Confronting the rising risks of biodiversity loss

rising, risks, biodiversity, EU, law, landAn incoming EU law banning the sale of products made or based on land that was deforested shows how companies have to accelerate biodiversity policies, says Arne Philipp Klug, biodiversity director at MSCI.

Companies are learning that the catastrophic potential of biodiversity loss, whether from resource exploitation, pollution or greenhouse gas emissions, can no longer be ignored. Yet internal company policies to curb the destruction may no longer suffice as scrutiny from regulators and stakeholders increases significantly, pressuring companies and investors to accelerate their response to the problem.

As part of this evolution, we have seen growing demand for advanced tools to help investors better measure the impact and manage the risks associated with biodiversity loss.

Growing ecological threat

We know from December’s UN Biodiversity Conference (COP 15) in Montreal that biodiversity is the basis for functioning ecosystems, and its deterioration presents essential risks to people and global economies.

More than half of global GDP depends moderately or heavily on intact nature and its so-called ecosystems services, the World Economic Forum estimates. These include, for example, fertile soil formation, raw material provision, carbon storage, air and water purification, and erosion and flood protection.

But these “free services” are at risk. According to the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services, 75% of all terrestrial ecosystems and 66% of oceans are threatened by massive human intervention.

As a result, policymakers are intensifying their focus on biodiversity loss and its consequences. In Montreal, almost 200 countries agreed on a new biodiversity framework with specific goals to protect nature. If these were to be converted into national laws, companies and investors to tackle biodiversity loss could significantly increase.

The European Union Taxonomy and Sustainable Finance Disclosure Regulation already includes biodiversity reporting requirements. Additionally, the draft of its European Sustainability Reporting Standards contains even more detailed obligations such as a company’s impact on threatened species or a breakdown of nature dependencies, risks and opportunities by specific site location. In December, the EU agreed on new regulation to promote deforestation-free supply chains.

Forests are essential for our planet’s ecological balance and for our economy. However, in the past two decades, the world has seen tree-cover loss of 436 million hectares — an area almost twice the size of Algeria, according to Global Forest Watch/World Resources Institute research. Continued deforestation, therefore, represents a significant threat to the planet and to profits.

Once the regulation is adopted and applied, companies would need to ensure that their products sold in the EU are deforestation-free. No product could enter the EU market if made or based on land that was deforested after 2020.

And the list of regulated commodities goes beyond the expected main drivers of forest loss, such as palm oil, soybean, beef and timber. It also includes coffee, cocoa and rubber as well as derived products such as furniture, leather car seats and chocolate. Companies wanting to sell products in the EU would be required to establish a due diligence system and collect geographical data on the farmland where the commodities have been cultivated.

Gauging risk, identifying opportunity

Tools have been developed that overlay biodiversity information onto geospatial data with the aim of isolating risks and identify opportunities resulting from biodiversity loss.

The intention is to enable investors to identify companies that have physical assets located in areas of high biodiversity relevance, such as healthy forests, prime areas for conservation, deforestation fronts or species-rich areas.

Integrating location data can also help pinpoint companies exposed to deforestation-related risks, including those that may directly or indirectly contribute to deforestation. The exposure could be a result of direct operations in areas of risk, such as the tropics, or by the production or reliance on the commodities considered key drivers of deforestation.

Ultimately, investors need data to help them, improve reporting to stakeholders and enable better engagement with companies.

*Arne Philipp Klug is biodiversity director at MSCI.

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