Authors: Esther Whieldon, Shirley Yap, Lokesh Raikwar, Gautier Desme
Published: May 10, 2023
New research from S&P Global Sustainable1 finds that 85% of the world’s largest companies that make up S&P Global 1200 have a significant dependency on nature across their direct operations.
The analysis also finds that 46% of companies in that universe have at least one asset located in a Key Biodiversity Area (KBA) that could be exposed to future reputational and regulatory risks.
S&P Global 1200 companies used an estimated 22 million hectares of land for their direct operations in 2021 to generate $28.9 trillion revenue. Expressed as an ecosystem footprint, this is equivalent to fully degrading 2.2 million hectares of the most pristine and significant ecosystems globally, such as the most intact and biodiverse parts of the Amazon or Sumatran rainforests.
Most of the world's largest companies are significantly dependent on nature in their operations even as the biodiversity and ecosystems underpinning those resources are declining due to overexploitation and climate change.
S&P Global Sustainable1 data shows that 85% of companies in the S&P Global 1200 — an index that covers the 1,200 largest companies across North America, Europe, Asia, Australia and Latin America — have a significant dependency on nature across their direct operations.
A look at a broader universe of companies in the S&P Global Broad Market Index (BMI) shows similar dependency on nature: 68% of companies in this index have a significant dependency on nature across their direct operations. The S&P Global BMI includes approximately 14,000 companies from across dozens of developed and emerging markets.
Protecting nature is a nascent priority for many companies, despite the fact that nature underpins much of the global economy. About $44 trillion of global economic value generation — over half of global GDP in 2019 — is moderately or highly dependent on natural assets and their ecosystem services, according to the World Economic Forum. A new analysis PwC released in April 2023 updated that figure, finding that 55% of global GDP, equivalent to an estimated $58 trillion, is moderately or highly dependent on nature.
The economy is reliant on the ecosystem services that nature provides in many different ways. For example, ecosystem services provide wood for timber harvest; ground water or fresh water for drinking, cooling power plants or irrigation; and animal or plant fibers for fabrics or fertilizer.
Nature also provides ecosystem services by modulating the climate and hydrological, ecological and soil processes. Examples of these ecosystem services include pollination, carbon sequestration, erosion control, flood and storm protection, disease control and soil quality.
How does this connect back to business? The global economy is benefiting from nature even as it is driving nature loss, which is reducing nature’s ability to sustain those ecosystem services. Pollution, deforestation and other unsustainable land use, paired with climate change and the spread of invasive species, have put about 1 million animal and plant species at risk of extinction, many within decades, according to the UN.
The 2021 Dasgupta Review, a landmark study of the economics of biodiversity, noted that from 1992 to 2014 the world's stock of natural capital assets per person declined by nearly 40% while during that same period the produced capital per person doubled.
Understanding ecosystem dependencies — how much an organization relies on certain ecosystem services to function — can also help the organization understand the risk it would face if that ecosystem service declined or stopped.
Ecosystem dependencies will vary based on location and the services a company provides. For example, a company with operations in a flood-prone area will be more dependent on flood and storm protection.
Healthy and diverse ecosystems also play a key role in absorbing carbon emissions and helping both the natural world and human society adapt to the physical impacts of climate change. But nature’s ability to provide those services will diminish with every degree of global warming, the Intergovernmental Panel on Climate Change (IPCC) warned in its recent synthesis report.
Biodiversity and nature are gaining rising attention from companies, investors and governments but many companies are in the early stages of understanding the risks these issues pose to their business.
To help address this challenge, S&P Global Sustainable1 has launched a new Nature & Biodiversity Risk Dataset that assesses nature-related impacts and dependencies across a company’s direct operations including at the asset, company and portfolio level. The Nature & Biodiversity Risk Dataset covers more than 17,000 companies and more than 1.6 million assets. The dataset applies the Nature Risk Profile Methodology for analyzing companies' impacts and dependencies on nature launched by S&P Global Sustainable1 and the UN Environment Programme (UNEP) in January 2023.
While understanding nature-related dependencies can help a company understand its risk profile, investors, regulators and groups drafting disclosure frameworks are also asking for details about how company operations impact nature. One way to determine impact is by looking at land use. Overall, companies in the S&P Global BMI use an estimated 87.3 million hectares of land for their direct operations — such as for farms, factories, mines, retail stores, hospitals and even office space.
To go a step further and measure the direct operational impact a business has on nature, the Nature & Biodiversity Risk Dataset includes an ecosystem footprint metric. This metric combines three key areas of analysis: the areas of land impacted by the company (land area), the degree to which the location-specific ecosystem integrity is reduced (ecosystem degradation) and the significance of the location-specific ecosystem impacted (ecosystem significance).
Our analysis shows that companies in the S&P Global BMI collectively have an ecosystem footprint of 7.8 million hectares of Highest Significance Area equivalent. Consumer staples companies in this universe, which includes food & beverage activities and agriculture, have the largest total footprint as well as the largest ecosystem footprint, followed by utilities, real estate and industrials companies.
S&P Global 1200 companies used an estimated 22 million hectares of land for their direct operations in 2021 to generate $28.9 trillion in revenue. Expressed as an ecosystem footprint, this is equivalent to fully degrading 2.2 million hectares of the most pristine and significant ecosystems globally, such as the most intact and biodiverse parts of the Amazon or Sumatran rainforests.
Another way to measure how a company may be impacting nature is by understanding how much it operates in areas that are important to biodiversity. Businesses may face legal, regulatory, reputational and market risks if their biodiversity-related dependencies are not appropriately identified and managed in connection with their operations. To understand these risks, investors and regulators are increasingly seeking to understand how company operations overlap with biologically significant locations or protected areas.
S&P Global Sustainable1 data shows that 46% of companies in the S&P Global 1200 index and 16% of companies in the S&P Global BMI have at least one asset located in a Key Biodiversity Area (KBA). KBAs are sites contributing significantly to the global persistence of biodiversity. KBAs are identified at the national, sub-national or regional level by local stakeholders based on standardized scientific criteria and thresholds.
Utilities in the S&P Global 1200, which include electric, gas, and water, had the biggest overlap with KBAs. As providers of electricity and natural gas to customers, utilities' footprints, especially their transmission lines, traverse millions of miles.
Energy companies in the S&P Global 1200, which include oil and gas as well as coal mining companies, had the second highest percentage of assets that overlap KBAs. Similar to electric utilities, oil and gas companies own and control millions of miles of pipelines around the world.
The materials sector, which includes metals and mining companies, has the third highest percentage of assets in KBAs, at 4.9%.
The percentages of assets per sector covered by S&P Global’s database located in KBAs and protected areas is similar for companies in the S&P Global BMI universe and the S&P Global 1200 sample.
Many companies will face difficult choices ahead in the energy transition as they build out additional infrastructure and increase their risk of overlapping with KBAs or protected areas.
Recent research from S&P Global Sustainable1 found more than 1,200 mining sites that intersect with KBAs, and 29% of those sites are for extracting minerals needed for the low-carbon energy transition.
As KBAs are identified by the scientific community based on biological criteria and thresholds, the designation does not carry legal protections. However, governments have been known to use KBAs as reference points in establishing legally protected areas. Protected areas are geographically defined spaces that are managed through legal or other effective means to achieve the long-term conservation of nature with associated ecosystem services and cultural values.
Protected areas include national parks, wilderness areas and nature reserves managed by local, state or national governments. A protected area can also be an area of land that is owned or managed by a private owner, NGO, for-profit organizations or Indigenous peoples.
Protected areas and KBAs often overlap. As of 2021, about 61% of KBAs were either partly or completely within protected areas, according to an annual report on the KBA program, which is managed by the International Union for Conservation of Nature (IUCN) and 13 other global organizations.
Globally, about 17% of land and 10% of marine areas are protected. And with the passage of a new global biodiversity framework at the UN's COP15 biodiversity conference in December 2022, governments will be looking to expand existing protected areas or designate new ones.
Under the new biodiversity framework, governments pledged to achieve "effective conservation and management of at least 30% of the world’s lands, inland waters, coastal areas and oceans" by 2030. The agreement "prioritizes ecologically-representative, well-connected and equitably-governed systems of protected areas and other effective area-based conservation."
S&P Global Sustainable1 data shows that about 70% of companies in the S&P Global 1200 have at least one asset in a protected area. In this universe of companies, the utilities sector has the largest amount of assets in a protected area (26.4%), followed by the information technology sector (12.7%), and the materials sector (8.9%).
Disclosure regulations and voluntary frameworks consider a number of indicators associated with nature dependencies and impacts, including the presence of operations in KBAs and protected areas.
The Taskforce on Nature-related Financial Disclosures (TNFD) in March 2023 released its final beta framework for nature-related risk management and disclosure that proposes to have companies assess and disclose how their operations and supply chains overlap with KBAs and protected areas, as well as potential impacts and dependencies on nature, and ecosystem integrity. The TNFD aims to publish its final recommendations in September 2023.
Similarly, the EU's Sustainable Finance Disclosure Regulation (SFDR) requires financial market participants and financial advisers based in the EU to disclose the share of their investments in companies that have sites or operations in or near "biodiversity-sensitive areas." SFDR defines biodiversity-sensitive areas as the European Natura 2000 network of protected areas, Unesco World Heritage sites and KBAs.
The GRI (Global Reporting Initiative), an independent international voluntary sustainability standards organization, is also developing a biodiversity disclosure standard. Comments on the draft standard closed in February 2023.
Meanwhile, corporate pledges to protect nature are increasing, but they remain rare. Research by S&P Global Sustainable1 has found wide variations in commitments to protecting biodiversity and ecosystem services. According to the S&P Global Corporate Sustainability Assessment (CSA), no assessed industry has a majority of companies making nature-related commitments.
Ecosystem footprint: In order to provide a decision-useful metric that enables comparison between business operations, land area, ecosystem integrity degradation and ecosystem significance are brought together to calculate the equivalent impact on the most significant areas globally in terms of biodiversity conservation and ecosystem services provision. This produces an Ecosystem Footprint expressed as the equivalent number of hectares in the most globally significant ecosystems that would be fully degraded by the company’s operations.
Dependency score: The dependency score considers the level of reliance that a business has on 21 different ecosystem services, as well as the expected resilience risk of the ecosystem providing these services, where these businesses are operating around the world. Significant dependency is signified by companies that have a dependency score over 0.6 (where 0 represents no dependency risk and 1.0 represents very high dependency risk).