SUSTAINABILITY IN GREEN FINANCE/ COMBINING CLIMATE- AND NATURE RELATED FINANCIAL DISCLOSURES

Climate change and biodiversity loss are inherently intertwined and tackling these twin crises together will give us a better chance at achieving the Paris Agreement climate goals and the Kunming-Montreal Global Biodiversity Framework goals.

by Dr. Rossa Donovan, Technical Director, Nature Positive Dr. Robert Charnock, Director, Metis Institute for Climate Change

Danielle King, Head of Climate Strategy, RSK Centre for Sustainability Excellence

Weiting Liu, Graduate Climate Consultant, RSK Centre for Sustainability Excellence

We live in unprecedented times. The latest UNEP Emissions Gap Report 1, having analysed the updated national pledges since COP26, has concluded that there is currently no credible route to get to the 1.5 °C global warming target set by the Paris Agreement. Their analysis shows that policies currently in place around the globe will lead to a 2.8 °C temperature rise by the end of the century and that if all current pledges are implemented, this will be limited to a 2.4-2.6 °C temperature rise. The report goes on to conclude that urgent system-wide transformation is required to reduce greenhouse gases by 45% by 2030 to give us any chance to reach the 1.5 °C target.

Human activity is also eroding the world’s ecological foundations. The unprecedented growth in economic output, life expectancy and reduction in poverty over the last 50 years is mirrored by the unprecedented decline in the natural systems that underpin life on Earth. Human activities have already severely altered 75% of land and 66% of marine environments 2. Approximately 25% of plant and animal species are threatened by human activity, with a million species facing extinction, many within decades, and ecosystems have declined in size and condition by 47% globally compared to estimated baselines 2.

A recent study by Swiss Re 3 estimates that the world economy is set to lose up to 18% of GDP from climate change by 2050 if no action is taken. Economies in Asia would be the hardest hit, with Singapore at risk of losing 46% of GDP in a severe scenario and China 24%, while the world’s biggest economy, the US, predicted to lose 10% and Europe 11%. By comparison, research by the World Economic Forum 4 estimates that $44 trillion of economic value generation – more than half of the world’s GDP – is moderately or highly dependent on nature and its services and is therefore exposed to nature loss.

In response to the climate crisis, and partly driven by legislation, many companies have begun to address their impacts on climate by measuring their carbon footprint, setting science-based targets to get to net zero carbon and disclosing the financial risks that climate change poses to their companies using tools such as the Taskforce on Climate-Related Financial Disclosures (TCFD) framework. Having formulated their decarbonisation plans, leading companies are now turning their attention to biodiversity and beginning to develop strategies and plans that consider not only direct impacts and dependencies within their financial or operational control, but also their indirect impacts and dependencies (i.e., those that sit within their value chain).

Many companies rely on complex supply chains (and less complex distribution chains) to generate profit, and more so than ever, these supply chains are often global. Raw materials often extracted in biodiversity hotspots across the world are processed and turned into products that are then shipped around globally to generate profit elsewhere. While carbon emissions, due to their release into the atmosphere, have a global impact, the destruction or loss of biodiversity results in local impacts, albeit with global repercussions. Many companies are beginning to understand this and are therefore starting to give biodiversity the same attention that they have been doing for GHG emissions. Fortunately, our understanding of how to assess and evaluate a company’s global biodiversity footprint has come on a long way in recent years and it is now, like carbon, possible to set science-based targets for nature (SBTN) and to disclose the financial risks that biodiversity loss poses to companies by following the Taskforce on Nature-Related Financial Disclosures framework.

Because companies have already begun their journey to net zero and are only starting on their journey to become nature positive, they have already grasped the nettle of preparing their TCFD disclosures but few as yet have begun to think about TNFD disclosures. By tackling these tasks separately, companies run the risk of overlooking the synergies between carbon and biodiversity, both from an assessment perspective but also from an action perspective. The work required to set SBTs for carbon requires an in depth analysis of not only a company’s direct operations, but also an analysis of that company’s value chain. This often involves trying to map Tier 1 and Tier 2+ suppliers to understand their activities, energy use and carbon emissions. Similar information is required when setting SBTs for nature or reporting through TNFD, and because climate change has an impact on nature, GHG emissions are required as input data for both SBTNs and TNFD. In addition, once companies have taken all the action they can to reduce their GHG emissions, they will, inevitably, have to offset their residual emissions to achieve net zero. In most cases this will involve planting trees or other habitats equal in value to the carbon emissions.

Tackling carbon and biodiversity together makes sense, whether setting SBTs or disclosing the financial risks that either of them pose. By taking a more holistic and less siloed view, companies will be able to take advantage of the synergies that exist between nature and carbon, and the assessment needs of both. This will result in a more integrated strategy which will be easier to embed in existing business strategies and processes, is likely to reduce reporting and assessment time and costs, and will require less governance than if dealt with separately.

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