Why and how companies need to respond to biodiversity-related risks and impacts

As you browse through the news, you may have noticed that one topic has received much more attention than usual. That topic is biodiversity.
Part of the attention was triggered by a landmark agreement on biodiversity at the end of the UN Biodiversity Conference COP15, chaired by China, which took place in Montreal in December 2023. The agreement aims to halt and reverse the loss of nature by effectively protecting 30% of the planet and 30% of degraded ecosystems by 2030. In addition, the richer nations have pledged to pay 30 billion US dollars a year to poorer countries for their efforts to protect and restore biodiversity by 2030 [1] .

However, it is important to emphasize that these policy developments have not emerged in isolation, but rather are the result of academic research and private initiatives that have highlighted and emphasized the risks to the global economy from the ongoing degradation of ecosystems and loss of biodiversity.

Given the changing political landscape and the international consensus to improve biodiversity protection, it is high time that financial institutions and companies put biodiversity on their agenda and integrate this issue into their daily financial decisions.
This blog post takes an in-depth look at the topic of biodiversity and explains its increasing importance in a global context and for financial institutions and companies in the real economy. How can risks be managed and opportunities exploited?
Biodiversity - why is it important?

We have all heard in one way or another that the growth of the world's population and our economy is putting pressure on nature. Images of rainforest destruction, overfishing or overhunting, intensive agriculture or oceans polluted with plastic waste are often associated with this (unfortunately this list is not exhaustive).

Fortunately, we can use data to track the integrity of biodiversity over time, for example by measuring the state of biodiversity worldwide through population trends of vertebrate species from terrestrial, freshwater and marine habitats. The Living Planet Index (LPI) is one of the most important indicators for measuring the current state of biodiversity. In 2022, the index included data from almost 32,000 vertebrate populations worldwide - mammals, birds, fish, reptiles and amphibians. The dataset is constantly being updated and expanded to include more species and habitats worldwide.
Despite the complexity of nature, the impact of human activities on the planet can be summarized in a single graphic. Between 1970 and 2018, intact biodiversity declined by an alarming 69%, with continental differences ranging from 18% in Europe and Central Asia to as much as 94% (!) in Latin and Central America.

Biodiversity loss should not only be a concern for David Attenborough fans, but also for business leaders who want to responsibly manage the impacts, risks and opportunities of their companies. Finally, biodiversity loss should also be of concern to anyone working to limit global warming, as the two issues are inextricably linked and cannot be effectively addressed in isolation [2].

How does this affect the economy?

Direct risk: dependence on ecosystem services

As the last three years have made painfully clear, economies do not thrive in a market environment characterized by crisis, volatility and unpredictability. The biodiversity crisis has the potential to significantly exacerbate these problems. A study published by the World Economic Forum (WEF) estimates that 44 trillion US dollars, or half of global GDP, is generated in industries that depend on nature, including biodiversity [3]. This puts biodiversity in third place in the 2022 WEF Global Risk Perception Survey [4].

At this point, it seems useful to briefly explain the specific impact of biodiversity-related losses:
Biodiversity is critical to economies as it provides the basis for ecosystem services that are essential for agriculture, fisheries and tourism - all areas that make a significant contribution to GDP and job creation. Healthy ecosystems also improve resilience to climate change and natural disasters, reduce economic losses and ensure long-term sustainability. In addition, biodiversity is a source of raw materials, medicinal resources and genetic diversity and promotes innovation and economic growth. However, with our current economic practices, we are degrading natural capital assets and thus the basis for valuable ecosystem services (see table below).

While these impacts are assessed at an economic level, sector-specific impacts can vary significantly in terms of their magnitude and risk factors. In particular, the food, agriculture and construction sectors are most affected by the direct impacts of biodiversity loss.

Let's look at some examples to illustrate how risks to biodiversity can materialize:

1. a relatively simple example of a risk is the loss of insects, particularly bees, which provide pollination for agriculture. This service alone has an estimated value of 195 to 387 billion US dollars per year [5].
2. biodiversity is crucial for drug discovery, as about half of all approved modern drugs in the last 30 years have been developed from wild species [6].
3. the ecosystem service of filtering air and water is threatened by the decline of algae, animals, microorganisms and (non-)vascular plants, which can have an impact on various sectors [7].

Although financial institutions are generally not directly affected by biodiversity risks, they internalize the indirect risks associated with their assets. Given their commitment, it is understandable why the financial industry pushed the biodiversity protection agenda during the last COP15 [8].

Transition risks - Reputation
There is a growing number of consumers who are making conscious decisions regarding the impact of their purchases on biodiversity. An example of this is the poor reputation of palm oil used in various products due to its impact on rainforest destruction [9]. If companies do not control their impact on biodiversity, they may face declining sales due to reputational risks that damage entire markets. Similarly, a poor reputation due to biodiversity negligence can have an impact on financial institutions that set biodiversity-related targets themselves in the future.

Transition risk - regulation
If the above risks are not convincing enough to voluntarily commit to biodiversity, companies (at least in the EU) will soon be required to do so by regulation.

The importance is already recognized by the legislator in the EU, hence the consideration under ESRS E4 [10] of the CSRD. This applies to all companies in the EU with around 250 or more employees and requires the following biodiversity disclosures.

Now that the relevance of biodiversity management as an issue at economic and corporate level has been demonstrated, the question remains as to what companies can do to take advantage of opportunities and avoid associated risks. The activities associated with "business as usual" are contributing to the loss of nature, so we clearly need to change the way we do business.

Dealing with impacts, risks and opportunities for nature - a way forward for organizations
As biodiversity attracts more and more attention and resources, it is difficult to know where to start given the multitude of frameworks, initiatives, guidelines, alliances and coalitions!

Based on our expertise in climate strategy, we have developed a five-step approach to managing biodiversity effectively and categorized selected initiatives according to their purpose.

1. knowledge and capacity building:
   While the mechanisms of climate change are complex, the human contribution can be attributed to excessive CO2e emissions. In contrast, identifying an individual farm's contribution to local biodiversity loss requires a deeper understanding of the system and its interdependencies. Determining the right metric to assess impact can vary depending on natural capital, drivers and ecosystem services. Companies should gain an understanding of the issue and recognize the extent to which their value chain is dependent on and impacts nature.
2. measurement:
   Various tools and frameworks have been developed to assess the dependence on ecosystem services and natural capital and to quantify the resulting risks and impacts. The choice of method depends on your organization, but Finance for Biodiversity provides an excellent overview of the tools currently available [11].
3. target setting:
   Target setting protocols such as that of the Science Based Targets Network (SBTN) provide an infrastructure that promotes transparency and accountability. A recommended benchmark would be to set a target that matches the regulatory ambition of the EU Biodiversity Strategy 2030 [12]. Targets should be measurable, actionable, time-bound and based on the best available science.
4. action plan:
   Develop an action plan detailing how the target can be achieved through own actions or a broader value chain as well as through public policy engagement. Actions should reflect a hierarchical order whereby (a) harmful actions are avoided, (b) existing harmful activities are reduced, and (c) affected natural assets are restored and regenerated.
5. disclosure and reporting:
   To get a head start on mandatory CSRD disclosure, sign up to TNFD or comparable voluntary disclosure frameworks.

Conclusion
Biodiversity is a key issue that will continue to grow in importance in the future. While it may be difficult to understand at first, it is very worthwhile from a risk and strategy perspective. Magnolia recommends identifying which stage of the biodiversity journey you are at and working from there. Keep up to date with all phases as the topic is still evolving. If biodiversity cannot be addressed internally, Magnolia Consulting can support you at all stages and in particular integrate it into your existing decarbonization strategy efforts.

Sources:
[1] https://www.cbd.int/article/cop15-cbd-press-release-final-19dec2022
[2] https://ec.europa.eu/research-and-innovation/en/horizon-magazine/climate-change-and-biodiversity-loss-should-be-tackled-together
[3] https://www.weforum.org/reports/nature-risk-rising-why-the-crisis-engulfing-nature-matters-for-business-and-the-economy/
[4] https://www3.weforum.org/docs/WEF_The_Global_Risks_Report_2022.pdf
[5] https://link.springer.com/article/10.1007/s12571-020-01043-w
[6] https://www.swissre.com/dam/jcr:a7fe3dca-c4d6-403b-961c-9fab1b2f0455/swiss-re-institute-expertise-publication-biodiversity-and-ecosystem-services.pdf
[7] https://encore.naturalcapital.finance/en/ecosystem_services/8
[8] https://www.unepfi.org/themes/ecosystems/cop15statement/
[9] https://www.wwf.org.uk/updates/8-things-know-about-palm-oil
[10] https://www.efrag.org/Assets/Download?assetUrl=%2Fsites%2Fwebpublishing%2FSiteAssets%2F11%2520Draft%2520ESRS%2520E4%2520Biodiversity%2520and%2520ecosystems%2520November%25202022.pdf
[11] https://www.financeforbiodiversity.org/publications/overview-of-initiatives-for-financial-institutions/
[12] https://www.eea.europa.eu/policy-documents/eu-biodiversity-strategy-for-2030-1