Nature-Related Risks and Climate Change

Nature losses are mission-critical to address and deeply intertwined with climate change. They’re finally getting some attention.

Much of the climate policy conversation to date has focused on greenhouse gas emissions. Climate pledges center around bringing a company, country, or even continent (in the case of the EU’s green pledges) to net zero emissions. Climate disclosure requirements like the SEC’s proposed climate rule focus on having companies disclose their emissions and reduction targets. Greenhouse gas emissions are indeed the primary driver of climate change and should be a central focus of climate policy–but global temperature rise itself is only one part of the equation. Another class of environmental risk exists: nature-related impacts, which describe how human activity since the Industrial Revolution has affected species biodiversity, ecosystems, and natural resources.

While an emerging suite of policies has emerged to require climate-related disclosures from companies and financial institutions, the nature-related disclosure space is nascent, and protections for biodiversity and ecosystems have lagged behind. The Task Force on Nature-Related Financial Disclosures (TNFD) is one of a few nonprofits laying the groundwork this year to help organizations assess and disclose their nature-related impacts, and on June 28 TNFD issued detailed guidance for its new disclosure framework for the first time.

Understanding and mitigating human impacts on biodiversity will be critical for environmental preservation and natural resource protection, and nature-related disclosure will likely be the next frontier of environmental policy and climate tech. Let’s dig in.

What are Nature-Related Risks?

Human activity over the last century has produced unprecedented economic prosperity, but unbridled growth has crippled species and ecosystems. The World Wildlife Fund (WWF) Living Planet Report provides a hard look at the state of nature today, noting that anthropogenic activities have altered 75% of the world’s ice-free land mass, degraded 85% of the planet’s wetlands, and brought 1 million species (500,000 insect species and 500,000 animal and plant species) to the brink of extinction. The WWF’s Living Planet Index (LPI), which quantifies biodiversity loss by calculating species population changes, shows a 68% biodiversity decline on average between 1970 and 2016. The heaviest biodiversity losses have taken place in tropical and historically species-rich areas of the planet, like Latin America and Africa.

Global biodiversity levels have fallen by almost 70% since 1970, with large variations between regions. Source: WWF Living Planet Report 2020.

New findings this month from the Intergovernmental Panel on Biodiversity and Ecosystem Services (IPBES) speak to how these biodiversity losses can impact human populations. One-fifth of humans worldwide–and 70% of the world’s poor–rely on wild plants and animals for food, and 2.4 billion people rely on fuel wood for cooking and heating their homes. “From the fish that we eat, to medicines, cosmetics, decoration and recreation, wild species’ use is much more prevalent than most people realize,” noted IPBES co-chair Dr Marla R Emery. Sustained biodiversity and ecosystem losses would be not only disastrous for nature but also deleterious for human food security and living conditions.

The Link Between Biodiversity and Climate Change

Isn’t all nature loss caused by climate change, and won’t fixing climate change deal with the nature impact issue? Climate change is actually not the top contributor to biodiversity loss right now–it’s just one of five main threats, the others being changes in land and sea use, species overexploitation, invasive species, and pollution. Biodiversity and climate change are interdependent but distinct, which means that climate-related disclosure policies alone will not account for the impact of human activities on biodiversity.

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But climate change and nature-related losses are intertwined in another way: while climate change is just one of five drivers of nature losses, nature losses are a primary accelerant of global warming. Land degradation is the primary linkage point between biodiversity loss and climate change, as noted in the UN’s 2022 Global Land Outlook report. Degradation includes everything from deforestation for timber and agriculture to the draining of wetlands, mining in rural areas, urbanization, and dryland desertification. The World Economic Forum (WEF)’s Nature Risk Rising Report notes that the “destruction of mangroves, peatlands, and tropical forests for agriculture and other uses contributes to 13% of total human CO2 emissions.” In addition to emissions impacts, Webb et al, writing for the Frontiers in Ecology journal, find that land degradation and climate change comprise a vicious feedback loop in which land degradation reduces the ability of ecosystems to adapt to climate change, and climate change accelerates land degradation through soil erosion, drought, and increased evapotranspiration rates.

The TL;DR: nature-related losses are critical to address not only because of their impacts on biodiversity and human welfare but also because of their ability to exacerbate climate change.

The Two-Way Connection Between Companies and Nature-Related Risks

Nature-related risk is a two way street: economic activity is highly exposed to nature-related impacts, and global ecosystems are highly vulnerable to economic overgrowth. WEF finds that $44 trillion of economic activity–or over half of the world’s GDP–is exposed to nature loss. Exposure to nature-related risks could have material impacts on a company’s bottom line, and WEF describes three main ways materiality could unfold: direct business dependence on natural resources; the loss of customers, geographies, or markets due to a company’s impacts on nature; and disruptions of the society where a business operates due to nature-related losses.

On the flip side, companies not only suffer from nature-related losses but also contribute to natural degradation. Industrial fishing, agriculture, and chemical processing are just a few instances of business contributions to nature risk that also showcase the interlinkage between nature impacts and climate change. Until now, though, there’s been no consistent way for companies, investors, and consumers to track and compare nature losses and advocate for ecosystem preservation. That’s where TNFD comes in.

Image courtesy of WEF’s Nature Risk Rising Report.

The TNFD Approach

Years ago, the UK’s Financial Stability Board created the Task Force on Climate-Related Financial Disclosures (TCFD), which has since then become the gold standard for policymakers looking to create climate disclosure policies and companies looking to disclose their climate-related data (check out this paper by my team at Persefoni and ERM to learn more). Now the TNFD is looking to replicate the success of the TCFD and shine a spotlight on nature-related environmental impacts.

The initial TNFD framework released earlier this year presented a set of 11 disclosure requirements that would mandate companies to take a hard look at their governance, strategy, risk management tactics, and metrics used to assess nature-related risks. After releasing this initial guidance, TNFD unveiled v0.2 of its reporting framework a few weeks ago, on June 28. The updated guidance provides a window into what kind of metrics the nonprofit will recommend companies to disclose.

There’s a lot to digest in v0.2, but perhaps the most critical piece to look at is how the TNFD proposes to handle nature-related metrics. A company’s climate-related impacts are often challenging and complex to calculate, but the world has mostly aligned on a few key metrics to measure these effects, chief among them the metric ton of CO2. By contrast, the TNFD reports that there are over 3,000 metrics currently in use to measure nature-related impacts.

The huge number of metrics makes it difficult to compare one company’s performance on nature impacts to another’s, a huge challenge for both bottom line-minded investors and nature-minded consumers. I’ve created a table below with the TNFD’s current thoughts on a systematic approach to nature-related metrics, which separates out nature impact metrics from nature-related risks, opportunities, and company response metrics. I’d expect to see more clarity here in the next 2 versions of TNFD, as noted in the right-side column.

TNFD is joined in its pursuit to bring visibility to nature-related impacts by a few other key organizations. The Partnership for Biodiversity Accounting Financials (PBAF) Standard enables financial institutions to report on their investment products’ nature-related risks. So far just 33 financial institutions have undertaken PBAF reporting, demonstrating how early this space is, but more are expected to join over the next few months. Meanwhile, the European Financial Reporting Advisory Group (EFRAG) has also issued working papers on nature-related disclosures, including drafts for pollution, marine resource use, and biodiversity disclosures.

Forward-Looking Predictions

The development of these standards alone does not guarantee that companies will begin assessing their nature-related risks and disclosing them. As is the case with climate-related disclosures, the key to voluntary nature disclosure will be pressure from investors who sense the possibility of lower returns from companies exposed to nature losses. Increased investor concern over nature-related risks will pressure company boards to begin looking at nature-related risks as part of their financial reporting over time.

Technological solutions will also need to catch up to reduce the manual effort required to calculate and disclose nature risks. As standard setters align on a set of key metrics to measure nature risks in different industries, I wouldn’t be surprised if “nature risk accounting” becomes a new bleeding-edge climate tech field for software innovation. Nature-related risks underscore the interrelatedness of species extinctions, ecosystem degradation, business activity, and human well-being, and the climate tech and policy worlds have catching up to do.

My Climate Top 5:

• Linux Foundation’s OS-Climate data initiative, developed in partnership with Amazon, BNP Paribas, and Airbus, released an open source tool to help financial institutions track their climate risks and make climate-aligned financial decisions.
• Europe struggled this week under the weight of a massive heat wave that brought record temperatures over 104 degrees F and wildfires to the United Kingdom, Italy, France, Spain, Portugal and more. Most homes and buildings in Europe don’t have air conditioning, making the heat wave lethal in some areas.
• Researchers located a new crack in the Marmolada Glacier of northern Italy’s Swiss Alps, just a few weeks after a crack in the same glacier caused an avalanche that killed 11 people. The new crack raises concerns about short-term glacier destabilization and underscores the long-term damage that this summer’s European heat waves could have.
• Electrolyzers are key to the green hydrogen economy–think hydrogen fuel cell cars–and Bloomberg NEF estimates that the electrolyzer sales are having a “hockey-stick moment”
• in 2022, with sales expected to 3x from 2021 figures.
• West Virginia Senator Joe Manchin said that he will oppose a $300 billion Congressional package for renewable energy manufacturing, launching another torpedo in the shell of the Biden administration’s ailing climate agenda.

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