Biodiversity risk represents a significant and growing financial risk, with the potential to impact global economic value directly and indirectly through operational risks, transition costs, environmental liabilities and more. A 2020 report by the World Economic Forum estimated that over half of the world’s GDP, about $44 trillion, is moderately or highly dependent on nature and its services, putting it at risk due to biodiversity loss.

Institutional investors, especially those who prioritize looking at long-term risk, are increasingly moving to incorporate natural capital into their risk assessments. Currently, companies disclose limited data on biodiversity-related metrics and unlike more established, mandated ESG priorities, biodiversity risk is not as easily defined.

Broadly defined, natural capital is the world’s stock of natural assets which include geology, soil, air, water and all living things. As with financial capital, when we draw down too quickly on resources without accounting for repayment or giving nature time to recover, for example by clear-cutting forests, we run the risk of ecological, social and economic liabilities (Source).

With a topic this all-encompassing, it can be very difficult for investors to determine the extent of material biodiversity risks in their portfolio. Usually, investors with exposure to high-risk sectors with high resource dependencies, such as agriculture, fisheries and pulp & paper, or high environmental impacts, such as oil & gas, mining and chemicals, are more likely to have material risks.

Biodiversity Disclosure Frameworks and Regulations

Although not yet mandated, emerging voluntary frameworks point to biodiversity as a likely place for disclosures soon. Initiatives like the Taskforce on Nature-related Financial Disclosures (TNFD), Science Based Nature Targets (SBTN), and the Corporate Sustainability Reporting Directive (CSRD) have motivated more companies to begin disclosing natural capital risks.

Using disclosure data from these standardized frameworks helps investors to compare data at scale, and screen to identify companies to target for engagement. To make biodiversity reporting easier, the GRI and TNFD published a joint interoperability mapping resource that gives a detailed overview of alignment between the two standards, so companies can report nature-related risk data consistently and investors can use it to assess investee companies’ biodiversity risks and sustainability practices.

Moreover, the EU taxonomy outlines specific criteria for sectors like forestry, agriculture, and land use that must be met to qualify as sustainable. These criteria focus on preventing harm to ecosystems, preserving biodiversity-rich areas, and reducing adverse impacts on natural habitats. Progress has been slow though, with the EU commission responding to concerns about members’ readiness for an upcoming deforestation regulation deadline by giving companies an extra year of phasing-in time.

The Sustainable Finance Disclosure Regulation (SFDR) incorporates biodiversity by requiring financial institutions to report on their investments’ environmental impacts, including effects on biodiversity. Specifically, the SFDR mandates the disclosure of “Principal Adverse Impacts” (PAIs), which include metrics on biodiversity-sensitive areas and activities related to deforestation. Companies must disclose whether and how their investments negatively impact ecosystems and biodiversity, as well as the steps they take to mitigate such risks.

Biodiversity Engagements: Where to Start

As a basis, investors may want to develop their own nature-related active ownership policies to determine what their goals and objectives are for engagement. Some pertinent questions that investors can ask prior to initiating biodiversity engagement efforts with investee companies include:

  • Does the company have a biodiversity policy?
  • Have they assessed their impacts and dependencies on natural resources, and are they disclosing the results?
  • What is the company’s reliance on raw materials in its operations?
  • What natural capital risks are material to the company (e.g., water consumption, deforestation, invasive species, etc.)?

Next, investors can consider what type of engagement they want to undertake and prioritize which of their investee companies they want to engage with on natural capital. Types of engagements can vary depending on the intended purpose:

  • Adoption of reporting frameworks among companies in higher risk sectors: Investors with exposure to companies in high-risk sectors can engage with companies to motivate them to adopt biodiversity reporting frameworks (e.g., TNFD). This enhances transparency and allows companies to focus on biodiversity-related risks, which can impact their financial performance and reputation.
  • Conducting impact and risk assessments: Engaging companies to conduct thorough biodiversity impact assessments can identify potential risks associated with their operations. Better understanding of these impacts may help companies mitigate risks that could lead to regulatory fines, operational disruptions, and reputational damage.
  • Land-use practices: Some investors are advocating for sustainable land-use practices to reduce deforestation and habitat loss. Sustainable land use is critical for long-term resource availability and compliance with environmental regulations, enhancing a company’s operational resilience.
  • Water management and pollution: Focusing on companies’ strategies for water management and pollution reduction, especially in areas where water scarcity is an issue, is important because poor water management can lead to legal liabilities, community opposition, and damage to ecosystems.
  • Sustainable production and sourcing practices: Encouraging companies to adopt sustainable practices, such as achieving RSPO certification for palm oil or enhancing supply chain transparency, is useful as sustainable sourcing reduces environmental impact and aligns with consumer preferences, which can enhance brand loyalty and market competitiveness.
  • Setting targets: Investors can engage with companies to set measurable nature-related targets aligned with international frameworks and goals. Setting clear targets allows companies to track progress, demonstrate accountability, and attract investment focused on sustainability, ultimately supporting long-term growth and risk management

Here are three ways that investors can start engaging with companies on nature:

  1. Consider joining the Taskforce on Nature-related Financial Disclosures Forum. Many financial institutions are committing to make disclosures aligned with the TNFD recommendations by the financial year 2024 (or earlier) or 2025. Several UK pension funds and asset managers signaled their intention to begin reporting against the TNFD. The UK government has been urged to mandate TNFD-aligned disclosures and in May published updated guidance regarding the UK Sustainability Disclosure Requirements (SDR) framework, but has not committed to implementing any nature-related obligations in the UK regulatory framework as of yet.
  2. Participate in collaborative engagement initiatives such as Nature Action 100, Finance for Biodiversity Pledge, PRI’s Spring.
  3. Partner with an engagement service provider like Glass Lewis to start engaging on biodiversity. This approach is particularly helpful for investors who need help identifying material engagement topics and companies to target for engagement, determine success indicators, run the engagement campaign, and define an escalation process.

Case Study: Japanese Beverage Company

Through our Active Stewardship Engagement program, Glass Lewis engages on biodiversity with respect to environmental incidents. We conduct much more detailed, proactive engagements on natural capital through our Custom Engagement Services.

Glass Lewis started engaging with a Japanese, multi-national beverage company in 2022 through a custom engagement on behalf of an investor client. Given the potential impacts on nature and biodiversity loss due to the company’s operations, which this investor identified as financially material risks, we started engagements on water risk assessment and implementation of biodiversity risk management measures.

Glass Lewis’ Stewardship team regularly engaged with the company through 2022-2023 with the following outcomes for the company:

  • Began a biodiversity risk survey and revised its biodiversity policy, committing to prioritize procurement, production and transportation methods that considered biodiversity.
  • Finalized its water stress survey and uses a tool to assess water risks from reduced precipitation and storm damage.
  • Now participates in the TNFD Forum, aiming to align disclosures with TNFD recommendations.

With an emerging engagement topic like biodiversity, it can be more difficult for investors to determine the best steps to take if an investee company is unresponsive to investor outreach or does not make sufficient progress on identified issues. Glass Lewis can help ensure your engagement objectives are aligned to your proxy voting policies, and pave the path forward for natural capital engagements.