Nature awakens: nature risk is the next big global challenge

Welcome to Supercharging Sustainability — my monthly newsletter featuring insights on sustainability, ESG 2.0, and sustainable finance written for non-experts and experts. Here, you will find a blend of strategic insights, case studies, best practices, recent developments, personal anecdotes, and practical tips.

55% of the world's GDP depends on robust biodiversity and ecosystems, and 85% of the world's largest companies have a significant dependency on nature across their direct operation, according to one study. Yet, nature today faces unprecedented pressure due to human activities, including pollution, land-use change, and resource extraction, causing significant shifts to ecosystems worldwide. It could well be argued that all activities on Earth rely on nature, which emphasises the critical need for comprehensive awareness and nature risk management.

Last week, new research conducted by The Green Finance Institute and the Environmental Change Institute (ECI), University of Oxford, and University of Reading, together with UNEP-WCMC, suggested that continued environmental deterioration could cause the GDP in the UK to fall by as much as 12%. This decline surpasses the impacts of recent global crises, such as the COVID-19 pandemic and the Global Financial Crisis. Though conservative and focused on near to medium-term risks, these projections highlight the cumulative impact of ecosystem degradation that will intensify over time.?

What does nature risk mean for businesses and finance, and how can we navigate it to ensure long-term value creation? What have we learned from the global response to climate change that we can use for our collective response to nature risks? In this newsletter, I elaborate on nature risk, biodiversity loss, and nature-related financial disclosures, including some of the risks and opportunities that come with these topics, how we can navigate strategies related to them, and why we should act now.

“Nature-related opportunities arise when businesses adopt practices that either reduce their negative impact on biodiversity or actively help restore it.”

Navigating Nature-Related Strategies and Frameworks

Nature and biodiversity are closely connected but distinct. Nature encompasses everything in the natural world, while biodiversity refers to the variety of all life on Earth. The state of nature and loss of biodiversity is such that we have exceeded their safe boundaries. This has increased the need for a structured global response, leading to the adoption of the Kunming-Montreal Global Biodiversity Framework in 2022.?

The Global Biodiversity Framework, signed by 196 governments, is to nature what the Paris Agreement is to climate. It aims to halt biodiversity loss, achieve a net positive impact by 2030, and fully restore biodiversity by 2050. Achieving these goals will require?

1. reducing the environmental impacts of sectors like agriculture and energy,?
2. evaluating nature risk for large corporations, and?
3. significantly boosting financial resources for the preservation of nature and biodiversity.?

The Science-Based Targets for Nature (SBTs), released in May 2023, provide a global benchmark for corporate commitments to conservation. Despite criticisms of its methodology, the widespread adoption of these targets signals a collective willingness to standardise nature conservation efforts. The Taskforce on Nature-Related Financial Disclosures (TNFD), formed in 2021, adds another layer of actionable guidance by offering recommendations for organisations to assess, disclose, and act on nature-related dependencies, risks, and opportunities.?

The Taskforce on Nature-Related Financial Disclosures framework, finalised in September 2023, helps identify risks and opportunities, integrates them into business strategies, and recognises how local these risks are and that the longer-term financial implications vary by region. This regional variation underscores the importance of location-specific analysis, contrasting with climate risks' global nature.

Counting the Costs of Biodiversity Loss

Biodiversity loss has significant financial and social repercussions, with approximately one million animal and plant species at risk of extinction within decades. The World Wildlife Fund’s Living Planet Report 2022 revealed an average decline of nearly 70% in wildlife populations since 1970. Industries like energy, tourism, mining, and agriculture exacerbate this trend, making biodiversity a material risk. Nature-related opportunities arise when businesses adopt practices that either reduce their negative impact on biodiversity or actively help restore it.

Financial institutions are beginning to back initiatives that protect nature and biodiversity, with over 100 key financial players such as asset owners, managers, banks, and insurers backing the TNFD as early adopters. However, businesses require the right datasets on nature and biodiversity to understand their risks better, unlock opportunities, and assess how nature impacts financial performance.

Is Nature Finance the Future?

Roughly half of companies' nature-related risks, 56% in the UK, originate abroad through supply chains and investments. This means their vulnerabilities often lie beyond their immediate environment, emphasising the need for international cooperation in closing gaps in risk management and disclosure. Looking across the domestic portfolios of the seven largest UK banks, the analyses indicate possible adjustments in the valuations of up to 4–5%, which is conservative, over the coming decade from physical nature-related risks. Depending on the bank, the most at-risk sectors include agriculture, utilities, real estate, and manufacturing.

Investing in nature means investing in nature-based solutions such as reforestation, afforestation, and coral reef restoration—collectively sometimes called ‘re-wilding.’ This also includes investments in sustainable agriculture practices and urban green infrastructure like green roofs and parks.?

Companies and financial institutions that act now can benefit from building their capacity to assess and manage nature and biodiversity risks, just as they've begun to do, to certain extent, for climate risks. Collaborating with relevant stakeholders will also help increase awareness and understanding of these risks. Governments and regulators must identify deficiencies in existing frameworks where nature might fall through the cracks, leading to underpriced systemic risks. Taking proactive steps today will help secure both economic stability and ecological resilience.

Is nature risk the new climate change?

Over the last decade, the focus has primarily been on climate change and our collective response to it. While we've made significant progress in understanding climate risks, improving data quality, and enhancing reporting, there's broad agreement that our pace of progress remains insufficient. Moreover, we may excessively focus on GHG emission reporting, leading us to overlook the bigger picture and other critical issues like nature risks.?

As the urgency escalates, it's clear that addressing climate change and nature risk now go hand-in-hand, requiring a swift and decisive collective response. Yet, every risk also presents an opportunity. Investing in nature and biodiversity, whether through time, effort, or capital, will yield positive results that will benefit our global economy. Only time, trial, and error will reveal whether investments will yield an acceptable risk-adjusted return on investment.

I invite you to add your thoughts and insights in the comments below. Your input will be used for a more refined version of this article on my website at bjarniherrera.com. To never miss out on updates like this, subscribe to this LinkedIn newsletter or sign up at newsletter.bjarniherrera.com.