Why nature risk is financial risk

Australia’s native animals are emblazoned on everything from our sporting teams, our coat of arms and our currency. We are home to some of the world’s oldest living trees. But we are losing our biodiversity faster than any other continent on the planet. Will the recommendations from the Taskforce on Nature-related Financial Disclosures reverse the decline?

“Nature risk is financial risk,” Elizabeth Mrema, Co-chair of the TNFD, said at the launch of 14 recommended disclosures to help corporates and financial institutions redirect the flow of capital towards nature positive investments.

Until now, businesses have mostly considered nature to be, as Mrema put it, “an unlimited and free provider of critical inputs into their operations and value chains”.

But the World Economic Forum estimates that around US$44 trillion of value, or around half of global economic output is dependent on nature – a precarious position when six of the top 10 global risks are environmental.

The term “nature positive”, which describes conditions in which species and ecosystems are repaired and regenerated, is being adopted around the world as we acknowledge the role of nature in human, financial and planetary health.

The TNFD, modelled on the Task Force on Climate-Related Financial Disclosures, represents a huge milestone in the fight for the planet. But it’s just one of several recent developments that were explored during a panel discussion I joined during the Carbon Market Institute’s Australasian Emissions Reduction Summit in mid-September.

In the last year, the International Sustainability Standards Board issued its first set of standards. The European Union enacted regulation on deforestation-free supply chains. The world’s central banks recognised biodiversity loss as a source of systemic risk. And 196 countries, including Australia, agreed to adopt the Kunming-Montreal Global Biodiversity Framework and a promise to protect 30% of our land and 30% of our oceans by 2030.

The Australian Government has developed a Nature Positive Plan and the Nature Repair Market Bill is with Parliament. However, there has been limited acknowledgement of, or action to address, financial risks to businesses relating to biodiversity and nature loss in Australia to date, but this is evolving rapidly. Australia has some of the world’s most diverse natural environments, some of those most at risk, and an economy that is dependent on nature to create value.

Pilots for nature positive

Over the last 200 years, Australia has suffered the largest documented decline in biodiversity of any continent. The State of the Environment Report, published in 2022, presents a bleak picture in which climate change, habitat loss, invasive species, pollution and resource extraction are eroding our nature capital at an eyewatering rate.

Historically we haven't quantified, or even contemplated, the financial risks we face from the loss of nature. But as frameworks and reporting requirements align, corporates must ask themselves some tough questions.

How dependent are Australia’s value chains on nature? And what financial risks does the loss of nature present to Australian businesses?

The Department of Climate Change, Energy, the Environment and Water (DCCEEW) sponsored and oversaw the delivery of TNFD pilot testing with Australian corporations and FIs. The TNFD Pilot Testing project was facilitated by EY in accordance with the TNFD Piloting Guide. The pilot study included 23 organisations and 8 peak industry bodies across five case study groups. Each case study group focused on one of the following nationally significant value chains:

·?????? Critical mineral mining for producing clean energy technologies

·?????? Natural gas extraction for industrial manufacturing

·?????? Domestically sourced fresh beef and salmon sold at a supermarket

·?????? Property development and building construction

·?????? Domestic cotton cultivation for export

Pilot participants tested the TNFD Framework’s nature-related risk and opportunity assessment process (i.e. ‘LEAP’ approach) to gain insight into Australian businesses’ preparedness to respond to the TNFD, identify challenges to implementation, provide recommendations to the TNFD Secretariat for enhancing the TNFD Framework, and develop policy recommendations for the Australian Government to facilitate market uptake.

Money grows on trees

In a separate piece of work, EY was commissioned by the Wilderness Society to examine the global finance sector’s links to deforestation in Australia.

Deforestation: Following the Money found Australia is a deforestation ‘hot spot’ as large-scale land clearing and logging destroys hundreds of thousands of hectares of forest and bushland each year, fuelling climate change and the extinction crisis.

From 2024, the EU’s groundbreaking regulation to ban the import of goods linked to deforestation will require firms working in deforestation hotspots to certify that their goods have not harmed forests.

EY analysis for the report found US$29 billion flowing from European financiers into 13 companies with links to deforestation and forest degradation-risk sectors in Australia. These European financiers, and many more, will be required to re-examine their investments.

Just as overseas investors have set the standard for climate risk, they will also be the ones to set what level of nature destruction and species loss is acceptable in Australia.

?Three steps towards nature positive

TNFD’s 14 recommendations have only just been released, and corporate leaders are still getting their heads around what they mean. But the trendline is very clearly pointing in one direction and there are three things to start thinking about today:

1. Value First Nations voices

TNFD recognises that First Nations stakeholders will be critical to the legitimacy and validity of disclosures or processes to manage nature-based risks and opportunities. But meaningful engagement is a significant undertaking, and there is a risk that TNFD disclosure will place an unfair burden on Indigenous stakeholders.

?Meaningful engagement means bringing First Nations stakeholders into the room, compensating them for their time and providing resources so they can actively engage. Importantly, the onus should not be on First Nations people to demonstrate adverse impacts; instead, the onus must be on corporates and financial institutions to understand how their activities may be creating potential negative impacts and the steps they can take to change course.

1. Consider ecosystem interdependencies

Take our cues from nature to understand the interconnected issues at play. We can't think about decarbonisation without considering how we will restore and regenerate nature or uphold human rights, for instance. We can't create a market that allows companies to misdirect attention to positive impact in one area, when negative impact is occurring somewhere else.

1. Acknowledge the work in progress

The current draft disclosures recommend that, when capital is deployed to nature positive projects or programs, it should be aligned to a government or regulated green investment taxonomy – but these simply don’t exist now. The only provision in the TNFD for positive impact on nature is in a future state and that comes with risks that must be carefully considered and managed.

We are at the start of a steep learning curve, with plenty of capacity building, better data collection and collaboration across sectors ahead. But the signposts are pointing in a positive direction. The Responsible Investors Association of Australasia, for instance, says the impact investment sector nearly doubled from $30 billion in 2021 to $59 billion in 2022.

But the bottom line is clear. Nature is no longer an unlimited bounty for business. But, news flash, it never was.