Climate and greenhouse gas emissions have been at the forefront of risk and investor conversations around the environment but recently biodiversity and nature have been working their way into corporate commitments. And investors have started to take notice. Last month, a report on the credit implications of natural capital from Moody’s Investor Service clearly indicates that nature has landed on the institutional investor’s desk.
In 2020 the World Economic Forum reported that $44 trillion of economic value relies on nature. Moody’s September report put another number to that value specifically focusing on the business community. It outlines $1.9 trillion in rated debt for nine sectors that have "high" or "very high" exposures to natural capital risks — and describes a further 24 industries that moderately rely on nature-based capital as having a combined $9.6 trillion in rated debt.
Here are three things institutional investors and others in the business community should know about nature-related risks from Moody’s report.
1. Extractive industries are the most at risk
According to Moody’s, the industries that rely on nature the most are the most at risk. Sectors such as mining metals and other materials (excluding coal) had many businesses in the "very high risk" segment, as well as the oil and gas industry. Ranching and agriculture is another category that relies heavily on nature and thus is at "very high risk" if nature starts to deteriorate, Moodys’ said. Other at-risk sectors include forestry, fishing and tourism, which are integrated into natural ecosystems, in addition to construction businesses that rely on limestone as a building material. These businesses will either be on the frontlines of the battle to protect nature or its first victims.
2. Measuring nature is hard, so the regulatory frameworks will be complex
It may seem ridiculous to call measuring CO2 emissions easy, but when you compare it to the variability and nuances of natural assets, suddenly carbon looks like a piece of cake. Greenhouse gases have an agreed-upon metric for tracking progress that is easily measured: carbon in the atmosphere. And it has a simple goal everyone is working towards: net zero.
Every industry needs to be ready for the time, resources and expertise it will require to evaluate nature.
Nature and biodiversity do not. The Moody’s report points out that there is no equivalent metric or goal for gauging risk or success in this space; each location is unique, and success or failure will look different. For example, it’s harder to evaluate the return to a healthy habitat for a lake, river or forest; there isn’t just one metric for that. Instead, scientists would have to aggregate many indicators including water quality, soil quality and the number of species. Therefore the policies, methodologies and regulatory frameworks for measuring that success or failure will be even more nuanced and complex than the ones for carbon emissions. My conclusion from reading this report: Every industry needs to be ready for the time, resources and expertise it will require to evaluate nature.
3. Investors and businesses need to shift their mindset
The prevailing attitude towards operating a business in the past was to "do no harm," but as the climate crisis has become more acute, the focus has shifted to "actively doing good," according to the Moody’s report. Therefore, businesses and investors need to be working on solving the problems that they created, especially in the face of slow action by governments, it concludes. In addition, investors and business leaders need to start looking at the long-term health of the planet, not just the short-term outcomes of their businesses. Finally, according to Moody’s, investments and corporate projects that enhance nature and impact biodiversity positively will be the future of good business.