Nature risk is the next challenge that demands a global solution

May 20, 2022It took decades for the world to understand, accept, and begin acting in a coordinated fashion to address the risks of climate change. By contrast, risks associated with nature loss have been less understood and discussed, although nature is degrading at rates outside human experience. The World Economic Forum ranks biodiversity loss as the third largest global risk over the next ten years.¹ Government and business leaders do not have decades to gradually get used to the problem and take action. Instead, nature-related risks are an issue that needs to be studied and addressed now.²

On March 15, the Taskforce on Nature-related Financial Disclosures (TNFD),³ 34 senior executives from financial institutions, corporates and market service providers with a market capitalization of $3.1 trillion, took a step forward by publishing a draft framework on how to address nature-related risks and opportunities. Vivid Economics, a McKinsey-owned company, supported the TNFD to develop this. The framework is a set of fundamental concepts and definitions for understanding nature-related risks that the TNFD recommends market participants use.⁴ Modeled on the Task Force on Climate-Related Financial Disclosures (TCFD) framework,⁵ which was released in 2017 and set the global standard for climate disclosures, the TNFD draft is intended to be the single, globally coordinating framework for how businesses report and act on nature-related risks and opportunities.

This initiative comes on the heels of a growing number of government representatives and climate change experts who talk about a “nature-positive” transition in the same breath as “net-zero.” Private sector groups are also committing to nature-impact targets in addition to making decarbonization pledges. For example, in February 2022, BlackRock, the world’s largest asset manager, said it may not support the re-election of board directors if companies had not “effectively managed, overseen or disclosed” risks associated with nature loss.⁶

The release of the draft framework is a signal to the world that the race to act on nature-related risk is on.

What are nature-related risks and opportunities?

Nature-related risks and opportunities encompass several dimensions. Physical risks refer to physical changes to the planet from the loss of nature, such as the one million species that are currently at risk of extinction. For example, if honeybee populations are reduced or eliminated, more than $50 billion a year in the US crops that depend on their pollination will be at risk.⁷ There are also transition risks and opportunities, such as regulations or costs that are introduced as a result of efforts to mitigate nature loss.⁸ An example would be a country tightly regulating commercial activity that contributed to pollution in order to protect the local ecosystem, which would create additional costs of compliance for businesses.

How does nature-related risk compare to climate-related risk?

Nature loss is closely linked to climate change, such as in situations where the changing climate negatively affects an ecosystem or species. But nature-related risk is not the same thing as climate-related risk, because damage to natural assets can also be unrelated to climate change.

Nature-related risk is in many ways a more difficult problem to address than climate change. It has no single unit of comparison, whereas GHG emissions are measured in tonnes of CO₂. The world doesn’t have a single goal such as limiting global warming to 1.5 degrees Celsius; coral reefs and rainforests are both critical for our planet but are important for different reasons in different areas of the world. The physical impacts of nature loss will not be distributed equally, and countries will respond in different ways. Under ambitious scenarios to halt and reverse biodiversity loss, risks and opportunities affect almost all sectors across the economy, and for some, are of a scale comparable to climate.

While there is much in common and much to learn from the climate change effort, key differences will require new thinking, data, and tools.

Net zero and nature positive

Political statements made during the most recent G7⁹ and G20¹⁰ meetings, at the COP26,¹¹ and by the Network for Greening the Financial System (NGFS) representing 114 central banks and financial supervisors¹² showcased a newly popular phrase: the “net zero and nature-positive transition.” This language underscores how government representatives and climate change experts increasingly recognize the importance of protecting and restoring natural capital and its tie to climate change.

UN leaders, civil society groups, and the business community express hope that the Convention on Biological Diversity (CBD) COP15, which will be hosted by China later this year, will be a turning point for global action on nature,¹³ as the Paris Agreement was for climate.

Policy ambition is matched by rising private sector action. Under the Finance for Biodiversity Pledge, 89 financial institutions managing over €13 trillion in assets have committed to set targets on their impacts on nature and periodically report on progress.¹⁴ At the same time as COP26, nearly 100 high-profile United Kingdom companies committed to becoming “nature positive,”¹⁵ joining global giants such as GSK¹⁶ and Holcim¹⁷ that are working with environmental leaders to transform their operations.

What is in the TNFD and how will it work?

The TNFD draft framework lays the foundation for how businesses across the world will be expected to manage and disclose their actions on nature. The TNFD is built on the same architecture as the TCFD framework, with disclosures organized around four key pillars: governance, strategy, risk management, and metrics and targets. To help companies get started, the draft framework lays out a four-step process, LEAP, to assess risks and opportunities relevant to their operations: (i) Locate the company’s interface with nature; (ii) Evaluate dependencies and impacts; (iii) Assess risks and opportunities; and (iv) Prepare to respond and report.

How is the TNFD draft framework different from the TCFD?

While there are similarities between the TNFD and the TCFD, there are also key differences that will require a change in approach. In particular, the TNFD draft framework asks companies to do the following:

• Assess and report on how company operations impact and depend on nature, in addition to financial risks and opportunities. Companies need to look across various dimensions, examining how business processes or investments depend on local ecosystems in specific geographies and assessing total operational impact on biodiversity and other forms on nature.
• Collect and work with a broader range of data. Data sources include physical natural science data (to understand and transparently report on the health of ecosystems that operations impact and depend on), geospatial data on the location of an organization’s assets, and operations (especially for nature-intensive industries such as agriculture), and scenarios of how nature-related regulation may evolve in the future.
• Ensure approaches to climate and nature are fully integrated. Companies should pay particular attention to de-risking their climate transition strategies for nature-related risk, and to capturing synergies between the two efforts.

In the private sector, companies have already developed ambitious pathways for organizational change in their response to climate change. Leveraging this experience will be critical to getting ahead on nature-related risk. In March 2022, Vivid Economics published an Integrated Transition Framework¹⁸ that financial institutions and corporations can follow to navigate both climate-related and nature-related risks and opportunities in an integrated way.

Following the climate standards-to-regulation blueprint

The TNFD effort is aligning with and shaping a broader movement towards the inclusion of nature into emerging disclosure standards and eventually regulations. The draft framework’s consistency with guidelines set by the new IFRS International Sustainability Standards Board¹⁹ (which consolidated several leading standard-setters) makes it simple for the framework to be integrated into a future disclosure standard. If the details of the framework are adopted by a global standard, there will be a concrete way to verify if companies have followed the process. In turn, if financial supervisors integrate nature-related disclosures into mandatory regulation, there will be a reliable method to measure whether a company was compliant.

The experience of climate disclosures demonstrates that once standards are drafted, regulation can be rapidly enacted. Now that climate has laid the blueprint, nature-related disclosure standards may be translated into regulations even faster.

How can businesses and financial institutions act now?

Companies that curb their negative impacts on nature, build resilience across their value chains, and develop nature-positive aligned products will enjoy lower risks, stronger growth opportunities, and increasing market share. Here are three actions early movers can take today to position themselves for success:

• Set targets to align operations with global nature ambition. Companies should start by developing impact measurement protocols, drawing from emerging frameworks such as the TNFD’s draft and the Science-Based Targets for Nature.²⁰ Early and voluntary moves offer the opportunity to signal ambitious action to consumers and investors, while ensuring future growth plans are consistent with developing global regulation.
• Develop strategies to build new green businesses and service lines. The nature-positive transition will create opportunity for growth in key sectors. For example, the global market for alternative proteins is expected to grow fifteen-fold by 2030 and fifty-fold by 2050, and recent reports suggest that annual investment in nature-based solutions to climate change will need to triple by 2030 and reach over $500 billion by 2050.²¹
• Integrate nature into risk-management frameworks and disclosure practices. By remaining in touch with key regulatory developments such as the European Commission’s proposal for a Corporate Sustainability Reporting Directive,²² leading businesses can strategically develop their nature-related protocols. Companies should have compliant systems for assessing which parts of nature they are most reliant and impactful on and put plans in place to mitigate the impact of potential disruptions or costs.

* * *

It took decades for the world to wake up to the climate change crisis and begin taking serious action. The nature crisis cannot follow the same timeline; it is an emergency that demands action now. Fortunately, many of the standards, frameworks, and regulatory systems that were developed for climate can be adapted to nature, which is now occurring. Companies that embrace the imperative to understand the issue and move swiftly and decisively will best position themselves to manage nature-related risks and opportunities and gain most from the net-zero and nature-positive transition.

_{1 https://www3.weforum.org/docs/WEF_The_Global_Risks_Report_2022.pdf
2 https://publications.banque-france.fr/en/silent-spring-financial-system-exploring-biodiversity-related-financial-risks-france, https://www.dnb.nl/media/4c3fqawd/indebted-to-nature.pdf
3 The TNFD is a network of companies and financial institutions which is funded by the United Nations, national governments, and nonprofit groups. The 34-members of the taskforce are from financial institutions, businesses, and market service providers with operations in over 180 countries.
4 https://www.wsj.com/articles/quantifying-companies-impact-on-forests-oceans-is-a-challenge-11647349201
5 https://www.fsb-tcfd.org/
6 https://www.blackrock.com/corporate/literature/publication/blk-commentary-engagement-on-natural-capital.pdf
7 https://www.weforum.org/agenda/2020/08/loss-of-bees-threatens-us-crop-yields
8 https://c402277.ssl.cf1.rackcdn.com/publications/1255/files/original/WWF_Nature_of_Risk.FINAL2.pdf?1568216828
9 https://www.g7uk.org/wp-content/uploads/2021/06/G7-2030-Nature-Compact-PDF-120KB-4-pages.pdf
10 https://www.unep.org/news-and-stories/press-release/g20-leadership-required-catalyze-private-capital-inflow-nature-based
11 https://tnfd.global/news/after-cop26-nature-positive-set-to-become-key-component-of-net-zero/
12 https://www.ngfs.net/en/communique-de-presse/ngfs-acknowledges-nature-related-risks-could-have-significant-macroeconomic-and-financial
13 https://www.theguardian.com/environment/2021/dec/30/super-year-for-nature-is-on-hold-again-but-how-long-can-planet-wait-kunming-aoe
14 https://www.financeforbiodiversity.org/launch-the-pledge/
15 https://spnews.com/british-businesses-pledge-naturepositive/
16 https://www.gsk.com/en-gb/media/press-releases/gsk-sets-new-environmental-goals-of-net-zero-impact-on-climate-and-net-positive-impact-on-nature-by-2030/
17 https://www.holcim.com/holcim-launches-nature-positive-strategy
18 https://www.f4b-initiative.net/_files/ugd/643e85_5cf34c0215a2426c98ec69c48df4a47c.pdf
19 https://www.wsj.com/articles/global-accounting-organization-launches-climate-disclosure-rule-maker-11635936301
20 https://sciencebasedtargets.org/about-us/sbtn
21 https://www.unep.org/news-and-stories/press-release/world-needs-usd-81-trillion-investment-nature-2050-tackle-triple
22 https://ec.europa.eu/info/business-economy-euro/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en}