Introduction to the Framework: Why nature-related risk and opportunity management matters
Why nature-related risk and opportunity management matters
Introduction
Nature underpins the global economy. More than half of the world’s economic output – US$44 trillion of economic value generation – is highly or moderately dependent on nature.[1] Our economies are embedded within nature, not external to it.[2] Yet most corporates, investors and lenders today are inadequately accounting for nature-related risks and opportunities. Corporates are failing to consider how their supply chains, operations and enterprise values depend on, and impact, nature. In turn, lenders and investors are not assessing nature-related risks and opportunities across their loan books and investment portfolios.
The natural world is in crisis, with nature deteriorating worldwide at a faster pace than any time in human history. That means many of nature’s vital services that benefit people are also declining.[3] Continuing along the current path of underinvestment in nature presents extreme risks and uncertainty for our economies, financial systems and society.[4] We are already operating outside the safe zones for six of the nine planetary boundaries, processes that are critical for maintaining the Earth’s stability.[5]
The impacts of extreme weather events and biodiversity loss are now second and third behind climate change as the most severe risks identified by global executives for the next decade.[6] These risks are also interlinked: we cannot mitigate – and adapt to – the adverse impacts of climate change without investing in nature’s capacity to store carbon and support resilient societies.
Leading market players and governments recognise the need for urgent action to halt and reverse nature loss. Later this year, governments will negotiate a global set of nature goals under the Global Biodiversity Framework under the authority of the UN Convention on Biological Diversity (CBD). The CBD’s draft framework highlights that the business and finance community have a critical role to play. Many corporates and financial institutions are now committing to science-based nature targets as well as climate targets. A growing number of organisations are recognising that nature must be factored into all decision-making, including financial, economic and business decisions.[7]
‘We now have to shape [the finance sector’s commitments to net zero] …to include biodiversity and nature.’
Mark Carney, UN Special Envoy for Climate Action and Finance
Illustrative examples of nature-related risks & opportunities
The examples outlined here are anonymised real-world examples of nature-related risks and opportunities.
Example 1 – Nature impacts: Weedkiller
Sector: Agriculture
Impact driver: Soil pollutants
An agrochemical company that develops herbicides to battle weeds produced a chemical to protect a genetically modified strand of soybean from weeds. While the chemical had been approved by the national Environmental Protection Agency (EPA), it drifted from fields where it was sprayed, damaging millions of acres of unprotected soybeans and other crops.
Nature impacts: An estimated 3 million acres of soybeans in the country were damaged in a single year. Severe beehive losses were also reported, and critical pollination sources were decimated.
Impact on society and economy: This created economic losses for farmers – over 3% of all soybeans planted in the country were damaged by the chemical, causing a three-year decline in farming income for soy farmers.
Nature-related risks that materialised for the organisation: A number of policy, legal and reputational risks materialised for the company. The national EPA restricted use of the chemical, and the backlash spurred over 10,000 lawsuits. The impact on the organisation was a 3-notch downgrade in its long-term credit rating, a valuation decrease of over 35%, and US$14bn in total settlement claims.
Example 2 – Nature-related dependency: Soil degradation
Sector: Agriculture
Nature–related dependency: Soil quality and soil retention services
Healthy soil provides many services, including a conducive environment for food to grow. Several factors compromise soil health, including the impact drivers of land-use change and resource exploitation. The vulnerability of degraded soil to extreme weather can impact asset values, highlighting the need for investors to incorporate nature-related risks into investment decisions and to actively engage with companies in the agribusiness sector.
Nature-related risks that materialised for the organisation: Modelling focused on Brazil showed that, following an extreme weather event, organisations along the value chain connected to degrading land had a materially negative impact on their market valuations. For instance, farmers operating predominantly on degrading land experienced a 13% decline and small packaged food companies that source from areas of degrading land saw declines of up to 45%. The smaller and less diversified a company, and the more connected to degrading land, the worse the valuation impact. Conversely, companies connected to healthy soil saw a valuation uplift, with farmers benefitting by 6%.
Source: Cambridge Institute for Sustainable Leadership (CISL)[8]
Example 3 – Nature-related risk: Salmon escape in Chile
Sector: Fisheries and aquaculture
Impact driver: Climate change
Nature-related dependency: Biomass provisioning (Salmon)
In 2019, 700,000 Atlantic salmon, treated with antibiotics, escaped from a coastal waters fish farm in Chile after a climatic event that occurred in the area. The organisation was granted a 30-day grace period to recapture at least 15% of the fish before facing fines due to environmental damage. They were only able to recapture 7%. The invasion of the escaped Atlantic salmon (a non-native species) reduced the health and integrity of the local aquatic ecosystem by introducing new predators (salmon) that feed on native species, many of which are important for conservation. Local reports indicated a decrease in the number of several species due to the disruption in the food chain. Increased organic matter deposits from local salmon predators (sea lions) also risked altering the biochemical cycles of marine ecosystems.
Nature-related risks that materialised for the organisation: As well as the loss of salmon stock that the company depended on, the organisation experienced significant reputational damage, faced a $7 million fine from the local regulator and saw a 40% drop in company-level operating income between 2019 and 2021. NGOs groups launched a campaign to force the closure of local fish farms and new regulations were implemented that aimed to prevent the sinking of salmon cages and included harsher penalties for salmon escapes. The company was ultimately divided into three separate organisations and experienced an 8% reduction in staffing. This example highlights the need for organisations to consider the interconnections between risks resulting from climate change and nature impacts.
Example 4 - Nature-related opportunity: Precision irrigation in Israel
Sector: Agriculture
Impact driver: Water use and climate change
Nature-related dependency: Water supply and biomass provisioning
Agriculture generates up to 29% of total greenhouse gas emissions. Yet in turn, agriculture is extremely sensitive to the negative impacts of climate change.[9] It also relies heavily on water. Moreover, to meet increased food demand as a result of expected global population growth, agriculture yields must become 70% higher over the next 30 years.[10] In response, an Israeli manufacturer of irrigation equipment developed precision irrigation technology to optimise the amount of water and nutrients delivered to each plant. This enables farmers to grow bigger yields using fewer resources. Precision irrigation technology uses 45% less water and can reduce greenhouse gas emissions by up to 85% compared to traditional flood irrigation. The innovative solution also reduces farmers’ dependence on rainfall, lowers energy consumption by 40% and can increase average crop production by up to 55%.
Nature-related opportunities for the organisations: For the organisations adopting the technology, as well as saving water, the method can cut consumption of energy and labour leading to large-scale, long-term sustainable savings. The manufacturer received access to new funding mechanisms, attracting over US$50 million in investment from a multilateral organisation in 2020.
Example 5 – Nature-related risk: Microchip manufacturers in Taiwan
Sector: Electronics
Impact driver: Climate change and water use
Nature–related dependency: Water supply and water purification services
Accounting for over 60% of the total foundry industry revenue globally, Taiwan dominates microchip manufacturing, a critical component in electronics such as computers, smartphones, and brake sensors in cars. Microchip manufacturing, however, is heavily reliant on high-quality water to cool its systems and rinse away industrial chemicals. One major Taiwanese microchip manufacturer alone uses on average more than 150,000 tons of water per day to maintain operations. Taiwan normally relies on monsoons for its water supply, but a lack of rainfall has caused droughts.
Nature-related risks that materialised for the organisation: Due to the water shortage, Taiwanese microchip manufacturers started replying on water trucks to maintain production. It is estimated that one major manufacturer spent over NT＄0.5 million on water trucks in 2021 alone. While the Taiwanese government has repeatedly insisted that the global microchip supply chain will not be affected by the drought, the water supply to citizens and businesses was suspended for two days a week in some cities.
The water shortage in Taiwan also risked impacting one of the most important links in the world’s tech supply chain and has added pressure to an industry already struggling with a severe microchip shortage due to the Covid-19 pandemic.
Example 6 – Nature-related dependency: Almond industry in California
Sector: Agriculture
Nature-related dependency: Pollination services
California grows around 80% of the world’s almonds, contributing around US$11 billion to the local economy each year.[11] Almond production depends on bee pollination. Many of the bees required to pollinate California’s annual almond harvest are trucked in from out-of-state to meet the increasing demand. Approximately 1.6 million colonies of commercial honeybees are placed in almond orchards in California each year.[12]
The areas of the United States most reliant on insect pollinators for high-value crops also tend to have poor habitats for pollinators, with regular use of pesticides and a lack of diverse flowering plants. [13] In addition, an increasing number of bees are lost each winter in the US.[14] During the 2020-2021 winter, an estimated 32.2% of managed colonies in the US were lost, an increase of 9.6% over the previous winter loss rate. [15]
Nature-related risks that materialised for almond farmers and Beekeepers: Meeting the growing demand for pollination services in agricultural production has become increasingly difficult. When colony losses are high, beekeepers must compensate for these losses, resulting in increased maintenance costs to both the beekeeper and the orchard grower renting the hives. Hive rental fees for almond pollination increased from approximately US$76 per hive in 2005 to over US$150 per hive in 2009.[16] As a result, pollination expenses as a percentage of operating costs have increased from 6.7% in 1998 to 20% in 2016.[17] With demand for bees outstripping supply, there have also been an increasing number of instances of bee theft during the Californian almond pollination season, presenting additional risks and costs to orchard growers and beekeepers as pollination service providers.
Impact on society and economy:
Almond production is not the only affected industry, with the United States Department of Agriculture (USDA) warning that honeybee pollination alone adds more than US$15 billion in value to agricultural crops each year. [18]
Example 7 - Nature-related opportunity: Alternative packaging
Sector: Manufacturing
Impact driver: Resource use and pollution
Nature-related dependency: Fossil fuels
Plastic water bottles require large amounts of fossil fuels to make and transport. Additionally, if left to decompose, a single plastic bottle can take up to 1000 years to decompose. While glass is easier to recycle than plastic and is often considered a more sustainable alternative, the production of glass is an energy intensive industry that is currently mainly fuelled by natural gas. [19]
To address these issues, an R&D collaboration between a major beverage manufacturer in the UK and a venture management company developed an alternative pulp packaging solution that is entirely recyclable and biodegradable. The organisations estimate their pulp bottles could potentially deliver significant improvements on the carbon footprint of glass bottles (90% savings) and plastics bottles (30% savings), addressing recycling rates and removing harmful plastic fibres from the environment.
Nature-related opportunities for the organisations:
While still in the early stages of development, the new collaboration expects their product to be cheaper than most glass bottles, reducing production costs.