Disclosure rules to reflect connection between climate and nature, as finance sector commits to mobilise capital at COP15.
The reporting standards of the International Sustainability Standards Board (ISSB) will reflect the “fundamental” value of nature, said Chair Emmanuel Faber yesterday, to ensure it is fully accounted for by corporates and financial institutions.
Speaking at COP15 in Montreal on ‘Finance and Biodiversity Day’, he outlined the ISSB’s plans to advance work on nature-focused disclosures, clarifying the role of nature in the board’s general sustainability reporting standard and extending its climate standard so it is more explicitly connected to natural ecosystems and the principles of ensuring a just transition.
“There has been a tragedy of accounting, where we count many things [in our economy], but not nature – we certainly don’t count the air, or water,” said Faber.
He said the ISSB would seek to redress matters by developing a new conceptual framework for sustainability in finance and business. “We have described sustainability as the value created by a company being inextricably linked to the stakeholders it works with and serves in the society in which it operates and the natural resources on which it depends,” said Faber.
The ISSB’s climate and general sustainability standards, which were created to serve as a global baseline for reporting across jurisdictions, are expected to be finalised in early 2023. Both will require companies to disclose how they are directly and indirectly responding to risks and opportunities, how their subsequent strategies will be resourced, and what consequent changes they expect to impact their financial position and performance over time.
ISSB’s new definition of sustainability will be included in the general sustainability standard, meaning that companies will need to outline their dependencies on and the risks of natural ecosystems and human capital to their business over the short- to long-term.
The two standards have previously been criticised by some quarters for their narrower focus on enterprise value, as opposed to double materiality, but ISSB has maintained it won’t ignore impact, and will expand the standards to cover sustainability-related issues as and when they become material.
Following “strong feedback” on the connection between climate and nature, Faber said the ISSB plans to immediately advance work on the climate standard, making explicit connections to natural ecosystems and human capital aspects of the net zero transition.
“We will consider the work of the Taskforce on Nature-related Financial Disclosure (TNFD) alongside other nature-focused initiatives which are focused on the materiality of nature in economic and financial decisions,” said Faber.
Also speaking at COP15, Mark Carney – Founder and Co-Chair of the Glasgow Financial Alliance for Net Zero (GFANZ) – warned that “there is no path to net zero” without addressing nature-related impacts, such as deforestation, or supporting nature-positive solutions.
“Investors can help to leverage the huge flows of finance that are being dedicated to net zero to also address the crises of nature and biodiversity loss, because nature and climate are interdependent.”
The ISSB also made two appointments to provide strategic counsel on issues relating to natural ecosystems and just transition.
Former World Bank Global Director for Environment, Natural Resources and Blue Economy Karin Kemper will advise the board on natural ecosystems.
Kemper said: “The ISSB is bound to play a fundamental role in helping address climate change and nature loss, decreasing systemic risk for the planet, the global economy and the financial system. It will fill a public-interest gap and provide investors with practical and globally applicable parameters.”
Hungerford said: “With recognition under the United Nations Declaration on the Rights of Indigenous Peoples and stewardship of so much of the Earth’s biodiversity, Indigenous peoples from around the world bring an important perspective on the ISSB’s sustainability disclosure work and on factors affecting enterprise value.”
Nature-positive finance flows
The participation of the private finance sector in discussions finalising the Global Biodiversity Framework (GBF) was welcomed by both Inger Andersen, Executive Director of the United Nations Environment Programme (UNEP), and Elizabeth Mrema, TNFD Co-Chair and Executive Secretary of the Convention on Biological Diversity.
“We need to ensure that capital flows don’t have nature-negative impacts,” said Andersen, adding that having investors “inside the tent is part of finding sustainable solutions”.
She said: “[Investors] need transparency and clear targets – the finance sector can’t just grab [targets and information] out of thin air. The post-2020 GBF text calls for the assessment and disclosure of nature-related impacts, so we need to understand and then reduce and reverse those impacts by increasing the flow of capital into nature – that’s what Finance Day has to be all about.”
Agreement on the text of the GBF, which comprises 21 targets and ten milestones, is due to be completed before COP15 closes on 19 December. The so-called ‘Paris for plants’ will likely trigger changes to laws and regulations globally, ensuring that nature is accounted for alongside climate via environmental laws and increased public and private funding.
The UN’s recent ‘State of Finance for Nature’ report said that investment in nature-based solutions (NbS) needed to increase from US$154 billion to US$384 billion per year by 2025, adding that just 17% (US$26 billion) of current investments in NbS is provided by the private sector. NbS investment flows should reach US$484 billion per year by 2030, the report added.
“We are seeing growing awareness that nature and biodiversity loss create risks to companies and the finance sector,” said Mrema.
“Banks, asset managers and insurers all have a lot more to do to align their financing and scale up investments that protect and restore biodiversity.”
She pointed to the relevance of target 15 of the draft GBF to investors and their investee companies, as it will require companies to assess, report on and mitigate their negative impacts on biodiversity locally and globally.
Target 15 will likely be realised through the TNFD framework, with the final version expected to be published September 2023.
GFANZ’s Carney outlined his priorities for governments, companies and investors moving forward.
He urged governments to “make concrete their professed commitments to protect nature” through a suitably ambitious GBF. Carney added that governments should establish a mandate within target 15 to “align all financial flows with nature goals”, which he noted would ensure investors could be held to account if they are financing nature and biodiversity loss.
“As net zero commitments move from targets into action, private finance must ensure that their net zero transition plans include clear priorities on deforestation, protecting nature and restoring biodiversity,” Carney said.
“The world is still not acting with the urgency that the twin crises of nature and climate demand,” he warned.