Our planet is at a crossroads. In addition to the well-documented climate crisis, the Earth’s biodiversity confronts a threat unprecedented in human history. An estimated one million species face extinction within the next few decades, per the International Union for Conservation of Nature’s Red List of Threatened Species.
The global economy is highly dependent upon nature’s resources. Healthy ecosystems directly support 55% of global GDP, and the conservation of biodiversity within those ecosystems is key to maintaining business sustainability. Yet, unsustainable business practices exacerbate water pollution, deforestation, habitat loss, soil degradation and climate change — all factors that contribute to biodiversity loss.
Firms of all sizes and across a wide range of industries have an important role to play in preserving our planet’s critical biodiversity. Fortunately, measurable strides are being made.
Biodiversity regulation is gaining momentum
Just two and a half months after its Biodiversity Convention in Montreal, the United Nations reached a historic breakthrough with the adoption of a legal framework to protect large swaths of ocean outside of national boundaries. The High Seas Treaty will be critical for enforcing the 30×30 pledge made during COP15 in December 2022 when U.N. member states adopted the Kunming-Montreal Global Biodiversity Framework (GBF) — a voluntary agreement among participating nations to conserve and manage at least 30% of the world’s lands, coastal areas and waterways, with a particular focus on areas impacting biodiversity.
Recognizing the major role the private sector plays in maintaining planetwide biodiversity, Target 15 of the GBF specifically calls on large and transnational companies and financial institutions to “regularly monitor, assess, and transparently disclose their risks, dependencies and impacts on biodiversity … provide information needed to consumers to promote sustainable consumption patterns” and “report on compliance with access and benefit-sharing regulations and measures … in order to progressively reduce negative impacts on biodiversity, increase positive impacts, reduce biodiversity-related risks to business and financial institutions, and promote actions to ensure sustainable patterns of production.”
In parallel with the U.N.’s voluntary biodiversity initiatives, the European Union (EU) is leading the way in implementing mandatory biodiversity reporting requirements for businesses.
On November 28, 2022, the European Council approved the Corporate Sustainability Reporting Directive (CSRD), which requires private firms to publish detailed information on their sustainability activities and impact. Protiviti published a Flash Report about the key elements of the directive and upcoming deadlines for companies subject to it. Companies are expected to comply with the directive by following a set of European sustainability reporting standards (ESRS), to be adopted as a delegated act later this year. The draft standards submitted to the European Commission on November 22, 2022 included a specific section on biodiversity and ecosystems.
Other jurisdictions and investor interest
Although the EU has taken the lead on biodiversity reporting requirements, other regions are rapidly following suit and are at various stages of releasing proposed regulation, with investors’ interest at the core.
In the U.S., the Securities and Exchange Commission (SEC) is expected to enact mandatory climate disclosure regulations for U.S. public companies — perhaps as soon as April 2023. These new regulations will enhance the climate disclosure regime currently in place for companies listed on U.S. exchanges. Similar regulations already exist or have been recommended in various jurisdictions, including the U.K. and Australia.
While it remains to be seen exactly what the SEC’s new rules will require, it is expected that the Commission will closely model its climate risk disclosure regulations on the Task Force for Climate-Related Financial Disclosures (TCFD) — a set of voluntary standards that are increasingly being requested by investors of public companies.
Akin to the climate goals of the TCFD and Science-Based Targets initiative (SBTi), both the Taskforce on Nature-related Financial Disclosures (TNFD) and the Science-Based Targets Network (SBTN) have created draft voluntary disclosure frameworks that will allow financial institutions, companies and cities to incorporate biodiversity- and nature-related risks and opportunities into risk management and asset management decisions. Moreover, biodiversity-aligned investor coalitions like Nature Action 100 and the Finance for Biodiversity Foundation, representing at least 130 financial institutions and US $20 trillion in assets, have committed to corporate action to combat biodiversity loss.
Ensure biodiversity compliance is part of your ESG program
Companies should view biodiversity compliance as an important component of a comprehensive environmental, social and governance (ESG) program. With the adoption of CSRD and ESRS, biodiversity, sustainability and ESG disclosure requirements will be more extensive and will impact a greater number of organizations than ever before. Subject firms will need to disclose information in a standardized format, with the same level of diligence as financial information disclosures. This information must be published in the management report and must be audited (starting with limited assurance, but likely graduating to reasonable assurance).
Certain industry sectors should pay particular attention to biodiversity requirements based on the nature of their operations. These sectors include agriculture and farming; forestry; construction and engineering; oil, gas and mining; energy production and utilities; water and waste services; food and beverages; paper and wood products; building materials; chemical products; pharmaceuticals and biotechnology; textiles and footwear; tobacco; and transportation. Any business that is highly susceptible to or has an outsized impact on biodiversity due to its operations should elevate biodiversity matters in its ESG reporting.
The reality of the planned transition periods is that companies are faced with having to act quickly. At this point, biodiversity compliance and reporting must become part of an organization’s governance, decision-making and business model by establishing a high level of transparency into its activities and how those activities affect its ESG goals. To properly prepare, organizations will need to first conduct an assessment of relevant biodiversity issues. This may entail:
- Identifying biodiversity issues that are material to the company and its suppliers
- Assessing biodiversity regulations across all jurisdictions in which the firm operates (with a particular focus on the clear requirements of the EU)
- Identifying specific risks and opportunities relating to biodiversity and ecosystems
- Conducting scenario testing covering potential ecosystem damages on business operations and impacts on biodiversity from business operations (i.e., “double materiality”)
- Surveying internal and external stakeholders to identify areas of risk relating to biological resources and linked ecosystems
Armed with the perspective gained from this assessment:
- Design a biodiversity strategy as a solid basis for complying with the upcoming reporting requirements
- Assess the organization’s current state of readiness and perform a gap analysis of the firm’s ability to execute the strategy
- Develop key performance indicators (KPIs) responsive to that strategy and the reporting rules
- Establish sound execution plans to achieve reporting readiness
- Develop a strong internal and external communication plan around biodiversity that is integrated with the overall sustainability reporting strategy
Final thoughts
ESG and biodiversity regulatory momentum is increasing, and firms must not adopt a “wait and see” stance but rather act quickly to integrate biodiversity considerations into their overall ESG strategy. Most companies operating in the EU will be impacted by the new reporting rules in a phased manner within the next few years. And for those businesses domiciled outside of Europe, it is only a matter of time before similar requirements are implemented in other jurisdictions.
Further, asset managers are increasingly seeking out those firms with high positive impact on our planet and its ecosystems while shying away from those perceived to have high negative impact. Therefore, investing in ESG compliance broadly — and within the realm of biodiversity specifically — is likely to help a firm not only meet its regulatory mandates but increase market value over time.
