by Jillian Button, Victoria Costa and Tiana Macleod · 26 March 2024
The nature-related financial impacts are real
There is scientific consensus that nature is in a state of decline, and increasing recognition that this decline poses risks to the global economy. According to the World Economic Forum, $44 trillion of economic value generation—over half the world’s GDP—is moderately or highly dependent on nature.
Biodiversity is declining faster than ever before in human history. Addressing this decline will require a whole-of-society approach, including from the private sector, and organisations should be responsive to the increasing regulatory and stakeholder expectations in relation to nature and biodiversity.
With the release of the final recommendations of the TNFD and other developments focusing on better protecting nature (such as the adoption of the landmark Kunming-Montreal Global Biodiversity Framework, and in Australia, the Federal Government's Nature Positive Plan), companies around the world are taking steps to better understand their relationship with nature and biodiversity (see more details in our Insight). This involves consideration of both nature-related risks and opportunities–for instance:
- how the company's nature-related dependencies (eg, on water supply, pollination or carbon sequestration) and impacts (eg, by causing or contributing to habitat loss or soil erosion) may pose material financial risks to the company; and
- how the business might seek to harness nature-based opportunities (eg, by investing in nature-based solutions and participating in biodiversity markets such as Australia's recently established Nature Repair Market).
How is the company addressing biodiversity in its strategy, risk management and capital allocation?
Most corporates and capital providers currently have a limited understanding of their nature-related dependencies and impacts, meaning they are likely to be inadequately accounting for nature risks and opportunities in their strategy, capital allocation framework and decision-making.
The growing spotlight on nature will put greater pressure on boards to oversee their organisation's preparation for a more orderly transition to nature-related transparency and management. Boards should consider their organisation's holistic response to nature and how it can more proactively embed nature (as appropriate, having regard to materiality) into strategy, risk management and governance frameworks.
What are the risks to be aware of?
Failure to appropriately identify and manage nature-related risks arising from a company's impacts and dependencies on nature may give rise to serious consequences for companies, including: financial loss, supply chain disruptions and missed investment opportunities. Boards should also be alive to how existing corporate reporting obligations apply to nature, for example by seeking to ensure that material nature-related risks are adequately disclosed in an organisation's Operating and Financial Review, and for ASX listed entities, in accordance with continuous disclosure obligations. Consideration should also be given to the interface between nature-related risks and opportunities and directors' duties and duties under industry legislation such as the Superannuation Industry (Supervision) Act 1993 (Cth) and Banking Act 1959 (Cth). Failure to adequately account for nature-related risks and opportunities in business operations will likely attract scrutiny from stakeholders, with shareholders already taking action on nature-related matters, which may result in reputational damage and increased litigation risk.
Directors will also need to have regard to nature-related risks when considering whether any financial statements prepared by a company present a true and fair view of the financial position of the company. Guidance published by the Australian Accounting Standards Board provides that entities preparing financial statements should consider: whether investors could reasonably expect that climate-related risks / emerging risks could affect the amounts and disclosures reported in the financial statements; and what disclosures about the impact of these risks on the assumptions made in preparing the financial statements are material to the financial statements, for the purpose of determining relevant disclosures. This guidance is equally applicable to nature-related risks.
What is next for boards?
With increasing focus and expectations from stakeholders, nature and biodiversity should be firmly on boards' agendas and considered alongside the organisation's management of climate-related risks and opportunities.
- A new opinion issued by barristers Sebastian Hartford Davis and Zoe Bush clarifies that directors should take practical steps to ascertain the materiality of nature-related risks relevant to their organisation and discharge their directors' duties accordingly.
- Boards should also consider how value can be created through nature-related opportunities relevant to their organisation, including through the voluntary national market established under the Nature Repair Act 2023 (Cth) which is intended to deliver improved biodiversity outcomes.
Elevating nature as a priority will also support boards in preparing their organisations for the foreseeable expansion of sustainability-related regulations to cover nature. For example, the Australian Government has already indicated that a number of climate-related proposals may be expanded to apply to nature in the future, including the proposed mandatory climate-related financial reporting regime.