In the past few years, the financial industry has been coming to terms with the fact that there’s a link between taking care of the environment and its own economic well-being, with banks, investors, and insurers now urging companies to disclose nature-related risks.
According to the World Economic Forum (WEF), $44 trillion of the world’s economic output depends on animals and ecosystems, and their demise would also mean financial trouble for the companies that seem to have taken them for granted until recently. For instance, insects pollinate commercial farmlands, wetlands purify water, and coral reefs protect buildings from coastal damage. If these ecosystems are destroyed, corporations stand to lose, too. Biodiversity loss, according to the WEF, presents the third most severe risk to the economy in the next three years. Doing nothing about climate change and extreme weather top the list of dangers as well.
Financial companies have begun taking steps to disclose risks to the environment. The Taskforce on Nature-related Financial Disclosures (TNFD) drafted a template in March for reporting biodiversity impact, the goal of which is to redirect money from companies that rely on and often destroy nature to companies that don’t, or do so less, Lucian Peppelenbos, a climate strategist at the investment firm Robeco, told Vox.
But right now, quantifying impact is messy, confusing, and not standardized. And the scientific foundation for what ecosystems are and how they affect industry is complex. A decrease in insects that pollinate crops, for example, could mean that a food company would have to buy bees instead, imposing additional costs. Or, harming the environment could have negative effects on a company’s reputation, which is aligned with its share price. There is also what’s called transition risk, Vox reports, which encompasses expensive changes in plans based on environmental impact.
This complexity makes it difficult to implement successful measurement strategies, according to Partha Dasgupta, an economist at Cambridge University who wrote a well-known paper in 2021 on the economics of biodiversity.
Good first steps include consolidating existing tools and creating new and better ones. The nature-related risk measurement systems that corporations now have in place fall under the loosely-defined Environmental, Social, and Governance (ESG) criteria.
“I think it’s going to be a mess for a while,” said Aled Jones, a professor of sustainable finance at Anglia Ruskin University. “But we will make progress on disclosure.”
