Value chain risk and biodiversity loss The World Wildlife Fund's Framework for nature-related risk to business
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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.
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