Biodiversity Risks Move Up the Investor Agenda

Standards and solutions come to market ahead of anticipated Global Biodiversity Framework and TNFD guidance.

Following COP26, biodiversity is beginning to move up the agenda for policymakers, disclosure bodies and financial institutions, in recognition of the need tackle climate change in parallel with other risks to natural resources. As a result, new standards, initiatives and products are being launched to help investors bolster – or at least avoid damaging – biodiversity.

The increased focus follows the first part of the UN Biodiversity Conference (COP15), which took place in October, beginning the process of finalising the Global Biodiversity Framework (GBF). The GBF will serve as an international agreement in which policymakers commit to reducing threats to biodiversity, meeting human needs through sustainable use and benefit sharing, and developing mainstream tools and solutions. It is expected that the subsequent increase in policy level action will further stimulate investors to prioritise the mitigation of biodiversity risks.

The second part of COP15 is expected to take place in Kunming, China, in April and May next year.

New reporting guidance

As well as co-constructing the EU sustainability reporting standards (ESRSs), the European Financial Reporting Advisory Group (EFRAG) and sustainable disclosure body the Global Reporting Initiative (GRI) are collaborating on the development of biodiversity standards.

EFRAG aims to submit a draft EU standard to the European Commission by June 2022, whereas the GRI aims to publish an updated GRI Biodiversity Standard in the second half of next year.

“When Commissioner Dombrovskis originally launched the revision of the Non-Financial Reporting Directive (NFRD), he and the Commission made it clear that the ESRSs should benefit from long-standing precursors and avoid reinvesting the wheel, while contributing at the same time to further substantial process globally,” said Patrick de Cambourg, Chair of the EFRAG Project Task Force.

Each group will join the other’s technical expert groups, sharing information and aligning work plans while incorporating the latest related developments made by other disclosure bodies, investor coalitions and governments.

Both standards will adopt the double materiality lens, meaning companies will be required to both disclose the impact biodiversity has on its business operations as well as how the company’s operations impact biodiversity.

“Our aim is to create the highest possible level of alignment between the ESRSs and the GRI standards,” said Cambourg. “Such alignment will also help address a second requirement from the Commission, which was to minimise the additional reporting pressure on organisations.”

The Climate Disclosure Standards Board has also launched its Biodiversity Application Guidance, which aims to “extend the Task Force on Climate-related Financial Disclosure (TCFD) recommendations and its core elements to nature”.

It will assist companies in the disclosure of biodiversity-related risks and opportunities in relation to their strategy and financial performance. The framework will supplement the CDSB’s existing guidance for reporting environmental and climate change information to investors.

Unlike the GRI’s incoming updated standard, CDSB is focusing on enterprise value-led disclosures. CDSB has recently been consolidated into the International Sustainability Standards Board (ISSB) alongside the Value Reporting Foundation.

New biodiversity-related products are also hitting the market to help investors avoid biodiversity risks.

In November, HSBC launched a benchmark product designed to exclude companies that pose a threat to biodiversity. The ESG Biodiversity Screened Index has been developed with Euronext, the pan-European stock exchange, and France-based FinTech Iceberg Data Lab.

It will draw on data produced from the Taskforce on Nature-related Financial Disclosures (TNFD). HSBC is expected to add a number of offerings to the index, including derivatives and structured products.

A nature-focused framework

The TNFD will be launched in 2023, providing investors, companies and policymakers with a voluntary reporting framework that will complement the TCFD.

It will aggregate the “best tools, materials and initiatives that already exist, in order to promote worldwide consistency,” said Elizabeth Maruma Mrema, Co-Chair of TNFD and Executive Secretary of the UN Convention on Biological Diversity (CBD).

Similarly to the TCFD, it is hoped that the framework will be adopted into domestic legislation alongside the GBF, inspiring a whole-of-financial system approach to biodiversity and wider nature-related issues.

In October, a report by a study group from the Network for Greening the Financial System (NGFS) and INSPIRE, emphasised the importance of a “whole-of-financial system” approach to mitigating biodiversity-related risks.

The report outlined four steps for central banks and financial supervisors to take to successfully address biodiversity risks: build skills and tools; assess the biodiversity-related dependencies and impacts of their financial institutions; issue guidance to the financial institutions they supervise; and supporting government efforts to reverse biodiversity loss.

In March, the Align project was also launched, led by the United Nation’s Environment Programme World Conservation Monitoring Centre (UNEP-WCMC) and funded by the European Commission. Over the next three years, it will be working with companies, financial institutions and existing nature-focused organisations to develop harmonised biodiversity measurement tools and approaches.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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