It Just Takes Two

Kunming success on biodiversity loss depends on stronger public-private coordination than seen after Paris Agreement.

In 2015, 197 countries gathered to sign the Paris Agreement, pledging to limit global warming to well below 2°C and to funnel resources into mitigating the effects of climate change. Next week, 196 countries will gather again – this time to address the risks posed by the continued damage and loss of global biodiversity.

Unlike climate-related risks, which are largely calculated in terms of greenhouse gas (GHG) emissions, the monitoring and management of biodiversity risks encompasses a whole host of nature-related issues and metrics, such as forest cover, ocean pollution levels and the rate of species extinction.

The sheer scope of biodiversity-related risks across sectors is concerning for investors as they look to protect their financial returns and invest in sustainable solutions.

“Biodiversity loss will have significant and systematic consequences for the global economy, and exposes investors to market, credit, liquidity and operational risks,” says Hugh Brown, Director of Investor Engagements for Food and Forests at NGO Ceres.

Without concerted and rapid action, investor portfolios will be exposed to escalating nature-related financial risks.

A recent Moody’s Investors Service report highlighted that 12 sectors, with a combined US$2.1 trillion in debt, including extractive industries like mining, already face “high or very high” natural capital risks. A further 16 sectors with a combined US$8.3 trillion in debt, including retail and apparel, have a moderate exposure.

It is vital that guidance is issued by policymakers and disclosure frameworks, otherwise biodiversity will remain a “relatively nascent field for the world of finance”, Rahul Ghosh, Managing Director of ESG Outreach and Research for Moody’s ESG Solutions, tells ESG Investor.

After Paris, there were delays and a disconnect between public policy and private sector action, leading to a lag in progress, with net-zero commitments from corporates, asset owners and asset managers only gaining momentum from last year. This time around, international disclosure standards and voluntary frameworks are being developed in tandem with policy goals by governments, hopefully resulting in a more harmonised and coordinated global plan of action.

The first half of the COP15 Biodiversity Convention (CBD) in Kunming, China, will take place online from 11 October. Policymakers will discuss the draft Global Biodiversity Framework (GBF) that will be formally signed and adopted during part two of the convention in April and May next year.

Meanwhile, the Task Force on Nature-related Financial Disclosure (TNFD) aims to build on the framework originally designed by the Task Force on Climate-related Financial Disclosure (TCFD), in order to provide financial institutions and corporates with a complete picture of how to measure and report nature-related risks and opportunities. The finalised framework will be published in 2023.

The Kunming Declaration

The existing draft GBF outlines 21 overarching 2050 targets and 10 milestones to be achieved by 2030. The latter includes preserving 30% of global land and sea areas, halving the rate of species extinction and scaling up global financing to tackle biodiversity loss by a minimum US$200 billion per year.

“While governments have made high-level commitments and targets aiming to stem biodiversity loss [in the past], there is currently a lack of clear policy responses which will create the incentives needed for corporates and financial institutions to act, thus making it difficult to assess risks and opportunities,” says Chris Dodwell, Head of Policy and Advocacy at Impax Asset Management.

Similar to the Paris Agreement, it is expected that the GBF will serve as a “catalyst” for national regulatory measures by policymakers, says Ghosh. This will “galvanise investor action on biodiversity risk”, helping to hone engagement efforts with companies, and track how their biodiversity targets align with national and international pledges.

The Convention will specifically refer to the Kunming Declaration in order to add further political momentum to the negotiations, according to the CBD agenda. The draft declaration calls on all parties to agree to “mainstream” biodiversity protection in decision-making.

One of the targets, Target 15, requires all businesses to assess and report on their dependencies and impacts on biodiversity, from local to global, and to progressively reduce their negative impacts.

While Target 15 is a “step in the right direction”, acknowledges Brown at Ceres, the GBF needs to go further by including an “explicit expectation for financial institutions and businesses to align financial flows to global biodiversity goals, supported by appropriate regulatory measures and financial incentives”.

The GBF should also look to emphasise the need for policymakers to ensure a regulatory environment that “would enable the private and financial sectors to successfully contribute to implementing the goals and targets of the GBF”, according to Sonya Likhtman, Manager of Engagement and Stewardship for EOS at Federated Hermes. This would commit policymakers to introducing national regulations for companies adhere to biodiversity-related targets.

Ahead of CBD, 78 financial institutions managing more than US$10 trillion in assets, led by Ceres, called on world governments this week to stop biodiversity loss and support the creation of an ambitious GBF.

Voluntary change

As a voluntary framework for companies and financial institutions, TNFD is following in the footsteps of the widely adopted and supported TCFD.

Developing such a framework will not be easy, given the sheer variety of biodiversity-related risks and the spectrum of impact these may have on companies, depending on size, sector and geography.

Although the finalised version is not expected until 2023, a draft beta version will be circulated next year to be tested and refined.

The TNFD recently announced that 30 senior executives from financial institutions, corporates and service providers have been appointed as taskforce members.

Convening for the first time on 6 October, these will form five working groups to drive forward the development of the TNFD framework, focusing on: defining nature-related risks; data availability; landscape of standards and metrics; development of a beta framework; and pilot testing and integration.

The framework is sorely needed, experts say.

According to recent research by Moody’s ESG Solutions, the average biodiversity protection score for 1,200 assessed companies was 32 out of 100, highlighting a lack of disclosure.

There is a further disconnect between company commitments and actions taken to reduce their impact on biodiversity, Moody’s noted. For example, while 61% of a subsample of 67 heavy construction companies disclosed commitments to address biodiversity, nearly half of these companies were “weak” in their implementation of such commitments.

A standardised framework could ensure a more targeted focus on a concrete set of goals, allowing investors to more easily identify both leaders and laggards failing to turn promises into action.

“But no matter what ends up in the TNFD framework, we know that investors are ready to engage on biodiversity right now,” adds Brown.

Ceres is leading a number of initiatives in this area. For example, in partnership with the World Wildlife Fund (WWF), Ceres is engaging major companies with significant agricultural supply chains on water stewardship. The AgWater Challenge aims to ensure these companies make transparent, timebound and measurable commitments that protect limited freshwater resources.

The Network for Greening the Financial System (NGFS), a coalition of central banks and securities market supervisors, has launched a study group focused on exploring the links between biodiversity and financial stability.

Partly in response to client demand, asset managers are finding their own solutions to the patchy availability of data on biodiversity risks in portfolios. Impax AM, for example, has incorporated biodiversity into its investment processes, assessing the degree of individual firms’ dependency on biodiversity and natural capital, says Dodwell. “We are also developing a taxonomy to help us understand which companies can help provide products and services to reduce biodiversity loss,” he says.

Further, investors can use proxy metrics that reflect on a company’s biodiversity impact without measuring it directly, says Brown. “Deforestation, land use and water usage have large impacts on ecosystem health, and therefore on biodiversity. These are good starting points for engagement for investors seeking to assess a company’s biodiversity impact,” he adds.

In-depth engagement on biodiversity is essential, agrees Likhtman, as “nature will not wait for the perfect framework”.

EOS at Federated Hermes is helping to develop Nature Action 100, a collaborative engagement initiative for nature and complementary to the existing Climate Action 100+ initiative.

Aligned targets

As TCFD has become a globally recognised framework governments are mandating, TNFD could be adopted in the same way. This can be more easily achieved if the TNFD framework and GBF are closely aligned from the offset, experts say.

Alignment will also mean that investors and corporates reporting under TNFD will be contributing in a measurable fashion to the national goals outlined in the GBF.

Brown notes that the easiest way to ensure this is for the TNFD to adopt two of the GBF’s targets: no net loss of biodiversity by 2030 and net biodiversity gain by 2050.

By fully understanding and managing nature-related risks that investors will also be well placed to capitalise on opportunities.
According to Brown, the utilisation of public and private financial flows into “nature-positive pathways” could generate as much as US$10 trillion in annual business opportunities and 395 million jobs by 2030.

“Many opportunities can also be realised by investing in innovative companies that are contributing to the protection and restoration of biodiversity through their products, operations and supply chains,” says Likhtman.

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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