With the recommendations of the Taskforce on Nature-related Financial Disclosures (TNFD) having already been adopted by more than 150 financial institutions around the world, nature-related targets have moved firmly from the “nice to have” to the “must have” category for a growing number of investors. Many will begin establishing nature-related targets and conducting risk and impact assessments in the coming year.
There’s a growing realisation of the economic importance of nature, considering that more than half of global GDP depends on nature and the services it provides. More than 75 per cent of global food crops, for example, depend on pollinators, while the construction, agriculture, food and health sectors get raw materials from the natural world, notes Dr Dorothy Maxwell, head of sustainability and ESG advisory with Davy Horizons.
“Healthy ecosystems support all life on Earth, providing natural capital that underpins the successful functioning of our economy, businesses and societal wellbeing,” says Maxwell. “The value of this natural capital to the global economy is estimated at $50 trillion per annum. For this reason, natural capital costs are increasingly being internalised in regulation and markets for many sectors. We see this continuing in the near term, especially in the EU, as the connection between the climate crisis and biodiversity loss becomes more apparent.”
Companies can find assessment of nature risks and opportunities a challenge and the TNFD and the Science Based Targets initiative (SBTi) for nature provide valuable playbooks for best practice, says Maxwell.
“For corporates subject to the Corporate Sustainability Reporting Directive, the material impacts on nature need to be disclosed in annual reporting. For companies in the commodities, food, timber and packaging sectors, the EU Deforestation Regulation is a priority as it goes live this year. For investors, lenders and insurers, ensuring that these risks are being managed and disclosed is a growing requirement in the EU, especially for funds under the EU Sustainable Finance Disclosure Regulations.”
So what impacts are nature and biodiversity likely to have on the responsible investing market in the near term?
Deirdre Timmons, sustainable finance lead, ESG reporting and assurance, PwC Ireland, believes we will see growth in biodiversity-related investment and a rise in thematic funds as the opportunities for this space have opened up dramatically with the launch of the Taskforce on Nature Related Financial Disclosure (TNFD) and the inclusion of biodiversity as a topic under the Corporate Sustainability Reporting Directive.
“The latter in particular will potentially provide investors with access to a range of data and information from investee companies that they would never have had access to before, and this should allow them to understand what many companies are doing in this area, both good and bad,” says Timmons.
“Therefore, they should be able to both manage their exposure to biodiversity risks and support biodiversity enhancements or opportunities, and this should provide potential to develop more investment opportunities in this space.”
However, despite the various regulations now pushing corporates into action, there is concern that this may be too little too late.
The World Economic Forum estimates that investment in nature-based solutions needs to at least triple in real terms by 2030 and increase fourfold by 2050 if the world is to meet its climate change, biodiversity and land degradation targets. This would equate to a cumulative investment of more than $8 trillion and a future annual investment rate of $536 billion.
As the Investing in nature-based solutions report from the European Investment Bank put it, “the main challenge of financing the increased uptake of nature-based solutions is that the majority of nature’s benefits currently have no financial market value, despite the fact that nature underpins our collective survival and prosperity”.
In the EU, it notes, nature-based solutions face a number of barriers including lack of scale, which make it difficult for lending institutions to generate a profit, long investment horizons and regulatory hurdles and uncertainty, among others.
In addition, following the broad pro-environment consensus in global business in recent years there are concerns about a rowing back of commitments in this area, especially from the new US administration.
Timmons says climate change provides undeniable evidence for action.
“The wildfires in Los Angeles, the flooding in Valencia and, more locally, Storm Éowyn have made climate change real for most and strengthened the case for action,” she says.
