The Business Case for Nature

Business can no longer ignore the importance of nature to their operations and reputation. Land degradation, water shortages, pollution, and more frequent and destructive natural disasters are risks that can force companies to increase prices, find new suppliers, and even shut down. Investors and regulators are pushing for more transparency about these nature-related financial risks. Fortunately, efforts are underway to provide companies with the tools they need to measure and address them.  
 
Nature in Peril

Global economic growth has helped lift millions out of poverty, but the improvements came at a high cost to nature. Human activity altered 75% of the earth’s land and 66% of its marine environments, destroying much of the world’s wetlands and coral reefs. Almost a million species are now on the brink of extinction.

The devastation to nature has contributed to global warming, forced migrations, and more severe and frequent floods, wildfires, and natural disasters. Over 3.5 billion people now live in places with inadequate access to water, and 1.2 billion people are in communities at risk for floods. The World Economic Forum’s 2020 Global Risks Report ranked the loss of biodiversity and ecosystem collapse as one of the top five threats humanity is likely to face in the next 10 years.

The shortages and extreme weather could have a massive impact on human health and safety as well as global productivity. Over half the world’s economic output ($44 trillion) is highly or moderately dependent on nature. While the agriculture, construction, and food and beverage industries are most dependent on water, shortages and natural disasters impact every sector. 

“Business has long seen nature as a side issue,” said David Craig, co-chair of the Taskforce on Nature-related Financial Disclosure. “But in the last 12 months, companies and the financial world have recognized that nature is being destroyed faster than can be sustained. They now see that the connections between economic activity and the natural system are far more material and direct than we had thought.”

Ignoring nature also could harm a company’s reputation. New research by the Oliver Wyman Forum finds that a growing segment of consumers expect business to do more to protect the environment. This group now accounts for 13% of consumers globally, including 20% in Germany, 16% in France, Italy, and the United Kingdom, but only 7% in the United States.

Almost three-quarters of these individuals are less likely to buy products from companies that are not committed to solving climate change. About a third already have boycotted specific businesses, and almost half expect to if companies don’t change. 

Climate Commitments

Governments are becoming more aware of the risks to nature and its importance in solving the climate crisis. Forests, for example, help moderate floods and are important repositories of carbon dioxide. This sequestration will need to double by 2030 to limit global warming to 1.5 Celsius. 

Nature was a major topic at the COP26 climate conference in Glasgow last year, garnering significant new financial and government support to reverse forest loss and land degradation by 2030. More commitments could come if an agreement is reached later this year at the UN Biodiversity Conference (COP15) in Kunming, China.  

Business awareness is growing but still lags. More than a fifth of the world’s largest corporations have committed to reducing carbon emissions to net zero, but most don’t yet recognize the role that nature must play in reaching that target. Only five percent of European companies responding to a recent CDP survey have set robust goals for emissions, water usage, and zero deforestation. 

Some businesses are still unaware of the potential risks to their supply chains and operations. Others have committed to net neutrality but need more guidance, especially about what information to collect. Unlike committing to carbon neutrality, addressing nature doesn’t yet have the needed definitions or scenarios to benchmark. 

Work is underway to help companies better understand how to meet these goals. The Taskforce on Nature-related Financial Disclosures was established to help companies, investors, and lenders factor nature into financial and business decisions. TNFD released in March its beta framework for businesses to use when analyzing the risk. This includes "fundamental concepts for understanding nature" – a taxonomy that can provide a basis for consistent understanding and articulation of impacts within the four nature ‘realms’ (Land, Ocean, Freshwater, and Atmosphere). Companies currently are piloting the strategy’s so-called LEAP process, which urges companies to Locate their interfaces with nature, Evaluate their dependencies and impacts, Assess their risks and opportunities, and Prepare to address nature-related risks and opportunities. The aim is to shift financial investment from nature-negative outcomes and toward positive ones. 

“Many companies grew up in a world in which they didn’t care where they were operating or where supplies were coming from,” said the Taskforce’s Craig. “If I emit a ton of carbon in New York and absorb a ton in Australia, it results in net zero. But a company’s footprint on the natural ecosystem and its use of ecosystem services depend on location. If I destroy a rain forest in Brazil, I can’t plant a bunch of trees in New York to negate it. This means we need a new valuation methodology.”