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The ESG Interview: From Ground Level to Board Level

Jessica Smith, Nature Lead at the UNEP FI, says it’s time for biodiversity to take its place alongside climate in investor priorities.

The UN summit tasked with preventing further destruction of biodiversity and nature has been delayed for a fourth time, meaning completion of a post-2020 Global Biodiversity Framework (GBF) designed to deliver the ‘shared vision of living in harmony with nature’ will be decided at least two years later than originally planned.

COP15, which had been rescheduled to take place this spring in China, will now be held in summer. This leaves investors, companies and policymakers still without a universally agreed system of targets and objectives to manage the risks of the ongoing destruction of habitats and species the world over.

Rather than be dismayed by the delay, however, Jessica Smith, Nature Lead at the United Nations Environment Programme Finance Initiative (UNEP FI), says this presents an opportunity for delegates at the resumed Geneva global biodiversity negotiations  to “build more understanding and engagement” around how the financial markets interact with biodiversity which they can relay to the COP15 summit.

Smith says: “There have been some delays in the calendar, but that means there has been much more engagement with different actors around developing the (GBF). A lot of the negotiators often come from legal, scientific, political, and conservation backgrounds, so we can’t expect them to really know everything about the financial markets and how they interact [with biodiversity and nature].”

Smith says there needs more understanding of the progress already made aligning finance with climate risk, which is set out in Article 2.1c of the Paris Agreement on Climate Change.

“We want to help decision-makers learn from what’s happened in the climate space, for example around Article 2.1c and aligning finance with managing climate change. There have been trillions of dollars committed to climate change as part of the Global Financial Alliance to Net Zero; now we want to recreate that commitment and momentum for biodiversity.”

She continues: “Nobody wanted delays [to COP15], but this is about getting the best GBF in place.”

Risks, impacts and opportunities

The Taskforce for Nature-related Disclosures (TNFD) beta framework, which opened for an 18-month consultation this week, will undoubtedly inform the GBF discussions.

Smith, who oversees UNEP FI’s role in the TNFD, in which it was a founding partner, says the prototype framework is designed to help a wide range of market participants understand nature-related risks, impacts and opportunities.

In keeping with the need to leverage existing initiatives, the nature-related disclosures will align with the approach and language used by the Task Force on Climate-related Financial Disclosures (TCFD), which already informs existing sustainability reporting requirements.

The TNFD makes disclosure recommendations across four pillars: governance, ensuring oversight and decision-making functions take nature into account; strategy, covering the integration of actual and potential effects of nature on business model, strategy and financial planning; risk management, relating to integration of nature-related risks into overall approach; and metrics and targets, encompassing quantitative and qualitative indicators and aims related to nature-related risk and opportunities, based on nature dependencies and impacts.

Smith hopes TNFD will provide a ‘normative framework’ that unites all the relevant parties and provides some consistency across different legislative demands.

“This is a framework that has to talk to board level, investors and it has to talk to the reality of nature on the ground. Over time it will be elaborated to include sector and region-specific guidance to tell a cohesive story about nature-based risks,” she says.

Pilot projects

During the next 18 months, there will be a series of pilots to test the proposed TNFD framework.

Smith says: “The beta framework gives our rallying point to start testing and working with different types of financial institution and corporates, and across all geographies to figure out the common threads. UNEP FI is going to play a big role in in the year ahead in the piloting programmes to work out what this will look like.”

The wider pilots follow a pre-pilot undertaken by UNEP FI and Global Canopy – a TNFD partner –  which tested the framework on a small group of organisations operating within, or providing finance to, soy supply chains.

Smith says the pre-pilot increased understanding of how TNFD’s framework would complement and enhance the existing TCFD framework.

She says: “The pre-pilot brought corporates together including Tesco and McDonald’s, Vitasoy and Danone, and financial institutions such as Santander and Rabobank. We will use that learning to develop to set up pilots worldwide on different topics.”

She adds: “It really helped to bridge the two worlds of TCFD and how the TNFD framework will work.”

The TNFD says asset owners and managers will be critical to the forthcoming pilots since the framework makes clear that they “play a catalytic role, as they influence the organisations they invest in to provide nature-related financial disclosures and strengthen their management of nature-related risks and opportunities”.

But if they are to effectively inform the forthcoming pilots, investors – and investee companies – need a set of metrics on which they can measure their nature-based risk. Unlike TCFD which relies on a single measurement of carbon emissions, TNFD requires multiple relevant sources.

Smith says TNFD uses Science Based Targets for Nature which include goals to reduce emissions from deforestation and degradation, and by restoring forests; improving forest management; and enhancing soil carbon.

But she adds: “We have to recognise the complexity with nature and biodiversity. We will always need accompanying qualitative information [alongside science-based targets]. With biodiversity there are often issues around livelihoods and land tenure, access to water and food security. We need to make sure we have that complementary information around the data and metrics so we can create indices that guide and inform.”

Innovative finance

Alongside building suitable sustainability metrics, Smith says the UNEP FI is also working to improve the range of nature-based investment vehicles to help asset owners manage biodiversity risk.

Smith says UNEP FI is due to announce official membership of the Coalition for Private Investment in Conservation (CPIC), a global multi-stakeholder initiative ‘focused on enabling conditions that support a material increase in private, return-seeking investment in conservation’.

“CPIC are now evolving from a focus on impact investors to targeting banks and more institutional investors, and we intend to join the Coalition and build links to our Biodiversity Community under the Principles for Responsible Banking and other efforts,” she says.

UNEP FI is interested in ‘total landscape’ projects that aggregate investments to transform entire forests or coastal areas, which Smith says are “a perfect opportunity for institutional investors including national pensions or universal owners, particularly those with a requirement to bring in a certain amount of investment to their own country before they start investing abroad”.

Pension funds and insurers are already investing in conservation total landscape projects in North America, restoring forests and repairing degraded land. Cashflows come from sustainable harvesting, payment for ecosystem services, land appreciation, land preservation tax credits, the sale of land rights, and other fees, such as hunting or fishing.

Increased shareholder engagement

While Smith is encouraging more innovative finance projects, she would also like to see asset owners increase their shareholder engagement on biodiversity issues to match that recently shown on climate change.

“Unfortunately, we hear from our members that they don’t get as much pressure from shareholders on biodiversity as they do with climate change. But we know this is an emerging area and investors are starting to make their voices heard.”

A 2021 ShareAction report on biodiversity found that “the majority of investors planned to focus on biodiversity as an ‘engagement topic’ but are not developing an overarching biodiversity policy or commitment on biodiversity”.

Reasons include a lack of understanding and the complexity and expansiveness of the topic; a dearth of credible metrics and data to measure progress towards biodiversity goals and targets; and the relatively “esoteric” nature of the GBF.

It will be essential these hurdles are overcome if UNEP FI’s ambition to push nature up the agenda is met, meaning much rests on the success of the TCFD framework and the outcome of COP15 in promoting global biodiversity risks and opportunities.

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