Robert Winch, Senior ESG Consultant
Undervaluing common resources.
This article has been taken and adapted from GRESB.
Natural environment – the common resource.
Businesses have historically had one fundamental purpose… make a profit. This resolve has been adopted by almost every business. It has enabled interconnected global economies to grow exponentially, lift people out of poverty and drive modernization.
All businesses operating within this global network draw their resources such as energy, water, and materials from a common stockpile, the natural environment. Businesses also dispose of their waste including carbon and other pollutants, into the confines of this same shared stock.
Whilst the impact of most businesses on this common resource is relatively small when viewed in isolation, their combined impact is enough to influence the global climate, shift biomes, and eradicate species.
Currently, over one million animal and plant species are threatened with extinction, this can largely be attributed to the undervaluation of businesses’ common resource, the natural environment.
This pattern is common in nature. When a population is left unchecked, for instance by a predator, it will increase until its resources (food, water, and space) diminish to a level below that which can support the population. That population will subsequently decline.
Parallels can be drawn from this analogy to businesses, which in this instance are the individuals within a population; once they start consuming more resources than those available or producing more waste than can be naturally managed, their number will consequently diminish. In nature, this plays out in a cyclical pattern whereby predator numbers increase and decrease alongside their prey.
However, unlike the analogy, the impact businesses are having on the natural environment is irreversible.
Nature can be thought of as a stock of environmental assets that provide benefits and resources to businesses. Businesses have a dependency on these environmental assets, and these can impact their health.
Nature-related risks are the threats to that dependency; these can, in time, lead to earnings and cashflow vulnerability, which can become financial risks such as market, credit, and liquidity risks.
Over half of the world’s economy, valued at approximately $44 trillion, is moderately or heavily dependent on nature. However, the value of nature is infinite and without it, the world’s economies could not exist.
But for businesses it is not just a fight for survival, it is an opportunity to flourish. These environmental assets can self-replenish when managed sustainably. Through proper governance, strategy, and risk management the risks can be mitigated, and financial opportunities created. A transition towards a nature-positive future is estimated to generate up to £10.1 trillion in annual business value and create 395 million jobs by 2030.
But an absence of risk management strategy could lead to devaluations, stranded assets, supply chain instability, and lost reputation. For investors this presents a material vulnerability to ensuring returns, causing instability in the global market.
Assessing dependencies, risks, and opportunities.
The Taskforce for Nature-related Financial Disclosures (TNFD) is developing a means to better account for the mutual impacts, risks, opportunities, and dependencies that exist between businesses and nature. The TNFD consists of organizations including financial institutions, corporates, governments, regulators, multi-laterals, NGOs, and consortiums. Collectively they have £18.3trn assets under management. The momentum behind TNFD’s approach is snowballing, it now has the support of G7 Finance Ministers and the G20 Sustainable Finance Roadmap.
The TNFD has thus far produced a first beta version of its framework, which is intended to support organizations’ reports on the risks from biodiversity loss and ecosystem degradation. The final version isn’t anticipated to arrive until late 2023, but this report will increase the availability of data and information that will enable businesses and their investors to make more informed decisions to mitigate risk.
TNFD’s approach has largely mimicked, as far as possible, the approach of the Taskforce for Climate-related Financial Disclosures (TCFD). The TNFD can be seen as the TCFD’s younger adolescent sibling, designed to address the latter half of the climate and biodiversity emergency. Whilst TNFD can learn a lot from the TCFD, it cannot inherit the exact same make-up. The TCFD had what some would argue a narrower scope, understanding risk through measurable changes such as carbon and temperature.
Nature-related risks are inherently more complex and interconnected, existing on a local and global scale.
It will be the first framework that will enable nature-related risks and opportunities to be assessed in an integrated and consistent way, bringing this to the front of financial decision-making.
Considering the TNFD’s launch, a business might be asking themselves: “Should I be looking at this now given I have just started to report against the TCFDs?”
This question implies a few falsehoods:
- That there is time to wait; the longer a business waits the greater the risks to them, their investors, their stakeholders, and nature;
- That there is no benefit in acting; this is about mitigating business risks and creating economic opportunities;
- That this is solely their decision; investors and financial institutions, amongst other stakeholders, are increasingly requesting this;
To address both the climate and biodiversity emergency, the answer to this question must be yes.
The future of ESG will need to utilize the driving force of financial institutions to mitigate the unequivocal level of capital at risk stemming from these twin emergencies.
The return for this action will be progress towards the sustained use of the largest common resource, the natural environment. If businesses continue to treat it like ‘share & tear’ bread, it will similarly disappear too quickly.