Why biodiversity and natural capital matter to companies
Why biodiversity and natural capital matter to companies
Companies might feel they have a lot on their plate, given soaring costs, ongoing supply chain disruptions, labour market shortages and the uncertain geopolitical and macroeconomic environment. Some might also be struggling to adapt their business to accommodate the impact of climate change and the need to improve sustainability. Forward-thinking firms need to add two further considerations to their to-do list: biodiversity and natural capital.
No company wants to add extra burdens to its operations or increase its running costs. However, by starting to think about natural capital and biodiversity now, companies can get ahead of the curve on an issue that is sure to gain greater prominence in the coming years. More importantly, by looking at their business through a biodiversity and natural capital lens, companies can better manage their risks and potentially take advantage of new opportunities.
What are biodiversity and natural capital?
Most of us are broadly familiar with the idea of biodiversity: it describes a mix of species that enable stability and resilience within ecosystems. You might think of the rich biodiversity of a coral reef, for instance. But biodiversity also has business consequences. Research has shown that single-species forest plantations are more susceptible to storms, forest fires and disease than mixed woodland: greater variety makes commercial sense.
Natural capital is the global stock of natural assets, such as geology, soil, air, water and all living things. Biodiversity adds to the world’s natural capital, by making it richer, and more varied and robust: it effectively acts as a multiplier of the value of natural capital.
“These ecosystem services don’t come with an invoice so they are not often part of business decision making,” says Jonas Persson, Head of Sustainability and ESG Finance at Lloyds Bank . “But a lot of the capital that powers businesses and the global economy ultimately comes from the natural world. The concept of natural capital makes ecosystem services visible and ascribes value to them, and companies can therefore make better-informed decisions that can benefit both them and the wider world.”
Why it pays to pay attention
Ever since the industrial revolution, human activity has been steadily eroding the world’s stock of natural capital. We are extracting value from nature at a rate faster than it can replenish itself. Shrinking rainforests and depleted fisheries are just the most visible signs of this.
The long timescale over which natural capital is diminished can make it difficult to assess the risks involved. Perhaps most important, the mind-boggling complexity of the natural world count against it: assessing the impact of any one interaction with nature is extremely challenging.
So how can companies begin to understand the implications of the erosion of biodiversity and natural capital – both for their long-term ability to survive and thrive as businesses and their short-term ability to deliver to customers?
As one of the sectors most reliant on natural capital, the food and drink industry offers some powerful examples. Recently, a global fast-food company announced that it would have to replace lettuce with cabbage in its meals because of a shortage caused by floods in Queensland, Australia. In the UK, in recent months companies were unable to market eggs as free-range (lowering their value) because hens had to be kept indoors due to avian flu.
“Understanding biodiversity and natural capital is essentially about risk management,” says Persson. “Some of these risks are relatively easy to understand, especially in sectors such as ecotourism (which is impossible if the environment it operates in is degraded), and the food and drink or fashion industries which depend directly on natural resources. But productivity and resilience for companies in all sectors can be impacted by supply chain risks: we all ultimately depend on natural capital.”
Gaining an early mover advantage
The debate around climate change prompted the Paris Agreement to limit global warming, and numerous standards and frameworks, such as the Task Force on Climate-related Financial Disclosures (TCFD), which underpins the UK’s disclosure climate-related financial information regime for larger companies. Approaches to biodiversity and natural capital are at an earlier stage but are starting to accelerate.
Last year, HM Treasury published an independent review led by Professor Sir Partha Dasgupta on the economics of biodiversity, which sets out ways to account for nature in economics and decision-making and could form the basis of future government strategy. “Our reliance on nature is brutally brought to life in the Dasgupta review,” says Persson
“The review demonstrates that in order to judge whether economic development is sustainable, nations need to adopt a system of economic accounts that includes nature as an asset. Instead of using gross domestic product, which is a flow, we need to focus on inclusive wealth, which is the social worth of the economy’s entire portfolio of assets.”
A mechanism for change may already exist. A Taskforce on Nature-related Financial Disclosures (TNFD) – analogous to the TCFD – has been created to help businesses understand their biodiversity risks and opportunities, and how to disclose their performance.
At a global level, the forthcoming UN Biodiversity Conference (COP 15) will convene governments to agree to a new set of goals for nature over the next decade to transform society’s relationship with biodiversity and to ensure that, by 2050, the world lives in harmony with nature. Some observers believe that COP 15 could be as important for biodiversity and natural capital as the Paris Agreement has been for climate change.
A purpose-driven approach
As well as supply chain and regulatory risks, companies also need to consider reputational risks linked to natural capital. Clearly, no company wants to be associated with an oil spill or deforestation. But companies also need to reflect on the everyday impact their business has on the environment and how it is perceived by stakeholders, such as consumers and the wider public.
This is an increasingly important issue given demographic shifts. Millennials are now the largest consumer group by size and spending, and have stronger views about sustainability than previous generations: they expect apparel, entertainment and other brands to share their values. As a result, many businesses are shifting to a purpose-driven approach and seeking to become better corporate citizens – an idea that aligns with biodiversity and natural capital. In time, a commitment to biodiversity and natural capital are likely to become part of companies’ social license to operate granted by stakeholders affected by the company’s activities.
Long-term benefits
Integrating the concepts of biodiversity and natural capital into business activities is at an early stage and, given the complexity of nature, many challenges – such as pricing and valuation – remain to be solved. “The Dasgupta review and the TNFD clearly indicate the direction of travel though,” says Persson. “Regulation is fast approaching and companies would benefit from understanding their relationship with nature sooner rather than later.”
However, valuing nature is about more than just data, disclosure and ticking boxes, he adds. “The bigger question is why companies need to consider biodiversity and natural capital: integrating these concepts into business models and decision-making makes companies more resilient and successful. Businesses face many pressing challenges at the current time and these ideas might not seem to be a priority. But understanding companies’ relationship to nature would do much to help them understand geopolitical and macroeconomic risks, many of which stem directly from upheavals in the natural world.”
?Five key questions for treasurers
Head of Sustainability and ESG Financing
Lloyds Bank
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2 年Fines equate to crimes and Chairman and Board have used Shareholders funds to pay their fines. Their assets should be sequestered! As should RBS and NatWest Executive! Both banks have paid over ￡1.5 bn in fines. Bonuses changed behaviours.
Client Partner- Banking & Capital Markets - Technology Advisor & Vocal Advocate for Inclusion
2 年Quite interesting. Biodiversity is an essential piece of the benefits that businesses get from natural capital. It also helps the key ecosystem functions that make sure businesses can run and be productive.
Group Chief Executive at Lloyds Banking Group
2 年Interesting read, Jonas Persson. Thanks for sharing your insights, natural capital and biodiversity are areas all of us must continue to pay attention to.?
Co-owner of Agri Web Media, editor of Direct Driller and Tech Farmer Magazines - 07583325512
2 年We sell carbon credits generated on farm. Lloyds manage all our accounts and are aware of exaclty what we do as a business. But they have never asked to buy any carbon or biodiversity credits from their customers. I find this whole tone of this article "do as I say," when they are not walking the walk and in fact have avoided all efforts to enage them in the past on these subjects. This is just a "cool" topic now to jump on the bandwagon. When I see some actual change and them offer support to those doing it, I'll be more impressed.