICMA, 2022), biodiversity describes the variety of life on earth and the natural pattern it forms. It is understood in terms of a wide variety of plants, animals, and microorganisms. Fragmentation, degradation, and outright loss of forests, wetlands, coral reefs, and other ecosystems pose the gravest threat to biological diversity. According to the Convention on Biological Diversity (CBD), three dimensions are key to biodiversity:
• The conservation of biological diversity (genetic diversity, species diversity, and habitat diversity).
• The sustainable use of biological diversity.
• The fair and equitable sharing of the benefits arising out of the utilization of genetic resources.
According to the International Union for Conservation of Nature (IUCN), the five major threats facing biodiversity are habitat loss and degradation, overexploitation of biological resources, pollution, climate change, and invasive species. Findings by Swiss Re (2020) indicated that 55% of global GDP depends on high-functioning biodiversity and a fifth of countries worldwide are at risk of ecosystem collapse as biodiversity declines. The global risk outlook from the Global Risks Report published by World Economic Forum (2022) suggests that biodiversity loss is ranked 3rd in one of the ten most severe risks on a global scale over the next 10 years.
This report covers an overview of international actions on biodiversity, the landscape for measuring biodiversity for companies and assets, the latest Taskforce on Nature-related Financial Disclosures (TNFD) and its recommendations for reporting on biodiversity, case studies for business applications for biodiversity, financial opportunities from biodiversity preservation and ecosystem protection. The discussions on global efforts to measure and prevent biodiversity loss require data insights and materiality assessments that go beyond what is currently measured by many sustainability reports published by companies. As the Post-2020 Global Biodiversity Framework is to be finalized later this year (2022), we are expecting more regulatory moves to emerge from nations to strengthen their commitment to sustain biodiversity and ecosystem preservations.
Post-2020 Global Biodiversity Framework
The post-2020 global biodiversity framework will be presented for consideration at the resumed session of COP-15, in Montreal, Canada, from 7 to 19 December 2022. The proposed first draft of the post-2020 global biodiversity framework with The vision of the framework is a world of living in harmony with nature where: “By 2050, biodiversity is valued, conserved, restored and wisely used, maintaining ecosystem services, sustaining a healthy planet and delivering benefits essential for all people.” introduced on July 05, 2021.
The Kunming Declaration committed to putting the world's biodiversity on a path to recovery by 2030. This included pledges to improve the effectiveness of conservation, strengthen environmental law, and reform financial incentives for protecting biodiversity (Convention on Biological Diversity, 2022).
However, the Future of Sustainable Data Alliance (FoSDA) identifies Biodiversity and Nature as one of the most critical missing data points among other ESG Data gaps and holes: an emerging theme not yet properly captured in existing reporting frameworks, meant to either identify company activities that would negatively affect nature or a company’s policy on biodiversity protection.
How Do Companies Measure Biodiversity?
The current progress on measuring biodiversity is reported as a part of the ESG or sustainability disclosures for entities and the use of proceeds for green bond issuers. For example, the GRI 304: The Biodiversity Standard (2016) is used annually by at least 2,000 organizations, out of the more than 10,000 companies reporting with the GRI Standards (GRI, 2021), which counts only 5% of total companies that report using GRI. While CDP has updated its 2022 questionnaires for all companies with six additional questions on biodiversity (C15).
The Landscape for Biodiversity Measurement
For each indicator presented in these frameworks and standards (above), the TNFD suggests disclosures to be material and chooses indicators based on the results of the location prioritization to cover all the TNFD’s four realms of nature, where relevant. That means indicators should be selected based on their ability to measure the most material dependencies, impacts, risks, and opportunities for the entity; on an ‘assess or explain basis. Detailed indicators and metrics for quantifying and qualifying biodiversity risks and dependency could be found in Appendix (A.1) of our full report on this topic.
TNFD “LEAP” Approach
Locate the interface with nature (Scoping the assessment): including the business footprint, nature interface at each location, priority location identification based on biodiversity importance and natural resources stress, and sector identification across business units, asset classes, and vale chains
Evaluate the dependencies and impacts: ID of relevant environmental assets and ecosystem services across business processes and activities at each priority location, ID of dependencies and impacts for further dependency & impact analysis on the sizes and scales
Assess material risks & opportunities: ID and assess corresponding risks, existing risks mitigation & management approaches applied, consider additional risks mitigation & management, conduct materiality assessment for opportunity & risk identification & assessment
Prepare to respond and report: preparation for strategy and resource allocation based on the evaluation & assessment results, set targets and define measurement for performance and progress, report and present nature-related disclosures in line with the TNFD recommendations
The Business Case for Biodiversity
Materiality and Sustainable Growth
According to the European Commission (EC), more than half of global GDP – some €40 trillion – depends on nature. It is important to develop sustainable business models that protect biodiversity and ecosystem services through both avoiding and minimizing threats to biodiversity and by creating benefits for nature. The relationship between business and biodiversity is more obvious in some sectors than in others. Agribusiness companies rely directly on fertile soils and a sustained supply of water, forestry companies depend on healthy trees, and parts of the tourism industry depend on wildlife and pristine destinations. According to the International Finance Corporation (IFC), while these sectors have a particularly clear incentive to maintain biodiversity, other sectors, including cement, retail, utilities, oil, and gas, or mining, can be affected by equally strong drivers such as impacts to reputation or access to resources (such as access to land, water resources, supply chain security, etc.) and capital.
Businesses accounting for their biodiversity impact shall be double material. The selected biodiversity indicators should be linked to both business performance and biodiversity management. Both the degree of dependency on biodiversity and the natural ecosystem and its impact on biodiversity are material to business growth. The economic and social costs of inaction among biodiversity loss and ecosystem collapse would be huge. The world already lost an estimated €3.5-18.5 trillion per year in ecosystem services from 1997 to 2011, and an estimated €5.5-10.5 trillion per year from land degradation. (EC, 2020)
For example, as suggested in GRI13: Agriculture Aquaculture and Fishing Sectors (2022), biodiversity generally declines as agriculture, aquaculture, or fishing activities intensify. This is largely driven by natural ecosystem conversion and habitat change. Biodiversity impacts result in increased mortality rates of species, and habitat fragmentation, and can lead to species loss or extinction… Biodiversity loss results in reduced crop yields and fish catches, increased economic losses from flooding and other disasters, disrupted supply chains, and the loss of potential new sources of medicine…all sum up to the urgency of accounting for biodiversity as a key area for assessing corporates’ materialities.
Compliance Requirements
Increasing compliance requirements and the cost of penalties are part of the key considerations for businesses to apply stricter biodiversity management and prevent the risk of penalties, controversy, and access to capital. The European Parliament resolution on corporate sustainability provides a list of environmental factors that should be accounted for as part of environmental due diligence. This list includes “climate change, air and water pollution, deforestation, loss in biodiversity, and greenhouse emissions”. (EC, 2022) Non-EU companies are under certain obligations to conduct due diligence on their value chains as well.
While in England, the Environment 2021 Bill includes a requirement for Biodiversity Net Gain (BNG). The essence of the BNG approach is that all new developments need to deliver biodiversity net gain after construction has been delivered. In addition, the net gain features need to remain in place for 30 years. In fact, they will also need to be monitored for 5 years after implementation. This will become law in 2023 but is already being actively engaged with by local authorities and better developers. (Green Roofs for Healthy Cities, 2022)
Controversy
The controversial risk of biodiversity is rising as investors start to quantify the impact of poor biodiversity management. For example, Nongfu Spring (09633. HK) was criticized by NGOs and consumers for irresponsible management or poor performance in ESG-related issues. Plastic products from an array of beverage companies including Nongfu Spring were accused of polluting Chinese beaches. The company was also criticized by China Water Risks, an NGO based in Hong Kong, for threatening China’s groundwater sources and intruding on nature reserves and natural landscapes. Reportedly, the China Biodiversity Conservation and Green Development Foundation filed an environmental civil public interest lawsuit against Nongfu Spring. The case reveals that the water intake point of Nongfu Spring is only 700 meters away from the core area of Wuyi Mountain National Park, and its plans to install 1,000 meters upstream, the core area of the protected area, which poses a huge risk of damage to the ecological environment, and the construction project should be stopped immediately. Nongfu Spring was reported to be "deforestation and fetch water", after on-site investigation and appraisal, the Forestry Branch has made a decision on the administrative penalty for forestry, ordering the construction party of Nongfu Spring to replant trees 2-5 times the number of trees (compare to pre-damaged level, 880 in total) and fined CN¥8,289.87 RMB (The Paper, 2020).
Opportunities
Blockchain-backed “bio-token” also creates a new marketplace for biodiversity investment and protection. One of the opportunities presented by biodiversity solutions is through the utilization of digital monitoring. For example, created by IUCN and the Huawei TECH4ALL program, Tech4Nature is designed as an open partnership to apply and promote digital solutions for fair and effective protected areas. Tech4Nature has developed a unique ‘benchmarking tool’ that uses digital technology to track progress and improvements in protected areas. Better assessment, monitoring, and stakeholder engagement processes using digital access and technology. Tech4Nature also extended the NFT market by offering Digital Nature Collectible, in a bid to provide sustainable funding and an innovative financing alternative for conservation work in protected and conserved areas, whilst also engaging with their main audiences.
Commonwealth Bank of Australia and BioDiversity Solutions Australia (BDS) have formed a partnership in co-developing the prototype that enables the creation of tradeable digital tokens (‘BioTokens’) within an efficient and transparent digital marketplace powered by blockchain, with the ‘BioTokens’ representing biodiversity credits for NSW Government’s Biodiversity Offsets Scheme. (Commonwealth Bank of Australia, 2019) The Biodiversity Offsets Scheme is the framework for offsetting unavoidable impacts on biodiversity from development with biodiversity gains through landholder stewardship agreements. The Biodiversity Offsets Scheme (BOS) was established under the Biodiversity Conservation Act 2016. Under the BOS, applications for development or clearing approvals must set out how impacts on biodiversity will be avoided and minimized. (NSW Government, 2022)
Under the NSW’s Biodiversity Offsets Scheme, landholders can establish Biodiversity Stewardship Agreements to create offset sites on their land to generate biodiversity credits. These credits are then available to the market for purchase by developers, landholders, or the Biodiversity Conservation Trust to offset the impacts of development or clearing. Sufficient funds are held in the trust to support the long-term management of the biodiversity stewardship sites.
More ESG Research and Insights are Available from GC Insights Contact: info@gc-insights.com for more information.