Biodiversity is building to become the next big ESG wave, with investors and other stakeholders telling companies to get prepared. Garnet Roach reports
Do you know what your company’s impact is on the rainforests? Have you worked out what risks water scarcity might pose to your future operations? Have you told investors where and how your company – and its supply chain – is dependent on nature? These are some of the big questions companies will be asking themselves in the near future – if they aren’t already. These are the questions your investors are going to want the answers to as the ESG spotlight falls on biodiversity.
Last year, Norges Bank Investment Management, manager of the world’s largest sovereign wealth fund and holder of an average 1.4 percent of all the world’s listed firms, published an expectation document on biodiversity.
The mega-investor says it ‘expect[s] companies to be transparent on how they depend on and impact biodiversity and ecosystem[s]’. Firms that are ‘highly dependent on or impacting biodiversity and ecosystems should integrate relevant nature-related considerations into their corporate strategy, risk management and reporting,’ it adds.
Then there’s Robeco’s climate survey, released in March this year, which finds that investor awareness of biodiversity is rapidly increasing and has more than doubled, from only 19 percent of investors saying that biodiversity was a significant factor in their investment policy two years ago to 41 percent today.
Around the world, companies are taking note. Nick Mazing, director of research at Sentieo, says the term ‘biodiversity’ is growing both in transcripts and in proxy statements. ‘In 2021, there were 58 proxies containing the word, compared with 29 in 2020, 22 in 2019 and just 13 and 11 in 2018 and 2017, respectively,’ he explains.
‘Biodiversity is also growing as a topic on conference calls, with more than 400 transcripts that mention the word in 2021, in contrast to just 42 in 2017.’ Mazing adds that high-profile CEOs are increasingly commenting on the issue (see From the CEO’s mouth). Shifting perceptions Karine Basso, practice lead for agricultural value chains at consultancy South Pole, says companies are increasingly waking up to the idea that protecting the natural resources they rely on, directly or indirectly, is about future-proofing their businesses.
Karine Basso, South Pole
‘Companies see the importance this has for their business continuity,’ she says. ‘We’ve seen it with the impact of climate change, we’ve seen it with Covid-19, with the disruptions to supply chains – how things can reach a level of disruption that you would not have foreseen two decades ago.
‘From that perspective, this future-focus is not necessarily a focus on biodiversity for its own sake, but more about the idea that if you do not take care of the impact your business has on nature, and on making sure that nature is conserved to a level that you can continue your business, you will have an issue in the future.’
The actual reporting of biodiversity, Basso adds, is almost a consequence of that way of thinking. Still, the issue is one that is almost too overwhelming if you try to think of it in big-picture terms. We all rely on nature, on water, on the planet, and Basso says companies don’t always know where to begin. At the same time, many are still trying to get to grips with Scope 1, 2 and 3 emissions, carbon pricing and the road to net-zero.
‘This is a topic that can seem a little daunting and companies will have different maturity levels,’ Basso admits.
But if you’re really starting from scratch, she says the first thing you need to do is ‘map your supply chain, map your activities as an organization to understand where your activities are located geographically, so you can begin to understand: if I’m sourcing from Africa, what are the biodiversity and ecosystems I’m tapping into? What are the activities I have? And what are the consequences of those activities?’
But she stresses that for most firms today, it’s not necessary to dive into the deep end on biodiversity reporting. Instead, it’s about understanding where the risks – and opportunities – lie. From that base of understanding, companies can expand their data, prioritize their focus and begin to talk to investors about what they’re doing – even if things are still at the early stage.
Biodiversity is much harder to measure than climate change
Agustín Delgado, Iberdrola
Ecosystems and species One company that is already a few steps along the journey is Spanish utilities giant Iberdrola. Agustín Delgado, director of innovation and sustainability, admits that biodiversity is definitely more difficult to deal with than some other ESG issues.
‘Biodiversity is much harder to measure than climate change, for example, where we have a single unit of measurement (CO2 equivalent),’ he says. ‘This does not exist for biodiversity. There are more dimensions to consider.’
For Iberdrola, the focus at present is on ecosystems and species, an approach Delgado says ‘provides enough information to address all material impacts’. Challenges still remain, though – and Delgado cites accuracy as one.
‘On ecosystems, for example, it is vital to understand the conservation status of an ecosystem before impacting it,’ he explains. ‘And there’s usually limited information available. On species, we rely on monitoring and observation activities, which are inherently partial. Also, impacts are hard to evaluate because ecosystems are open systems, subject to impacts from multiple agents, so understanding cause-effect relationships is a real challenge.’
Investors are also aware of the difficulties around biodiversity reporting. Half of the investors responding to the Robeco survey cite a lack of research data, ratings and company information on biodiversity as key challenges.
Despite the difficulties, Delgado says this is an area investors – as well as other stakeholders – are increasingly interested in, partly because of the sector Iberdrola operates in. In fact, he says ‘it is very unlikely that a company with material biodiversity impacts, operating in a well-developed regulatory environment is not doing a lot of this already.’
In an attempt to deal with some of these issues, a number of frameworks are on the way. Two examples include the Taskforce on Nature-related Financial Disclosures (TNFD) and Science-Based Targets for Nature (SBTs for Nature). TNFD has released a beta version of its framework designed to measure and disclose nature-related risks at public companies, with full recommendations due in Q3 2023. SBTs for Nature, with a focus on fresh water, biodiversity, land and oceans and which seek to take companies beyond climate action, are due later this year or early 2023.
Delgado says, however, that while these are helpful, the lack of a joined-up approach is still causing confusion because the more frameworks that appear, the harder it is to decide what to use – an issue the climate change frameworks industry is currently seeking to address.
So what do investors want to know? Describing a ‘surge’ in investor interest in biodiversity over the past few years, Delgado says most investors are focused on reporting biodiversity impacts and dependencies.
‘Several metrics are available for this but still need consolidation,’ he continues, adding that this a short to mid-term aim.
‘In the longer term, this should evolve into natural capital assessments to cover the whole ecosystem services’ impacts and dependencies. Another long-term goal is addressing impacts on the whole value chain.’
It’s fine for companies to say, I understand that biodiversity is a key topic: we are starting to work on this right now – and we do have a plan
Opportunities as well as risks When it launched the beta version of its reporting framework, TNFD stressed that biodiversity isn’t just about risk – it is also about opportunities. The idea of becoming ‘nature-positive’ is taking hold; it's something Delgado talks about for the future at Iberdrola – and what that means in terms of reporting. ‘Iberdrola is on a firm path to becoming net-positive on biodiversity so reporting has to evolve to methodologies that provide an assessment on net impacts, considering both negatives and positives,’ he says.
What about for those companies far earlier in their biodiversity experience? Basso stresses the importance of transparency – and legitimacy.
‘It’s not about communicating only when you have the whole plan ready, as long as you’re truthful to what you have in place, and what you don’t,’ she says. ‘It’s fine for companies to say, I understand that biodiversity is a key topic: we are starting to work on this right now – and we do have a plan.’
She advises companies to let investors know their plans around reporting, even if it’s simply saying that in a year’s time, you’ll publish your risk and opportunities hotspots. This lets you communicate from the beginning as well as set milestones for yourself – something she says helps companies avoid fluff and show investors they are genuine in their efforts.
‘A lot of organizations will be appreciative of the fact that a company realizes this is important and is starting to work on biodiversity, that it has a plan,’ Basso points out. ‘What's important is to continue to communicate and be transparent about that plan.’
And Delgado says that Iberdrola already sees the benefits of its approach to biodiversity, despite the inherent challenges.
‘Measuring is quite difficult… but we have a long experience of the intangible benefits of doing things right,’ he points out. ‘Projects that are developed and operated considering environmental (and social) impacts tend to receive a much faster consent process, better stakeholder acceptance and fewer operational troubles – so investing in biodiversity really does pay off.’
Nick Mazing, Sentleo
Nick Mazing, director of research at Sentieo, selects CEO quotes that highlight the growing focus on biodiversity.
