Biodiversity risk is increasingly going to be on the corporate radar as part of ongoing work to mitigate climate change risk (and support nature-based solutions) and broader initiatives on ESG. At the same time, accounting and reporting standards for biodiversity-related risks and impacts are taking shape. Against this backdrop, Clyde & Co's Climate Risk and Resilience team, together with the Global Resilience Partnership, has produced a joint report on biodiversity liability and value chain risk.
BIODIVERSITY LIABILITY AND VALUE CHAIN RISK
March 2022
CONT E NT S
04. Executive Summary
08. Accounting for biodiversity loss
18. Value chain risk and biodiversity loss
26. Biodiversity law and regulation
48. Biodiversity liability risk
56. Mitigating biodiversity risk: action plan
5
E X E CU T I V E S UMMA RY
What is the problem?
Climate change is just one of the world’s planetary boundaries. Human civilisation also depends on a healthy biosphere – the thin layer of interconnected ecosystems that sustain life on Earth. We depend on biodiversity to pollinate crops for the food we eat, to clean water and air, for many of the products we consume and our physical, mental and spiritual well-being. Nature has been providing these “ecosystem services” free of charge with economic models not properly accounting for nature’s contributions to people, or for the true costs of pollution and environmental degradation. As a result of ignoring the importance of the natural world, we are now facing a biodiversity crisis; current extinction rates are 100 to 1,000 times higher than the baseline rate, and they are increasing. Biodiversity loss threatens human survival; it is the “value chain” on which we all depend. Reflecting the urgency, there is a movement towards integrating biodiversity risk into mainstream economic thinking and financial and corporate planning, similar to the trajectory of climate change risk. Stakeholder interest is growing, with government initiatives now bolstered by financial market pledges such as the Finance for Biodiversity Pledge. Shareholders will soon be scrutinising biodiversity in investee companies and regulators will be looking carefully at the environmental impacts of companies and expecting due diligence on subsidiaries and value chains. Business leaders and boards will face a raft of new responsibilities.
For industry generally we will see new physical, regulatory, market and reputational risks – all of which are compounded by the hyper-connectivity of global value chains. The consequences of not managing these risks will play out in terms of inability to attract finance, do deals and ultimately in damage to market value. For insurers, write-downs and write-offs will lead to business line impacts, increased insurance claims and higher premiums.
At the same time, biodiversity risk is being actively “mainstreamed” into financial markets and corporate decision-making. The taskforce on Nature-related Financial Disclosures (TNFD) is following the playbook set by the Taskforce on Climate-related Financial Disclosures (TCFD) just a few years ago. The final release of the TNFD recommendations is scheduled for 2023 and like TCFD, this will embed biodiversity risk reporting into mainstream corporate reporting standards. Biodiversity is also front and centre in new due diligence frameworks. These laws, pioneered in European jurisdictions including France and Germany, draw inspiration from the UN Guiding Principles on Business and Human Rights, the OECD Guidelines for Multinational Enterprises and the OECD Due Diligence Guidance for Responsible Supply Chains. The next generation of mandatory Human Rights and Environmental Due Diligence (mHREDD) go beyond mere reporting obligations and create new standards of care for companies to act to mitigate human rights and environmental harms in their value chains through “vigilance” or “prevention action” plans and institute corrective actions where abuses are identified, including by severing business relationships. The most significant and potentially far-reaching development in this area is the advent of mHREDD at the EU level. On 23 February 2022, the EU Commission published its proposed Directive on Corporate Sustainability Due Diligence. The Directive will apply
to companies with substantial turnover in the EU: EUR 150m, or EUR 40m for high-impact sectors like textiles, food production and extractive industries. Like GDPR, there will be an extraterritorial effect, as companies will have the obligation to exercise due diligence over business partners with whom they have an “established busines relationship” in both their direct and indirect value chain. Importantly, the new EU Directive envisages investigatory powers at a national level with the possibility of fines, and requires that implementing Member States establish a liability regime for corporate breaches of the due diligence obligations.
What is the timeline/ when can we expect biodiversity risk to become material?
What are the liability risks?
There is increasing attention to “nature-based solutions” to climate change, and nations are actively seeking to preserve and create natural carbon sinks, such as forests, mangroves, wetlands and peatlands. Biodiversity was a strong focus at COP26, where 141 states agreed to the Glasgow Leaders’ Declaration on Forests and Land Use, supporting the preservation of biodiverse forests as imperative in the fight against climate change. Many countries are also putting in place 30x30 targets for biodiversity – to preserve and protect 30% of land and sea by 2030 – and it is envisaged this will be agreed as an international goal at this year’s Conference of the Parties to the Convention on Biological Diversity (COP15) in Kunming China. States are now thinking beyond a single habitat or species, but in terms of broad, time-limited biodiversity goals, which will have far-reaching impacts for regulation, policy-making, and attendant liability risks to corporates.
Companies in mHREDD jurisdictions will need to understand whether value chain partners’ activities are having an adverse impact on biodiversity, as well as other environmental harms and human rights abuses. Liability risks may arise from due diligence failures. For example, in March 2021 an international coalition of NGOs sued the French supermarket chain Casino for its alleged failure to prevent cattle industry-caused deforestation of the Amazon and Cerrado in Brazil and Colombia and attendant human rights abuses against Indigenous Peoples. Inadequate planning or management around the physical risks of biodiversity loss can impact companies directly reliant on ecosystem services, such as food and agriculture. But it can also harm companies in diverse
Executive Summary
7
What action is needed?
lines of business, as biodiversity risks are embedded in every value chain, including real estate, aviation, and electronics. We need only look at the impact of a zoonotic disease like Covid-19 – a result of diseased wild animal populations coming into closer contact with humans – to appreciate the enormous financial and human risks posed by biodiversity loss. Companies that fail to anticipate the scale of the transition to a sustainable economy will also find themselves exposed to liability risk. Businesses will need to stay nimble and anticipate incoming investor and regulatory pressures, as well as rapidly changing procurement priorities for value chain partners. With increasing understanding of biodiversity loss as a financial risk, companies will increasingly need to understand and report on how their operations impact and are impacted by biodiversity loss. Liability risks may arise from failure to adequately or accurately disclose those risks.
At pages 54 to 55, this report sets out some recommendations to corporates and their officers to take a proactive approach to managing the looming material risk of biodiversity loss, incoming regulation and liability risks. Compared to climate risk, the timeline here is accelerated. We expect wide-ranging value chain due diligence standards of care to be in place in many jurisdictions by 2024. A framework for nature- related disclosures will likely have crystallised in 2023, and ambitious nature conservation targets will be in place, with a ratcheting-up of ambition on nature-based solutions to climate change mitigation and adaptation through the climate COP process, including this year’s COP27 in Sharm El Sheikh Egypt. If they haven’t already done so, forward-looking corporates in every sector need to begin their biodiversity risk journey by:
– understanding incoming regulations and the scope of value chain due diligence that will soon be expected
What developments heighten the risk?
At the same time as due diligence laws create obligations for companies to scrutinise biodiversity loss and other impacts in the value chain, courts in some developed jurisdictions – e.g. the UK, Netherlands and Canada – are increasingly willing to look behind the fiction of “legal personhood” and lift the “corporate veil” to hold parent companies liable for the acts of subsidiaries. As knowledge of biodiversity loss and risk grows, including through nature-related financial disclosures, the standards of care expected of directors and officers, including as to reporting, will rise. There is an increasing ability to account for, monitor and quantify biodiversity loss, including through remote sensing, and data-driven supply chain management permits greater transparency, also raising the standards of care that will be expected in this area. The Rights of Nature movement is creating new legal persons with standing before the Courts to sue for biodiversity harms: rivers and forests now have standing and constitutionally-protected rights and cases may be brought by Indigenous Peoples, children or other guardians in the name of Nature itself. Biodiversity-focused litigants are emerging and, with biodiversity risk increasingly recognised as the next most urgent planetary boundary, this could be the next frontier in strategic litigation.
– mapping vulnerabilities and exposures to biodiversity risk for the company, its subsidiaries and value chain partners, as part of a wider environmental and human rights risk assessment
– getting to grips with emerging reporting standards
– identifying opportunities and strategies for the transition to a sustainable economy
These actions and more will help to mitigate biodiversity liability risks.
9
[fig. 1]
THE UN’S SUSTAINABLE DEVELOPMENT GOALS FOR SOCIETY AND ECONOMY REST UPON A HEALTHY BIOSPHERE
We are part of Nature, not separate from it.
ECONOMY
The Dasgupta Review, February 2021
SOCIETY
AC COUNT I NG F O R B I OD I V E R S I T Y L O S S
BIOSPHERE
Biodiversity describes the enormous variety of life on Earth and can refer to every living thing in one region or ecosystem, including plants, bacteria, animals and humans. 1 Human well-being, culture and development depend on a resilient biosphere - the thin layer of ecosystems and biodiversity on planet Earth that supply essential ecosystem services. 2 Ecosystems and biodiversity are not something external to the economy or human societies, but rather the very foundation of civilisation. [fig. 1] The biodiversity crisis is upon us. Human actions have driven at least 680 vertebrate species to extinction since 1500. The global rate of species extinction in the 21st century is tens to hundreds of times higher than the natural rate over the past ten million years. 3 1970 to 2016 saw a 68% decline in known animal species 4 and more than one million known animal and plant species are now threatened with extinction. 5 22% of the world’s tropical and subtropical forests have been converted to agriculture. 6 The biodiversity crisis is not only a threat to those species and habitats, but to human civilisation. Reflecting this, the World Economic Forum’s (WEF) Global Risks Report 2022 lists biodiversity loss in the top three most severe risks on a global scale over the next ten years, along with climate action failure and extreme weather. 7
BIODIVERSITY LOSS: BREACHING A PLANETARY BOUNDARY
The planetary boundaries framework is a conceptual tool pioneered in 2009 by the Stockholm Resilience Centre to define a “safe operating space for humanity” on planet Earth. 8 There are nine planetary boundaries representing limits on stratospheric ozone depletion, loss of biodiversity and biomass, novel entities (e.g. chemicals, plastics), climate change, ocean acidification, freshwater use and change in the global hydrological cycle, changes in land use, the presence of nitrogen and phosphorus, and air pollution. A boundary is breached when we are operating beyond the bounds of safety. The risk of biodiversity decline is as grave a risk to human survival as climate change and is one of five boundaries considered to have been breached, along with climate change, land system change, changes to the global nitrogen cycle, and novel entities (man-made chemical compounds). According to the scientists at the Stockholm Resilience Centre, “transgressing one or more planetary boundaries may be deleterious or even catastrophic due to the risk of crossing thresholds that will trigger non-linear, abrupt environmental change within continental-scale to planetary-scale systems.” 9 [fig. 2]
Source: Stockholm Resilience Centre
BIOSPHERE INTEGRITY IS JUST ONE OF THE PLANETARY BOUNDARIES – AND WE MAY HAVE ALREADY GONE BEYOND THE ZONE OF UNCERTAINTY INTO A HIGH-RISK SITUATION
[fig. 2]
E/MSY
CLIMATE CHANGE
BILL (not yet quantified)
NOVEL ENTITIES (not yet quantified)
LAND-SYSTEM CHANGE
STRATOSPHERIC OZONE DEPLETION
FRESHWATER USE
ATMOSPHERIC AEROSOL LOADING (not yet quantified)
OCEAN ACIDIFICATION
P
1 National Geographic Society, Biodiversity, National Geographic Society, 23 August 2019. 2 Carl Folke et al., Our future in the Anthropocene biosphere, SpringerLink, 14 March 2021; Sandra Díaz et al., Assessing nature’s contributions to people, Science, 19 January 2018. 3 The Global Assessment Report on Biodiversity And Ecosystem Services, IPBES, December 2020. 4 Living Planet Report 2020,WWF, 2020. 5 IUCN Red List of Threatened Species, IUCN, 2022. 6 Biodiversity and Climate Change Scientific Outcome, IPBES-IPCC, June 2021. 7 The Global Risks Report 2022,World Economic Forum, 2022.
N
BIOGEOCHEMICAL FLOWS
Below boundary (safe) In zone of uncertainty (increasing risk) Beyond zone of uncertainty (high risk)
8 Johan Rockström et al., Ecology and Society: Planetary Boundaries: Exploring the Safe Operating Space for Humanity, Ecology and Society, 2009. 9 Ibid.
Source: Stockholm Resilience Centre
Accounting for biodiversity loss
11
POLLINATION: AN ESSENTIAL REGULATING NCP
NATURE’S CONTRIBUTIONS TO PEOPLE
[fig. 3]
Pollination is an example of a regulating NCP fundamental to food production and global food security. The presence of biologically diverse species of insects and animals increases the size, quality and stability of harvest for 70% of the world’s leading crops. 14 For example, a study in Costa Rica found a 20% increase in annual yield in coffee plantations situated within 1km from the forest edge. 15 In South Africa, mango yields were enhanced when patches of wild native flowers were planted in agricultural fields. 16 In financial estimates, the annual global value of crop pollination services is between USD 195 billion and USD 387 billion. 17 Yet over the past 50 years habitat conversion for production, use of pesticides and fertilisers, and the introduction of invasive species have led to a decline in pollinator diversity. 18 Such decline has an adverse effect on human nutrition, especially in tropical regions, where one-third of the diet is derived from insect-pollinated plants. 19 Loss of wild pollinators also impacts wild plants and the species depending on them for food, which can have far-reaching ecosystem consequences. 20 A Dutch study found that the Dutch financial sector’s exposure to the risk from a decline in pollination services amounted to EUR 28 billion. 21
REGULATING NCPS
MATERIAL NCPS
– Flood regulation – Water purification – Erosion control – Disease regulation – Waste decomposition – Crop pollination
– Wood and fiber – Fresh water
– Fuel – Food
NATURE’S CONTRIBUTIONS TO PEOPLE (NCPS)
– Genetic resources – Pharmaceuticals
NON-MATERIAL NCPS – Spiritual experiences – Recreation – Physical and mental well-being
– Religious values – Cultural values – Cultural landscape
The twin crises – biodiversity and climate change
Mangroves 23 and peatlands 24 have even greater carbon sequestration potential 25 , while the ocean holds 38,000 gigatons of carbon. Conversely, degradation and destruction of ecosystems can exacerbate climate change. For instance, land-use change, including deforestation and peat drainage, was responsible for 9 to 19% of global anthropogenic CO2 emissions between 2010 and 2019. 26 The preservation of carbon sinks and the creation of new ones is key to achieving the Paris Agreement goal to keep the increase in global average temperature to below 2°C and ideally 1.5 °C above pre-industrial levels by the end of this century. 27 Such “nature-based solutions” are also vital for adaptation to an already-changing climate: coral reefs protect coastlines against storm surge and wetlands absorb storm water and reduce land temperatures. 28
At the same time as the value of biodiversity and the price of its decline have become apparent, many have started looking at biodiversity as part of the solution to the most prominent planetary crisis. One of the most important ecosystem services in a world facing climate change is carbon sequestration. Terrestrial and marine ecosystems are important sinks for carbon dioxide (CO2) and contribute significantly to stabilising the climate. Old-growth and regenerating forests can absorb as much as two gigatons of carbon dioxide annually. 22 14 Alexandra-Maria Klein et al., Importance of pollinators in changing landscapes for world cops, Proceedings of the Royal Society B: Biological Sciences, 27 October 2006. 15 Lucas A. Garibaldi et al.,Wild Pollinators Enhance Fruit Set of Crops Regardless of Honey Bee Abundance, Science, 28 February 2013. 16 Luísa G. Carvalheiro et al., Creating patches of native flowers facilitates crop pollination in large agricultural fields: mango as a case study, Journal of Applied Ecology - Wiley Online Library, 5 November 2012. 17Rafaella Guimarães Porto et al., Pollination ecosystem services: A comprehensive review of economic values, research funding and policy actions, SpringerLink, 19 May 2020. 18 The Economics of Biodiversity: The Dasgupta Review, HM Treasury, February 2021
Ecosystem services: Nature’s contributions to people
Regulating NCPs - regulate and maintain ecosystem processes such as water flows that prevent flooding, or erosion control that prevents landslides. Material NCPs – provide materials and energy for products that humans extract from the environment, such as fresh water, food or pharmaceuticals. Non-material NCPs - offer non-material benefits, such as spiritual experiences, recreation, and well-being (physical and mental health). These are often difficult to qualify in monetary terms. 13 [fig. 3]
Ecosystem services, or nature’s contributions to people (NCP) is a way of describing the multiple benefits that ecosystems provide to humans. 10 The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) pioneered the notion of NCPs in 2018, 11 building on the “ecosystem service” concept popularised by the Millennium Ecosystem Assessment (MA) more than a decade earlier. 12 According to the IPBES framework, NCPs fall under three broad categories:
23 Jonathan Sanderman et al., A global map of mangrove forest soil carbon at 30m spatial resolution, Environmental Research Letters, 30 April 2018. 24 Joannie Beaulne et al., Peat deposits store more carbon than trees in forested peatlands of the boreal biome, Scientific Reports, 29 January 2021. 25 Daniel M. Alongi, Carbon sequestration in mangrove forests, ResearchGate, April 2014. 26 Climate Change 2021 - The Physical Science Basis, IPCC, 2021. 27 Keeping 1.5°C Alive: Actions for the 2020s, Energy Transitions Commission, September 2021. 28 What Are Nature-Based Solutions And How Can They Help Us Address The Climate Crisis?,WWF, 10 November 2020.
10 Living Beyond Our Means - Natural Assets And HumanWell-Being, Millennium Ecosystem Assessment, 1 March 2005. 11 Sandra Díaz et al., Assessing nature’s contributions to people, Science, 19 Janu- ary 2018. 12 Living Beyond Our Means - Natural Assets and HumanWell-Being, Millennium Ecosystem Assessment, 1 March 2005.
19 Ibid. 20 Ibid.
21 Joris van Toor et al., Indebted to nature – Exploring biodiversity risks for the Dutch financial sector, Planbureau voor de Leefomgeving, November 2020. 22 Thomas A. M. Pugh et al., Role of forest regrowth in global carbon sink dynam- ics, PNAS, 21 December 2018.
13 Sandra Díaz et al., Assessing nature’s contributions to people, Science, 19 Janu- ary 2018.
Accounting for biodiversity loss
13
Accounting for biodiversity
BIOENERGY CROPS – A CLIMATE POSITIVE BUT BIODIVERSITY NEGATIVE NATURE-BASED SOLUTION Not all nature-based solutions to climate change have a positive impact on biodiversity. 41 For example, bioenergy relies on growing monoculture crops such as corn 42 for use in fuel. Research has found that the use of bioenergy crops contributes significantly to lower species richness and abundance. 43 In addition, the use of fertiliser and pesticides on bioenergy crops negatively affects biodiversity in adjacent ecosystems; 44 this can lead to soil erosion and further loss of biodiversity 45 with the worst affected regions in Asia and Central and South America. 46
To date, nature has provided humanity with ecosystem services free of charge. Traditional economic thinking has not fully accounted for nature’s inputs, or for the “externalities” of pollutants or waste. There is a growing appreciation that in a closed system such as the biosphere, there are finite natural resources and no true externalities. [fig.4] With a clearer understanding that the degradation of the natural environment and loss of biodiversity pose an existential threat to human societies, there are efforts to quantify the value of natural capital and ecosystem services; 47 to translate biodiversity into economic language in order to better value, measure and protect biodiversity. Natural capital accounting (NCA) is a tool to measure the full extent of a country’s natural assets and give perspective on the link between the economy, ecology and our environment. NCA has its origins in a 1987 UN report Our Common Future 48 which introduced the concept of “sustainable development”, and the 1992 Rio Earth Summit’s Agenda 21 in which Chapter 40 called on countries and non-governmental organisations (NGOs) to develop indicators of sustainable development. 49 Methodologies and frameworks for NCA have been developing since then.
Nature-based solutions have gained prominence in climate negotiations: at the most recent Conference of the Parties on climate change in Glasgow (COP26), an entire day was dedicated to the topic of nature. One of the results of COP26 was the Glasgow Leaders’ Declaration on Forests and Land Use 38 , in which 141 states representing 90.94% of the world’s forests committed to halting deforestation by 2030. 39 The final agreement of COP26, the Glasgow Climate Pact, also emphasises the importance of protecting, conserving and restoring nature and all of its ecosystems and biodiversity as a means of restoring sinks and reservoirs of greenhouse gases. 40 While climate change and biodiversity loss crises are inherently connected and, as planetary boundaries, equally important, the political consensus on climate change is more advanced. As a result, it is crucial to ensure that nature-based climate solutions employed in the next few decades are designed and implemented in a way that also supports biodiversity goals.
MARINE PROTECTED AREAS - CLIMATE AND BIODIVERSITY POSITIVE NATURE-BASED SOLUTION Marine protected areas (MPAs) are defined marine areas which are established and managed with a view to achieving long-term nature conservation and sustainable use. 29 There are many types of MPAs found around the globe, for example the European Union’s Natura 2000 sites, 30 Special Protection Areas (SPAs), Sites of Special Scientific Interest (SSSIs), and no-take zones (NTZs). 31 Multiple studies have shown that MPAs can protect endangered habitats from decline, restore food webs, and sustain ecosystem services, if managed effectively. 32 For example, marine species biomass has nearly tripled over a decade in the Misool Marine Reserve in Indonesia and there are 25 times more sharks inside the reserve than in comparable areas outside. 33 In a small 2.67 sq kmNTZ in Scotland, lobsters have become over four times more abundant. 34 MPAs also play an important role as part of nature- based solutions to climate change. 35 For example, sandbanks, seaweed and saltmarsh play a role in protecting the coastline from severe weather events. 36 Seagrass and mud habitats can sequester or ‘lock up’ atmospheric carbon. 37 29 About Marine Protected Areas, JNCC, 17 May 2019. 30 Natura 2000, European Commission, 2008. 31 About Marine Protected Areas, JNCC, 17 May 2019. 32 J Gallacher et al., Evaluating the success of a marine protected area: a systemat- ic review approach, University of Plymouth - PEARL, 01 December 2016. 33 Global Leaders in Building Effective Marine Protected Areas,WildAid Marine Programme, April 2019. 34 Bryce D. Stewart et al., Marine Conservation Begins at Home: How a Local Community and Protection of a Small Bay Sent Waves of Change Around the UK and Beyond, Frontiers, 13 February 2020. 35 Developing the evidence-base to support ‘climate smart’ decision-making in the marine environment: a focus on MPAs, DEFRA, 2019.
41 Biodiversity and Climate Change Scientific Outcome, IPBES-IPCC, June 2021. 42Dipti Narwal and Priyanka Sehrawat, Bioenergy Crops an Alternative Energy, Research India Publications, 2013. 43 Sophie Jane Tudge et al., The impacts of biofuel crops on local biodiversity: a global synthesis, SpringerLink, 24 July 2021. 44 Biodiversity and Climate Change Scientific Outcome, IPBES-IPCC, June 2021. 45 Monoculture Farming Explained: What Are The Pros And Cons?, Earth Observ- ing System, 20 October 2021. 46 Sophie Jane Tudge et al., The impacts of biofuel crops on local biodiversity: a global synthesis, SpringerLink, 24 July 2021.
47 The Economics of Biodiversity: The Dasgupta Review, HM Treasury, February 2021. 48 1987: Brundtland Report, Federal Office for Spatial Development ARE, 1987. 49 Agenda 21, Department of Economics and Social Affairs, Division for Sustaina- ble Development.
FINANCIAL STABILITY IS NOT SEPARATE FROM EARTH SYSTEM STABILITY: THE TWO ARE NECESSARILY INTERLINKED AND COMPLEXITY MULTIPLIES AND AMPLIFIES RISK FACTORS
[fig. 4]
FINANCIALLY MATERIAL SYSTEMIC RISK Indirect, long-term effects resulting from complex and often non-linear causality, resulting in networked risk and cascading effects
CONVENTIONAL NOTION OF RISK Direct, short-term effects based on linear causality
EARTH SYSTEM STABILITY
FINANCIAL STABILITY
AGGRAVATION RISK Externalities created by one industry, which contribute to large-scale environmental change that comes back and affects the sector itself, and multiple other sectors across short and longer time- scales
38 Glasgow Leaders’ Declaration On Forests And Land Use, UN Climate Change Conference UK 2021, 2 November 2021. 39 Ibid. 40 Glasgow Climate Pact, UNFCCC.
36 Ibid. 37 Ibid.
Source: The Anthropocene reality of financial risk
Accounting for biodiversity loss
15
Some tools focus on a particular type of ecosystem. Global Forest Watch, for instance, is an online open- source platform that uses satellite image analysis to provide near real-time information about where and how forests are changing around the world. 70 Water Risk Filter 71 is a portfolio-level screening tool for corporations to assess water risks 72 including baseline water stress and estimated flood occurrence. 73 Ocean Data Viewer 74 assesses marine biodiversity using datasets related to coral reefs, seagrasses, saltmarshes and mangroves. Other tools cut across all systems. The Integrated Biodiversity Assessment Tool 75 provides datasets on Key Biodiversity Areas (KBAs), the most important places in the world for species and their habitats. By accessing these datasets, commerical users, private industry and other stakeholders can make decisions about how to manage land (or water), where to avoid development and how best to conserve and protect species. The data sets have been used by the World Bank and International Olympic Committee. 76 Co$tingNature is an open-access tool, used by more than 3,500 organisations in 180 countries, for mapping risks to nature and NCPs. It is capable of presenting output metrics in dollar units through economic valuation and as Nature’s contributions to achieving the SDGs. 77 Another accounting system that is currently being piloted is Gross Ecosystem Product (GEP). Calculated in similar ways to GDP, GEP is a means of aggregating all NCPs in a single, monetary metric. Recent research has highlighted successful implementation of GEP in China. The United Nations Statistics Division is developing ways to scale and standardise GEP as a global reporting metric. 78
THE DASGUPTA REVIEW
“…incomplete accounting occurs in the exploitation of other natural resources, especially in the case of resources that are not capitalised in enterprise or national accounts: air, water, and soil. In all countries, rich or poor, economic development must take full account in its measurements of growth of the improvement or deterioration in the stock of natural resources.”
February 2021 saw the final report of an in-depth study on the “Economics of Biodiversity” commissioned by the UK’s HM Treasury and led by Cambridge University Economist, Professor Sir Partha Dasgupta. The 610-page- long Dasgupta Review 56 is the result of an 18-month long independent global assessment on the economics of biodiversity. The Review positions natural capital accounting within a wider framework of changing measures of economic progress. 57 It argues that if the goal of society is to protect and promote well-being across generations, “inclusive wealth” (encompassing produced capital, human capital and natural capital) is a better yardstick than GDP. 58 Natural capital accounting permits the valuation of ecosystem services: the global value of ecosystem services is estimated at USD 125-145 trillion per year. 59 USD 44 trillion of economic value generation over half the world’s total Gross Domestic Product (GDP) is estimated to be moderately or highly dependent on nature. 60 The loss of ecosystem services between 1997 to 2011 cost the world around USD 20 trillion per year. 61 These numbers cannot begin to capture the intangible value that ecosystems provide to humans.
Our Common Future, 1987
In 2012 the UN Statistical Commission adopted the System of Environmental Economic Accounting (SEEA) to integrate economic, environmental and social data into a single, coherent framework for holistic decision-making. 50 The SEEA provides a consistent monitoring framework that produces an actionable set of indicators on ecosystem condition, as well as the supply and use of ecosystem services. 51 Importantly, it allows NCPs to be expressed in monetary terms so that decision-makers can compare them to other goods and services. 52 Numerous accounting standards, such as the Natural Capital Protocol 53 , ISO 14007 and 14008 54 (environmental impact valuation), have developed since then and there are growing calls for standardisation. 55
New approaches to measuring biodiversity
Given that biodiversity encompasses the diversity of all living things unique to each ecosystem, it is notoriously difficult to measure. 62 Essential Biodiversity Variables (EBVs) aim to capture major dimensions of biodiversity change 63 by measuring ecosystem structure, ecosystem function, community composition, species population, species traits and genetic composition. 64 A simpler framework focuses on conservation status, population trends and biotic integrity (essentially, community composition). 65 Other frameworks, such as the Red List Index, 66 the Living Planet Index 67 or the Biodiversity Intactness Index 68 use population and distribution data, among others, to measure the state of the world’s biodiversity across species or geographical areas. 69 56 The Economics of Biodiversity: The Dasgupta Review, HMTreasury, February 2021. 57 Ibid. 58 Ibid. 59 Robert Costanza et al., The value of the world’s ecosystem services and natural capital, Nature, 15 May 1997. 60 Briefing for Finance: Biodiversity, Accounting for Sustainability, 2021. 61 Robert Costanza et al., The value of the world’s ecosystem services and natural capital, Nature, 15 May 1997. 62 The Economics of Biodiversity: The Dasgupta Review, HMTreasury, February 2021. 63 What are EBVs?, GEO BON. 64 The Economics of Biodiversity: The Dasgupta Review, HMTreasury, February 2021. 65 Georgina M. Mace et al., Aiming higher to bend the curve of biodiversity loss, Nature Sustainability, 14 September 2018. 66 IUCN Red List of Threatened Species, IUCN, 2022. 67 Living Planet Index, Zoological Society of London andWWF, 2014. 68 Helen Phillips et al., The Biodiversity Intactness Index - country, region and global-level summaries for the year 1970 to 2050 under various scenarios, 28 October 2021. 69 The Economics of Biodiversity: The Dasgupta Review, HMTreasury, February 2021.
50 Principles of Natural Capital Accounting, Office for National Statistics, 24 Febru- ary 2017. 51 The Role of the System of Environmental Economic Accounting as a Meas- urement Framework in Support of the post-2020 Agenda, United Nations Committee of Experts on Environmental-Economic Accounting, 14 December 2018. 52 Ibid. 53 Natural Capital Protocol, Capitals Coalition, 14 January 2021. 54 Liz Gasiorowski, Calculating the value of the environment with new ISO stand- ard, ISO, 14 November 2019. 55 CORPORATE NATURAL CAPITAL ACCOUNTING — from building blocks to a path for standardization - Understanding the landscape, leading applications, challenges and opportunities, Transparent, April 2021.
70 Forest Monitoring, Land Use & Deforestation Trends, Global Forest Watch. 71 WWFWater Risk Filter 6.0,WWF, 2022. 72 Ibid. 73 WRF Methodology,WWF, February 2022. 74 Ocean Data Viewer, UNWCMC. 75 Integrated Biodiversity Assessment Tool, IBAT. 76 Ibid. 77 Costing Nature, King’s College London, AmbioTEK. 78 Zhiyun Ouyang et al., Using gross ecosystem product (GEP) to value nature in decision making, Proceedings of the National Academy of Sciences of the United States of America, 23 June 2021; Sarah Cafasso, Accounting for nature in economies, Stanford News, 09 June 2020.
Accounting for biodiversity loss
NEW MARKET-BASED APPROACHES TO PROTECTING AND RESTORING BIODIVERSITY
Natural Asset Companies (NACs), a new type of corporation have been established by the Intrinsic Exchange Group in partnership with the New York Stock Exchange to catalyse private sector action in this sphere. 82 The primary purpose of NACs is to maximise the production of ecosystem services. NACs are expected to be listed and traded on the exchange and work to provide funding for the protection of the natural assets they represent and ecosystem services these assets provide. 83 Their introduction signals a significant shift in how the mainstream economy perceives nature and its services. Rather than nature as an asset to be exploited with negative externalities borne by nature itself, NACs put value on what was once received as free-of-charge benefits and have the potential to move finance from exploitation to preservation and stewardship.
In recent years, governments have trialled payment for ecosystem services (PES) to finance conservation and restoration of nature. Under PES programmes, the beneficiaries of ecosystem services pay to conserve and restore those ecosystems. 79 For example, under the Communal Areas Management Programme for Indigenous Resources in Zimbabwe, the state awards inhabitants of a savannah ecosystem the right to charge for the services it provides to safari tourists. 80 Under the Ganga Action Plan in India, the state pays restoration costs for the benefit of citizens to clean the water in the river to a “bathing standard”. 81
82 Be Invested, Intrinsic Exchange Group. 83 Ibid.
79 The Economics of Biodiversity: The Dasgupta Review, HMTreasury, February 2021. 80 Ibid. 81 Ibid.
19
VA L U E CHA I N R I S K AND B I OD I V E R S I T Y L O S S
Global trade and the integration of a globalised economic system has been an overarching narrative of human development over the last two centuries. Across the world today, one fourth of global production is exported. 84 Value chains connect continents, countries and companies with multinational corporations involved in over 80% of global trade. Even during the pandemic-stricken year of 2020, international shipping moved 10.65 billion tons of cargo across the globe. 85 Yet several recent crises have highlighted the fragility of the global value chain system. Value chain risk and resilience is front of mind for multinationals, financial institutions and, increasingly, the general public. Value chains are complex networks of organisations, people, activities, and resources which are involved, on the upstream end in the harvesting of rawmaterials and production and transport of goods, and on the downstream end, in their sale, consumption and final disposal. 86
The spread of Covid-19 in early 2020 in Wuhan reverberated across global supply chains. Data analysts reported that at least 51,000 companies around the world had one or more direct suppliers in the impacted region of China. 87 In March 2021, the Ever Given container ship blocked the Suez Canal, which connects Asia and Europe and carries 13.5% of the world’s freight. 88 During the six-day blockage, 369 ships were halted in a tailback, 89 holding up an estimated USD 9.6 billion of global trade each day. 90 Autumn 2021 saw supply chain crises around the globe as national economies emerged haphazardly from the 18-month-long economic standstill caused by the Covid-19 pandemic. 91 While consumer demand for non- essential goods increased in many import countries with high levels of vaccination, production of these goods remained low in export countries that were struggling with vaccine shortages. 92 According to data analysis of US e-commerce, in October 2021 alone, US customers saw over two billion out-of-stock messages online. 93 Parts of China experienced energy outages as factories struggled to keep up with the surge in demand. 94
Supply chain issues were exacerbated by floods in Europe, 95 wildfires and heatwaves in North America 96 and drought in East Africa. 97 This type of disruption is a forerunner of value chain disruption to come. The IPCC predicts that average global surface temperature will continue to increase until at least mid-century unless there are deep reductions in greenhouse gas emissions in the coming decades. 98 With every 0.1°C increase in average temperatures, the frequency and severity of extreme weather events and natural disaster multiplies, with impacts on every ecosystem on the planet. 99 95 Germany floods: Dozens killed after record rain in Germany and Belgium, BBC News, 15 July 2021. 96 Gabrielle Canon,What the numbers tells us about a catastrophic year of wild- fires, The Guardian, 25 December 2021. 97 The drought ravaging East African wildlife and livestock, BBC News, 03 Decem- ber 2021. 98 Climate Change 2021 - The Physical Science Basis, IPCC, 2021. 99 Ibid.
As this report goes to press, the Ukraine crisis threatens global security and trade in unimaginable ways. Value chain risks are now exacerbated and magnified on a near- daily basis.
Nature-related risks to business
Biodiversity loss, too, has the potential to cause severe disruption to businesses and value chains.
87 Business Impact of the Coronavirus, Dun & Bradstreet, February 2020. 88 Jade Man-yin Lee and Eugene Yin-cheungWong, Suez Canal blockage: an analy- sis of legal impact, risks and liabilities to the global supply chain, MATECWeb of Conferences, 2021. 89 Mary-Ann Russon, The cost of the Suez Canal blockage, BBC News, 29 March 2021. 90 Justin Harper, Suez blockage is holding up $9.6bn of goods a day, BBC News, 26 March 2021. 91 Dominic Rushe et al., How the supply chain crisis is affecting six big economies, The Guardian, 2 October 2021. 92 Ibid. 93 Adobe: Shoppers Have Seen Over 2 Billion Out-of-Stock Messages Online, Ado- be, 11 September 2021. 94 Primrose Riordan et al., China’s energy crisis threatens lengthy disruption to global supply chain, Financial Times, 17 October 2021.
The World Wildlife Fund (WWF) has compiled a framework for nature-related risks to business, 100 identifying risks cited in corporate reporting, disclosure frameworks and risk analysis tools as a proxy for the materiality of nature-related risks across sectors.
84 Esteban Ortiz-Ospina and Diana Beltekian, Trade and Globalization, Our World in Data, October 2018. 85 Tannis Thorlakson et al., Companies’ contribution to sustainability through global supply chains, PNAS, 12 February 2018. 86 The Value Chain, Institute for Strategy and Competitiveness - Harvard Business School.
100 The Nature of Risk: A Framework for Understanding Nature-Related Risk to Business,WWF, 2019.
Value chain risk and biodiversity loss The World Wildlife Fund's Framework for nature-related risk to business
21
Risk type
Threat
Consequences
Physical Risks
Acute events; damage from natural/ man-made hazards Biodiversity loss and decreasing species richness Scarcity of water Availability, reliability, and security of energy
Disruptions to business operations Labour shortages
Habitat loss Air pollution Water pollution
Regulatory and Legal Risks
Litigation, damages, and/or compensation Pricing or other regulations for emissions (greenhouse gases (GHG)*/other) Restrictions on land and ES access Air pollution regulation Non-hazardous waste management Soil pollution regulation Resource quotas for ES use Unsustainable practices Changing liability regimes Hazardous waste management Water pollution regulation Changes in disclosure requirements Changing consumer preferences Inability to attract co-financiers due to uncertainty Purchaser requirements Negative press coverage Divestment or other stakeholder campaigns Impacts on World Heritage Sites or protected areas Impacts on species on IUCN Red List
Unexpected costs of compliance/fines for noncompliance Stranded assets
Market Risk
Changes in the cost and availability of resources
Reputational Risk
Lost sales due to negative perceptions of the institution
Value chains in the biosphere
However, biodiversity risk can come from unexpected corners and create unanticipated effects on disparate businesses. For example, producers of non-essentials may also be exposed to a decline in pollinator populations. If lower agricultural yields increase food prices, there is less household spending on purchasing non-essentials. In this way biodiversity loss can put the equity and debt market values of corporations active in value chains of non- essentials at risk. 104 Corporate lenders may be exposed to risk from biodiversity loss caused by deforestation and land conversion for agriculture, which reduces flood control, putting assets at greater flood risk. This capital destruction could increase credit risk to financial institutions. 105
Historically, global value chains have had a largely negative impact on biodiversity, with traded commodities relying on extractive activities, land use change, and unsustainable fisheries or land management practices. 106 An analysis of 15,000 commodities linked with five billion supply chains across 187 countries found that 30% of threats to species’ survival result from international trade. 107 Beef, soy, timber/pulp, and palm oil are commodities with the greatest impacts on biodiversity, accounting for 113 million hectares of tropical forest loss between 2000 and 2012 and 40% of overall global deforestation, 108 with 31% of this deforestation linked to exports to the EU and China. 109 106 Andrew Deutz et al., Financing Nature: Closing the Global Biodiversity Financing Gap, The Paulson Institute & The Nature Conservancy, 2020. 107 M Lenzen et al., International trade drives biodiversity threats in developing nations, Nature, 6 June 2012. 108 Franziska Haupt et al., Zero-deforestation Commodity Supply Chains by 2020: Are We on Track?, Prince of Wales’ International Sustainability Unit, 25 January 2018. 109 Ibid.
These may all lead to financial risk, including:
One salient example of nature-related risk is food security. Our global food system is the primary driver of biodiversity loss. At the same time, agricultural yields are threatened by loss of biodiversity in pollinators 101 and the microorganisms in the soil that underpin critical processes. 102 Agriculture can also be threatened by loss of predator species due to habitat destruction, which results in overpopulation of crop-destructive pests. 103
Increased cost of capital or lending requirements
Write-downs of asset value and write-offs of assets
Increased insurance claims
Higher premiums; loss of insurance value
Increased risk of default
Loss of investment value related to reputational risks
101 The assessment report of the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services on pollinators, pollination and food production, IPBES, 2016. 102 Sulaimon Adebisi Musbau and Badmus Hafiz Ayinde, Micro and Macro (Or- ganisms) and Their Contributions to Soil Fertility, Frontiers in Environmental Microbiology, June 2021. 103 Heidi Liere et al., Trophic cascades in agricultural landscapes: indirect effects of landscape composition on crop yield on JSTOR, Ecological Applications, 2015.
Changes in market value of the business
104 Grant Rudgley and Nina Seega, Handbook for nature-related financial risks: Key concepts and a framework for identification, University of Cambridge, 1 March 2021. 105 Ibid.
Value chain risk and biodiversity loss
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[fig. 5]
THE WORLD’S RELIANCE ON IMPORTS – THE EXAMPLE OF RICE PRODUCTION IN MEKONG DELTA Large parts of the world do not have self-sufficiency in their food production 112 and some of the world’s largest economies rely heavily on food imports to feed their populations. 113 Nearly all cropland areas brought into production from 1986 to 2009 were used to grow export crops, 114 and by 2050 more than half of the world’s population could be fully reliant on food imports. 115 The world’s population is expected to increase by two billion persons over the next 30 years, from 7.9 billion today to 9.7 billion in 2050. 116 This increase in global population will require increased food production, putting further pressure on biodiversity and interconnected value chains. The rice paddy fields of the Mekong Delta are man-made wetlands, 117 which produce 90% of Vietnam’s rice, the world’s third largest rice exporter. 118 The condition of the rice paddies have been negatively affected by salinity intrusion caused by climate change. 119 In 2020, amidst the Covid-19 pandemic, the Vietnamese government estimated 460,000 metric tons of rice production was lost due to an increase in salinity. 120 Given the global reliance on the Mekong Delta for rice, a staple food for numerous countries, this is an acute example of the threat to global food security caused by environmental factors transmitted through value chains.
THE FIVE THREATS TO BIODIVERSITY
Land and Sea use change
Pollution
Species overexploitation
Climate Change
Invasive species and disease
Make the environment unsuitable for survival directly and indirectly.
Forcing the animal to shift range or confounding the signals that trigger seasonal events and more.
Example: Agricultural land use which is responsible for 80% of the global deforestation, including habitat loss and degradation.
Example: Overfishing, which may decimate global fish populations by 2050.
Compete with native species for space, food and other resources; sometimes spread disease that native species have no immunity of.
Source: The Living Planet Report 2020
The drivers of biodiversity loss
While value chains impact biodiversity, they are also at risk. The cross-border and hyperconnected nature of global value chains can act as a multiplier of biodiversity risk – translating disturbances and shocks from one company or region into disruptions in other parts of the value chain in other regions. The link between biodiversity and economic output is most obvious in the construction, agriculture, and food and beverages sectors, where a combined USD 7.9 billion of gross value added (GVA) is directly dependent on nature. 110
In other industries such as chemicals and materials, aviation, travel and tourism, mining and metals, and real estate, the GVA directly dependent on nature represents only 15%, yet more than 50% of the GVA of their supply chains is highly or moderately dependent on nature. 111 This hidden dependency means that value chains are a primary determining factor in many industries’ exposure to biodiversity risk.
112 Graham K. MacDonald, Eating on an interconnected planet, Environmental Research Letters, 2013. 113 Lanessa Cago, Countries Most Dependent on Others for Food,World Atlas, 5 December 2017. 114 Thomas Kastner et al, Rapid growth in agricultural trade: Effects on global area efficiency and the role of management, Environmental Research Letters, 20 March 2014. 115 Graham K. MacDonald, Eating on an interconnected planet, Environmental Research Letters, 2013. 116 World Population Prospects 2019, United Nations Department of Economic and Social Affairs, Population Division, 2019. 117 Phil Carter, The Ramsar Convention and Japan’s rice-paddy ecosystems, The Ecologist, 6 July 2020. 118 Robert Akam and Guillaume Gruere, Rice and risks in the Mekong Delta, OECD, June 2018. 119 Nguyen Huu Quyen et al., Impact of climate change on future rice production in the Mekong River Delta, CCAFS, October 2018. 120 Salty land turns productive in the Mekong, ACIAR, 26 March 2021.
110 Celine Herweijer et al., Nature Risk Rising: Why the Crisis Engulfing Nature Matters for Business and the Economy,World Economic Forum, January 2020.
111 Ibid.
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