Five weeks after delegates at COP27 discussed action towards valuing, conserving, restoring, and sustainably using biodiversity to reduce climate change impacts, the UN Biodiversity Summit aims to have countries come to a bold new agreement to nature. More specifically: governments are to agree to a global biodiversity framework with internationally binding targets for biodiversity (akin to the temperature target of the Paris Agreement for climate) providing a guiding light for all market participants. It is proposed that 2030 milestones will be interim steppingstones for 2050 goals, including increasing the area of natural ecosystems by at least 5% globally and halving the number of new introductions of invasive species.

Evidence continues to highlight the impending risks of nature loss, with around 50% of global GDP (Gross Domestic Product) moderately or highly dependent on nature and its services. This creates material risks and opportunities for financial institutions, asset owners and asset managers, as they lend or invest in companies facing increasing threats associated with biodiversity loss, or even experience the impacts directly.

Whilst climate measurability is challenging, biodiversity is even more complex given its idiosyncratic nature. So, it is not perhaps surprising that disclosure and reporting around biodiversity has not been as high on the agenda as climate change metrics, such as emissions, but there is increasing recognition that this is an area of material importance.

At a supranational level, work is still being done to establish ‘value’ and agree targets for biodiversity, it is arguably a slower process to integrate this into financing efforts. At present, many projects that damage biodiversity are not explicitly captured under Do No Significant Harm (DNSH) frameworks, nor conservation of biodiversity explicitly rewarded. The emergence of biodiversity key performance indicator (KPI)-linked products for a number of asset classes continues to rise, with this being one area that could be considered.

Whilst the Task Force on Climate-related Financial Disclosures (TCFD) is increasingly used by many asset owners, organisations  and corporates to report climate-related intent and purpose, the Working Group for the Task Force on Nature-related Financial Disclosures (TNFD) is hoping to be embraced as the equivalent for natural capital; recently launching a consultation on the beta version of its proposed framework. The current thinking includes a 'double materiality' approach i.e. both how nature impacts a company and its operations, in addition to how the operations of a company impacts nature. However, more work is needed to distil this into straightforward measures that financial market participants can track, monitor and report.

Barbara Pompili, former French Minister of the Ecological Transition, said: "The challenge of biodiversity and nature preservation is crucial. We need corporate and financial institutions to take their parts. Yet, we lack unified definitions, standards and metrics to accurately and thoroughly embrace nature preservation. The TNFD will constitute an important step to start properly addressing at [the] global level biodiversity-related risks and impacts."

The TNFD, like TCFD, will use a four-pillar approach (governance, strategy, risk management and metrics & targets), shown below. By 2023, it will deliver a framework to report on nature-related risks to shift financial flows towards nature-positive outcomes and/or reduce nature-negative outcomes.

Chart 1: TNFD timeline

The TNFD definition of 'nature-related risks' is distinct, as it goes beyond the short-term financial risks by also including the longer-term risks associated with an organisation’s impact and dependency on nature.  Although different to the TCFD, there are similarities in approach and financial materiality, which will also incorporate transition risks, as well as scenario analysis or stress testing. Once again, financial institutions, central banks and regulators are deliberating how environmental risks and opportunities should be managed in the future to create nature positive outcomes.

The Banque de France is a good example of action being taken. It started analysing the biodiversity impact of its investment portfolios in 2020, which included two impact metrics:

• Biodiversity scores: which reflect commitments, measures and outcomes of the companies invested in (for example: formal policy/ information published)
• Indicators of exposure to companies involved in the production of substances harmful to biodiversity (for example: pesticides)

When asked why Banque de France chose these impact metrics, Alexandre Gautier, Secrétaire général adjoint, said "the short answer is: because they were available … we need collective participation to identify a wider range of indicators. That's why I expect a lot from the TNFD. When you focus on disclosure then you can help companies to participate in this disclosure. I don't expect the TNFD to identify precise data necessarily but at least identify some topics which are useful to report."

In March 2022, The Network of Central Banks and Supervisors for Greening the Financial System (NGFS) recognised that nature-related risks could have significant macroeconomic and financial implications. NGFS argued that central banks and financial supervisors should build a scientifically grounded analytical framework to assess the interactions between nature, the macroeconomy and the financial system in order to align future policies.

And, there has been a flurry of recent reports including the recently published ‘A Market Review of Nature-Based Solutions: An Emerging Institutional Asset Class’, which finds that nature-based solutions provide a growing opportunity to invest in activities to protect and restore ecosystems. With current spending of biodiversity conservation currently at $130 billion per year, the report argues that private investment must be scaled to meet the >$700 billion financing gap annually. In addition, Nature Finance estimates that nature markets produce more than US$7 trillion worth of goods and services, equivalent to 8.6% of global GDP:

Chart 2: Nature, Economy, and Nature Markets

Like the TCFD, the TNFD is intended to shape private capital flows; however, engaging with financial policy makers and regulators remains a priority, such as the G20, G7, as well as standards bodies such as the International Financial Reporting Standards (IFRS), TCFD and other relevant initiatives, given the importance of reporting and disclosure requirements, which we have seen in climate. Data will once again play an important role.

Despite challenges with data, momentum is building:

• The Principles for Responsible Investment (PRI) is currently inviting its signatories to sign a statement on biodiversity ahead of the UN Biodiversity Conference (COP15) in December: “We cannot reach net-zero without halting and reversing nature loss, and we cannot tackle biodiversity loss without tackling climate change. We, the financial community, have a role to play in this complex ecosystem. And increasingly, the financial sector is stepping up to the biodiversity challenge. But voluntary action is not enough. We take inspiration from the Paris Climate Agreement where Article 2.1(c) set a clear mandate for countries to require the financial sector to align its activities with climate goals.”.
• To unlock Biodiversity Finance, the International Finance Corporation (IFC) published a reference guide intending to provide a structured approach for investors and issuers to identify eligible use of proceeds alongside an indicative list of projects and activities that constitutes Biodiversity Finance.
• The University of Cambridge Institute for Sustainability Leadership (CISL) published the Biodiversity Impact Metric, a risk-screening tool for supply chain businesses that source agricultural commodities, in order to indicate a business’ impact on biodiversity.
• A new ENCORE (Exploring Natural Capital Opportunities, Risks and Exposure) biodiversity module by Nature Finance enables financial market participants to explore their portfolio’s impact on species extinction risk and loss of ecological integrity (particularly for agriculture and mining).
• And, corporates are starting to take the lead on eradicating the negative impact of their business operations on biodiversity: French Luxury Group Kering, for example, has committed to having a net-positive impact on biodiversity by 2025.

With the TNFD framework now under consultation, biodiversity was one of the main topics of COP27 a few weeks back, and now the UN Biodiversity Summit only a month away, 2022 is shaping up to have been a significant year for improving biodiversity awareness and debate.

Whether it means adopting the new natural capital framework being developed or using new tools and methodologies to measure the impact on biodiversity, asset owners and investment managers, as well as financial institutions, need to build on their understanding of biodiversity. This needs to be both its risks and opportunities with regard to their portfolios, and how investment and lending choices going forward will factor this component into the decision-making process, particularly relative to other ESG metrics.

Undoubtedly, this will require knowledge sharing and collaboration between stakeholders to accelerate the expertise and best practise to incorporate this analysis into business processes.

Governments, regulators and central banks will also play a significant role to create international reporting standards, as well as supporting the data collection and generation. Considering how an organisation impacts and depends on nature, and the resulting financial risks and opportunities is an area we cannot ignore.