August 25, 2022
August 25, 2022
The consequences of environmental degradation on businesses are wide-ranging. Not only does extreme biodiversity loss, widespread pollution, and the overconsumption of natural resources present direct challenges for key industries, but they also exacerbate critical challenges associated with climate change, societal health, supply chain reliability, and food security that are experienced across economies and societies. Boards of directors will need to ensure that their organizations have a nature-risk strategy to navigate changing regulations, manage complex interdependencies, and take advantage of emerging opportunities from new technologies and more efficient business processes. The imperative is to increase resilience to nature risks and help to reverse nature loss.
Nature loss is not a recent issue, and decades of regulation and technological advancements have led to some changes but have not reversed the global trend of deteriorating ecosystems.
In particular, the complex interactions between environmental degradation and climate change threaten to edge us closer to dangerous tipping points, with unpredictable, irreversible, and catastrophic ramifications. Many of the ecosystem services that humanity relies on are under pressure from climate change, while efforts to avoid even more dangerous levels of global warming rely heavily on functioning ecosystems to absorb carbon.
Risk experts and leaders in business, government, and civil society surveyed by the World Economic Forum for the latest edition of the Global Risks Report 2022 identified “biodiversity loss and ecosystem collapse,” “human-made environmental damage,” and “climate action failure” among the top ten risks the world will face in the coming decade.
For businesses, these global issues translate into direct and indirect risks, with impacts on business models, value chains, investment portfolios, market strategies, and stakeholder relations.
Businesses should get ahead of the curve by taking a hard look at their risks and strategic responses. This will include reviewing the “double materiality” of risks—understanding how a business’s assets and operations impact nature and how in turn a business depends on nature.
A growing number of global agreements, policies, and legislative steps are underway, and we can expect countries to eventually establish biodiversity and ecosystem targets on which to measure public policy and economic activities. The most recent example is the new “National Strategy to Reflect Natural Assets on America’s Balance Sheet,” announced by the White House in August.
However, nature loss is a complex area, and well-meaning policies and corporate initiatives can have unintended consequences. Greenwashing is a growing challenge, particularly in the absence of clear standards as to what reversing nature loss entails. In the near term, all of this will make for considerable policy and regulatory unpredictability as conflicting stakeholder pressures resolve into a coherent approach and new solutions emerge.
Boards of directors need to show leadership by ensuring that their organizations are alert to these regulatory changes and that necessary steps are taken to embrace nature loss as a business risk and to reverse it as an opportunity. Below are four related steps boards can take:
Organizations should embed nature-related risks into a dynamic resilience culture and ensure that current governance processes bring together all business functions relevant to nature risks, from operations to product design, risk management, and employee engagement. Boards of directors need to ensure that businesses consider nature as a key component of their companies’ wider environmental, social, and governance (ESG) and environmental resources management strategies.
Businesses need to take advantage of better data and improved analytics to increase resilience and capitalize on new growth opportunities. Building on the adage that what gets measured gets managed, various methodologies and tools are being developed to assess and help reduce environmental degradation. One key development is the launch of the Taskforce on Nature-related Financial Disclosures (TNFD). Established in 2021, TNFD aims to redirect financial flows to nature-positive outcomes by developing a cross-industry framework for organizations to assess, report, and act on nature-related risks and opportunities. TNFD is rapidly emerging as the standard for nature disclosures. Early engagement gives businesses a chance to learn and shape the emerging framework.
A shift to nature-positive outcomes requires significant investments and changes in the flow of capital. Markets were for a long time “blissfully ignorant” but are now increasingly seen as part of the solution, with a range of innovative approaches being piloted by corporations, investors, and the public sector. One example is the world’s first sovereign blue bond issued by the Republic of Seychelles to support sustainable marine and fisheries projects in the country. Another example is a green water bond set up by DC Water to secure funding for the delivery of green infrastructure to improve water quality in Washington DC. In particular the market for carbon credits has seen significant growth, with landowners starting to trade ecosystem services such as carbon offsets through their forests. However, while an increase in natural carbon sinks such as forests or peatlands is essential to fighting climate change, this should be considered complementary but not an alternative to radical reductions in fossil fuel emissions.
New financial instruments are being tested, aimed at regenerating coral reefs and mangroves for coastal storm protection. Financial stakeholders are already involved in nature-related initiatives such as Finance for Biodiversity and more capital will move into new ventures aimed at transforming business models to be actively nature-positive. Nature has emerged as a new focus for investors actively looking to demonstrate the mutually beneficial social, economic, and environmental possibilities of their investments. It is an imperative for senior leaders and those developing nature-positive strategies to understand the requirements, risks, and dynamics of these markets and to evaluate how this can provide capital for their own nature-positive transition.
Boards need to ensure that companies are engaging across stakeholders to build trust. There is a growing expectation from employees, customers, business partners, regulators, and policy makers that businesses adapt their strategies to help reduce nature loss. Businesses can use these relationships to help challenge themselves about blind spots and shortcomings and avoid the danger of greenwashing. They will likely find that nature-risk resilience efforts align well with other agendas, such as ESG ambitions and operational resilience.
Reversing nature-loss is imperative from a corporate resilience and risk management perspective and, if done early and smartly, can translate into significant new business opportunities. Accelerating environmental degradation makes this shift more urgent, but organizations will have to navigate complexities and uncertainties. The interdependencies between nature and business are dynamic and wide-ranging and it is hard to predict the speed of transition, persistence of political will, fluctuations of consumer sentiments, and regulatory effectiveness.
Boards of directors across sectors and geographies should embrace this new business imperative and all the complexities and challenges that come with it and put it firmly on the corporate agenda.
Swenja Surminski is the managing director of climate and sustainability for the Marsh McLennan Advantage Insights team.
NACD: Tools and resources to help guide you in unpredictable times.