Nature-related risks, opportunities and disclosures

What are nature-related risks, and how is this relevant to investors?

Nature provides essential ecosystem services for businesses and society. Healthy and stable ecosystems provide essential resources, including food, fibre and fuel. They purify the air we breathe, maintain healthy soils, improve community wellbeing and increase resilience to extreme events. The assets that underpin these services are sometimes called ‘natural capital’. According to the Sustainable Business Council, 70% of Aotearoa’s entire export earnings depend on natural capital.

Globally, more than half the world’s GDP (US$44tn) is moderately or highly dependent on nature and its services according to the UN Principles for Responsible Investing. The critical role nature plays in sustaining the global economy prompted the World Economic Forum to include major biodiversity loss and ecosystem collapse as one of the top five risks in the next 10 years in its 2020 Global Risks Report.

In its first Global Assessment Report, the Intergovernmental Science-policy platform on Biodiversity and Ecosystem Services (IPBES) found that around one million species are currently threatened with extinction, and biodiversity is declining at a rate unprecedented in human history. In Aotearoa, we have already lost 59 species of birds since first human contact. In 2020, the Department of Conservation estimated that around 5000 species are threatened or at risk of extinction. Because nature is ‘free’ it is often taken for granted, however this rapid ecosystem degradation and biodiversity loss is creating significant risks for businesses here and around the world.

“New Zealand’s growth model, largely based on exporting primary products, has started to show its environmental limits, with increased greenhouse gas emissions, diffuse freshwater pollution and threats to biodiversity.”

OECD Environmental Performance Reviews: New Zealand 2017

A te ao Māori lens

Aotearoa’s indigenous culture makes us uniquely positioned to tackle nature-related risk. Te ao Māori is reflected in kaitiakitanga, which refers to the ability of humans to protect and care for nature, and in turn be provided and cared for by nature in a mutualistic way. Incorporating te ao Māori principles, such as kaitiakitanga, into business operations can enable organisations to become better environmental stewards. Through the te ao Māori lens, businesses can take a holistic lens to understand their place in the natural world.

How NZ businesses are applying the Taskforce on Nature-related Financial Disclosures (TNFD)

As many organisations start to consider Nature impacts and apply the TNFD recommendations, many are finding that nature is a very complex issue in terms of impact, dependency and risk to their business.

Learn how nine of NZ’s biggest companies are working through the TFND process to understand what it means for their business, and in the New Zealand context applying a Te Ao Māori worldview.

15/12/23

Nature-related risks and opportunities

Frameworks such as the Taskforce on Nature-related Financial Disclosures (TNFD) are being developed to support organisations to understand their nature-related risks, and make the most of opportunities, in a systematic way. Businesses that seize the opportunity to align with the principles of the TNFD can build sustainable value and resilience in their operations and supply chains, as well as boosting stakeholder confidence and managing growing regulatory risk.

Nature risks become material for businesses in three ways:

When businesses depend directly on nature for operations, supply chain performance, real estate asset values, physical security and business continuity

When the direct and indirect impacts of business activities on nature loss can trigger negative consequences, such as losing customers or entire markets, legal action and regulatory changes that affect financial performance

When nature loss causes disruption to society and the markets within which businesses operate, which can manifest as both physical and market risks.

Physical impacts of biodiversity loss can directly impact financial performance, with direct operational impacts or supply chain disruption. For example, according to Nature Risk Rising, a report published by the World Economic Forum with PwC in 2020, 60% of coffee varieties are in danger of extinction due to a combination of climate change, disease and deforestation. These extinctions could destabilise a sector with retail sales of $83 billion in 2017, affecting communities and the livelihoods of many smallholder farmers.

Industries such as agriculture, forestry, seafood and construction were all rated as highly dependent on ecosystem services in Nature Risk Rising. A number of other industries, including electricity, water utilities, tourism and real estate, were also considered to have high or medium dependence on ecosystem services via their supply chains.

Transition risks, which may arise if an organisation’s strategy is not aligned with government or international action to reverse ecosystem decline, can impact access to financing, market access or reputational loss. In addition, strong action targeting particularly damaging industries can lead to wider systemic risks with potentially market-threatening impacts.

Just like storms, floods, heatwaves and sea level rise, nature-related damage, such as habitat destruction, invasive species and species loss/collapse can also disrupt value chains, impair operational performance and reduce asset value. Physical risks can be:

Commodity risks - Nature is a key contributor to your business’ production processes
Supply chain performance risks - Nature is critical to the performance of your supply chain
Damage and business continuity risk - Nature provides the stable conditions (i.e. physical security against acute and chronic events) necessary for your business’ operations and continuity

Business value risk - Nature enables the conditions necessary for maintaining the value of your business (for example nature loss can give rise to real estate asset repricing).

Increased policy and regulatory intervention in response to nature loss could see some sectors of the economy face shifting asset values (for example stranded assets due to legislation change), or higher costs of doing business for companies with a high environmental footprint (for example in response to subsidy removals or new taxes and fees). Laws, policies, regulations and court actions which may affect business operations include:

Standards/certifications
Moratoria/bans/fines on access
Taxes and fees
Subsidies
Tradable permits and resource quotas
Trade directives
Payment schemes
Emissions pricing
Changes in disclosure requirements
Changes in liability schemes

Companies can also face risks to business from emerging products/services, technologies and business models aimed at mitigating nature risks. Likewise, market risks arise from shifting supply and demand patterns, as consumers and the market react to nature risks.

Shifts in public sentiment mean that companies face reputational risks. Customers, clients, and the wider public seeking to reverse nature loss may shop or invest accordingly or hold companies accountable for environmental degradation. This can result in lower brand value, loss of customer base and profits and/or further increases in insurance premia.