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Rapid biodiversity loss poses financial risk for business, new report finds

A new U.K. government report highlights the growing financial risks corporations face as a result of a relentless depletion of Earth's natural resources, an issue that so far has flown below the environmental, social and governance radar of most businesses.

The 600-plus-page analysis, commissioned by the U.K. Treasury in 2019 and published Feb. 2, 2021, uses an economist's lens to explore the links between the degradation of the natural world — from the rising rate of species extinction to pollution, soil depletion and habitat loss — and the intensifying production of economic assets, such as cars, homes, machines, food and clothing. It is the first time that a finance ministry has sought a wide-ranging and in-depth study on the economic importance of natural capital.

The study describes how the loss of natural capital is lowering crop yields, reducing fish catches, hurting corporate supply chains and exacerbating flooding and other natural disasters. It argues strongly that the overall cost of using natural resources should be embedded in everything from finance ministry accounts to corporate balance sheets and global trade arrangements. For companies and financial institutions, the exposure to nature-related risk stems from a range of sources such as bank loans, equities, sovereign and corporate bonds, commodities and real estate.

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"Nature is underpriced in our day-to-day lives," said the report's lead author, Partha Dasgupta, an economist and professor at the University of Cambridge, during a webinar to discuss the findings. "Climate change and COVID-19 are striking examples of nature's loss of resilience" as a result of over-exploitation of the planet's forests, grasslands and oceans.

More than half of the world's GDP depends on nature. The report says that between 1992 and 2014, the per-capita value of produced capital doubled, while the per-capita value of human capital rose by about 13%. At the same time, the per-capita value of the stock of natural capital plunged by nearly 40%. Government subsidies that encourage businesses to exploit nature rather than protect it contribute significantly to the problem, according to the report. Globally, these subsidies total between $4 billion and $6 billion every year.

According to a separate analysis the EU published in May, the world lost between €3.5 trillion and 18.5 trillion per year in ecosystem services from 1997 to 2011 as a result of land-cover change, and €5.5 trillion to 10.5 trillion per year from land degradation.

As a topic for corporate boardrooms, biodiversity has yet to receive the same attention as other ESG topics such as climate change or gender diversity. But momentum on the subject is building as more businesses realize that the benefits of protecting natural capital can outweigh the costs. For example, studies have shown that every €1 invested in marine protected areas will generate a return of at least €3.

In May, countries plan to meet in Kunming, China, and hammer out a new accord on biodiversity and to set new global targets, similar to the Paris Agreement on climate change. In May, the EU published a sweeping strategy aimed at reversing the continent's biodiversity losses by 2030. "At least 30% of the land and 30% of the sea should be protected in the EU," according to the European Commission. "This is a minimum of an extra 4% for land and 19% for sea areas as compared to today."

There is action on the corporate front, too. To halt ecosystem loss, 10 large financial institutions, including BNP Paribas SA, Standard Chartered PLC and AXA SA, in July 2020 said that they would help establish a new U.N.-backed reporting framework, the Task Force for Nature-related Financial Disclosures, or TNFD. The task force is expected to be launched in the second half of 2021. It will complement a similar reporting framework set up for climate change.

In a separate move, five companies, including Philip Morris International Inc., electric utilities Iberdrola SA and Engie SA, and chemicals company Solvay SA, agreed to work together from September 2020 onwards to "strengthen the connection between biodiversity and overall business and sustainability strategy to ensure impact on the ground."

Nonetheless, corporate efforts to tackle the loss of ecosystems are still in their infancy. For example, an April 2020 assessment of the 350 most influential companies in forest-risk supply chains found that the leather industry was the worst performing when it comes to commitments to address tropical deforestation. Published by nonprofit Global Canopy, the analysis showed that more than 80% of the 64 most influential companies assessed for leather in the 2019 Forest 500 annual report had no commitment to source deforestation-free leather.

If biodiversity is not quickly tackled, "physical, transition and litigation risks affect real economic activities, which in turn affect financial institutions," the Dasgupta report said. "These impacts can occur directly, for example lower profitability or the devaluation of assets, or indirectly through macro-financial changes."