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Nature takes root on the balance sheet

Without question, nature is an even bigger issue than climate change. After all, climate change accelerates as nature is harmed.

Tree roots

This article originally appeared in the State of Green Business 2021. You can download the entire report here.

ESG issues continue to gain prominence, with climate change getting the most attention today. We see customers demanding action on carbon emissions, investment firms structuring new green products and governments developing regulations to support the transition to a sustainable future. This has led to a strong focus on two main sectors: energy and transportation.

Of course, moving to renewable energy wherever possible and reducing emissions across cars, shipping and aerospace are important initiatives. If the focus remains narrow, however, all other patterns of consumption will stay the same. This will have a tremendous impact on nature that, in turn, will affect businesses and the global economy.

As with climate-related risks, nature-related risks need to be better understood and acted upon. The World Economic Forum analyzed 163 industry sectors and their supply chains and found over half of the world’s GDP is moderately or highly dependent on nature and its services. Highly dependent industries generate 15 percent of global GDP ($13 trillion), while moderately dependent ones generate 37 percent ($31 trillion). Despite this reliance, human behavior continues to push species into extinction, reduce the world’s acreage of forests and deplete the water supply.

The Financial Stability Board recognized that climate change presents a financial risk to the global economy. By creating the Task Force on Climate-related Financial Disclosures (TCFD), a framework is in place for organizations to better understand and report on these risks. This increased awareness is helping companies make more informed strategic decisions, while also providing better access to capital by increasing investors’ and lenders’ confidence that a company’s climate-related risks are being appropriately assessed and managed.

The TCFD provides a framework to help understand and report on nature-related risk, but only in climate terms. Its framework excludes areas such as plastics in the oceanic food chain and the loss of soil fertility. In response, a Task Force on Nature-related Financial Disclosures (TNFD) will be launched in 2021 to operate alongside the TCFD. The aim is to translate nature-related risks into financial terms and help redirect flows of finance towards nature-positive activities.

Over half of the world’s GDP is moderately or highly dependent on nature and its services.

Valuing the economic benefits of nature is a complicated undertaking, but some firms have been taking steps to tackle the challenge. Puma, a leading sports lifestyle company, believes that businesses should account for and ultimately pay for the cost to nature of doing business. It recognizes that these costs could hit the financial bottom line as a result of new government policies, environmental activism, consumer demand or a growing scarcity of raw materials.

Back in 2011, the company worked with Trucost to develop an environmental profit and loss (EP&L) account to help measure and manage environmental impacts across its operations and supply chain. An extension to this analysis helped assess the environmental impacts of a product at each stage of its lifecycle, from the generation of raw materials and production processes all the way to the consumer phase when the owner uses, washes, dries, irons and ultimately disposes of a product. The work helped Puma realize the value of nature’s services, without which it could not sustain its operations.

The Dow Chemical Company is another example of a company that is taking action. Its 2025 sustainability goals include one for valuing nature, which is a commitment to consider nature in all business decisions. The valuing-nature goal builds on work that began in 2011 in partnership with The Nature Conservancy.

Scientists, engineers and economists from both organizations have worked together to create tools to assess the various services that nature provides to Dow’s operations and the community, including water, land, air, oceans and a variety of plant and animal life. But much more is needed. While certain steps are being taken, it is important to ask what really has been accomplished to date.

According to a 2020 report by the World Wildlife Fund, nature is worth $125 trillion, but humanity’s increasingly destructive behavior is having catastrophic impacts. The report points out that human activities have caused the world’s wildlife populations to plummet by more than two-thirds in the last 50 years. In addition, marine ecosystems have been negatively affected through overfishing and pollution, and deforestation is increasing the abundance of carbon dioxide in the air.

Without question, nature is an even bigger issue than climate change. After all, climate change accelerates as nature is harmed.

As the TNFD is launched, more information should become available to better understand the monetary value of nature. Once nature firmly takes root on the balance sheet, more companies likely will make investments that will help heal the natural ecosystem and preserve the world’s wealth.

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