Biodiversity on the Rise Amid ESG Policy Developments

An environmental issue for many years, biodiverisity has risen in importance in “E” discussions since 2020. It was further underscored during the UN’s COP 15 meeting late last year. In this Insight we describe where policy discussions are going in light of the climb in global atmospheric carbon levels and describe biodiversity for those unfamiliar with it.

Policy Developments and Standards

Several leading organizations are working on standards and/or regulations to define biodiversity and ecosystem support.

The Global Biodiversity Framework is a non-binding, multi-national plan signed in December that includes several points for ecosystem set-asides. It calls for effective conservation and management of at least 30% of the world’s land and water ecosystems by 2030 (a.k.a., the 30 x 30 plan) with emphasis on areas of importance or uniqueness for biodiversity and ecosystem functioning. This would be an increase from ~17% and ~10% of the world’s land and marine areas, respectively, currently under protection.

The Task Force on Nature Related Financial Disclosures (TNFD) is a financial services advisory group representing more than $24 trillion in assets. TNFD recently released the fourth version of its proposed standards and disclosures framework, with formal adoption of disclosure rules expected later this year. The recommendations will be voluntary but are gaining momentum from policy makers to fund promulgation of the standards and stimulate regulatory discussions around the world.

The International Sustainability Standards Board (ISSB) was formed in late 2021 to develop a comprehensive baseline disclosure standard. A formalized list of Sustainability Disclosure Standards is expected later this year, with requirements expected to include the disclosure of operating impacts and risks related to ecosystems and biodiversity. In as much as jurisdictions such as the EU adopt the standards earlier than others, the ability to trade with those jurisdictions may impact international companies (even if not domiciled there). The ISSB effort will consider the TNFD work to help facilitate coordination across standard setters.

The SEC is expected later this year to formally require financial-statement disclosures of material climate-related risks, including greenhouse gas emissions and quantitative impacts on financial statement line items. Disclosures of both direct and indirect operational risks of climate change—seemingly both downside and upside—will also be required. This includes the impacts of consumer choices, supply chain disruptions, a shift to a low-carbon economy, or new regulations. While the proposed rules have been circulating for several months and do not specifically include biodiversity disclosures, many comments asked for their inclusion. So some mention may make its way into the final documents.

Given EPA budgets are significantly less than other departments in the US government, some environmentalists call for more money to be budgeted to develop and protect key areas. Because many unique and threatened biosystems are located outside the United States, additional funding for ecosystem preservation and recovery may also become more prevalent.

Rehabilitating degraded but recoverable ecosystems would help achieve the goal of greater conserved ecosystems. Steps could include reforestation, habitat development, or contiguous area expansion. Along these lines, restoration goals in last fall’s COP meetings included restoration of at least 30% of degraded global terrestrial, inland water, coastal, and marine ecosystems.

More areas that require additional measures to minimize impacts on biodiversity—or that should be avoided altogether—will be identified. Because some areas may require crossings due to lower carbon infrastructure needs, offsets in other areas (particularly contiguous ones) may become more viable policy paths rather than outright project denials.

Policy makers are becoming more nuanced in balancing the frequent tradeoffs between long-term global goals and regional assessments. And assessments are becoming more programmatic and uniform, in part because of legal challenges to prior oversight regimes.

A Primer: The Complexities of Biodiversity

Biodiversity is becoming more of a concern to investors, as evidenced in Figure 1 below from FactSet Document Search (which allows users to search for key words or phrases across multiple document types).

Figure 1: Rising Document References to Biodiversity

Source: FactSet 

For those less familiar with the term, we include below some descriptive information on biodiversity and its application. Biodiversity is usually described in one of four broad dimensions with numerous perspectives. Following are examples:

• Regional species counts: polar bears, rhinos, bees

• Ecosystem diversity within a region: swamp with fringe tree cover, palm oil or eucalyptus monocultural plantations, semi-arid with shade cover, and water resources

• Genetic diversity within a species: types of bees, birds, fish

• Unique ecosystems or unique species in an ecosystem: coral reefs, jungle canopies

Biodiversity impacts include habitat loss or fragmentation due to changes in temperature and precipitation. Temperature changes impact vegetation production and habitat structure—and even the expression of genes in some species. Moisture levels, too, impact environment and species development and survival rates.

For example, changes in the seasonal timing of flowering or migrations could in turn interrupt pollination, predator/prey relationships, the food chain in general, and reproduction rates. Most species will attempt to adjust or, if possible, move to a more satisfactory location. But barriers to migration or too-rapid ecosystem changes could also prevent survival.

Some may recall situations where biodiversity considerations significantly impacted industry. Examples include the Snail Darter in the 1970s, the Spotted Owl in the 1990s, and the Sage Grouse in the 2000s. A common denominator was the setting aside sufficient, unadulterated range in an ecosystem with interconnected parcels to stabilize the habitats.

On land, the biggest driver of biodiversity loss is habitat destruction and degradation, often because of farming. At sea, the problem is often overfishing. There is potential for more restrictions on cultivating virgin ecosystems and more marine areas with fishing restrictions. Policy makers in Brazil, for example, are working toward restrictions on land conversions in the Amazon basin.

The natural world could also face altered light patterns, water runoff, ocean acidification, soil degradation, and debris and chemical pollution throughout the lifecycle of new energy transition technologies. Some anticipated changes are a mix of negative and positive. So, yes, there could be biodiversity winners in, for example, a warmer, wetter ecosystem—better survival rates or more productive growing season for instance—but the focus is on what important elements may be lost directly or indirectly elsewhere.

Reducing food waste significantly would reduce the pressures to convert undeveloped environments to cultivated land. Transportation infrastructure, storage, transshipment facilities, and refrigeration can bring their own environmental issues but are typically the best solutions for reducing food waste in many less developed countries.

Metrics and Risks

The study of biodiversity concerns entails a commitment to quantitative measurements, which may take time to develop and make comparable across entities. Requirements under development will require large and international companies and financial institutions to monitor, measure, and disclose their impacts and risks on biodiversity through their operations, investments, and supply and value chains. Essentially additional requirements on a Scope 1- and 2-basis. Investors are clamoring for reported environmental metrics in general and are looking with interest to see how biodiversity will be measured.

With natural world risks gaining more attention, there are rising risks among companies deemed to have poor performance in supporting biodiversity. Those risks include mandated spending to defend existing operations, appeals to potential employees or customers, and even the right to operate in certain jurisdictions.

Biodiversity Tensions

Amid “E” discussions and regulatory proposals, there is a tense dichotomy: Biodiversity protection is often mentioned as an argument against energy-transition projects. For example, wind or solar farms, battery metals mines, biofuel production (newly planted acreage), electricity transmission lines, and pipeline infrastructure (to shift away from coal).

Investments are required to assist in reducing carbon emissions, but the investments can also require clearing large areas of undeveloped land and present risks of contamination and damaged ecosystems.

In Summary

As biodiversity rises in importance within climate change conversations, more disclosures will be required—albeit hopefully under more consistent standards and metrics. In addition, ecosystems and biodiversity-preservation projects are likely, even if not strictly for economic return. Corporations are at risk for litigation or project denials for not meeting guidelines. Yet they also have non-financial opportunities to support biodiversity projects for stronger brand perceptions, employee value propositions, and customer retention over time.

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