The Solutions to Biodiversity Loss are Not Simple

Because of risks this poses, organizations are increasingly expected, and in some instances required, to disclose their biodiversity impacts and dependencies. That’s where the Taskforce on Nature-related Financial Disclosures, or TNFD, could play a role.

The TNFD framework, launched on Sep. 18, is a set of disclosure recommendations and guidance for organizations to report and act on evolving nature-related risks and opportunities.

It is Difficult to Decide How Exactly to Tackle Nature-Risks

Sophia Cheng, chief investment officer at Cathay Financial Holdings emphasizes that having the TNFD framework that is backed by science-based research and analysis is a crucial step forward to maintaining healthy dialogues among different stakeholders.

“In recent years, I have come to realize that scientists are now more eager than ever for their research work to be adopted by the real commercial world. Simultaneously, the commercial world is being urged to align their growth targets with scientific principles, which is a significant shift from the past.”

From the climate version of the disclosure framework to the nature part, Cheng observes this has given scientists time to better understand the needs and desires of financial institutions and corporations, and corporations a better understanding of how scientific toolkits are applied. She thinks: “By knowing each other a bit more, there’s little room for people to play around, which I think is a very healthy development.”

Cheng, who also is the board committee chair of Asia Investor Group on Climate Change, says tackling climate challenges is dealing with just one part of the work in nature and there is more work to do to understand the reality.

Echoing the view, Pablo Berrutti, a senior investment specialist at Stewart Investors, says: “There is certainly a role for TNFD that it can play in helping to improve the quality and the availability of information around nature risks and nature issues.”

At the same time, fund houses point to the multiple layers of issues that are interlinked with each other, and thus, prudence must be exercised against lending too much in direct comparison with its climate sister – TCFD. Both Cheng and Berrutti highlight the inherent difficulties in tackling nature-related risks.

In climate, there’s a common unit of currency – carbon emissions. Berrutti explains: “With nature, it’s very location-based and is very specific to the type of activity that’s being conducted. There are cumulative impacts that occur as well, where it’s often hard to attribute as you can with emissions where the harm is coming from.” There’s also a danger of this becoming a box-ticking exercise, he adds.

The Investing Solutions to Biodiversity Loss Are Not Simple

The complexity of the biodiversity issues at hand is significant. An even broader danger is the risk of organizations adopting a siloed view of environmental, social, and other factors.

“The danger with this is also that people start looking at issues in silos, thinking about nature, climate, and human rights as all separate considerations,” Berrutti says. “But, when you think about it from the company level, they can be very, very deeply intertwined”

For starters, there is a deep connection between climate and biodiversity – the evaluation of biodiversity risk is key to addressing climate change. A Sustainalytics research shows that nature-based solutions are estimated to provide 37% of climate mitigation until 2030. Even within the environment sleeve, multiple problems abound.

Take for example Salmon farming. Aquaculture is considered a carbon- and land-efficient way of including more protein in our meals.

Felix Odey, portfolio manager for global resources equities at Schroders, says: “There is the potential for salmon farming to be detrimental to local biodiversity because of the occurrence of pests like sea lice during the farming process.”

Odey also brings attention to the transition of palm oil, the controversy of which largely circulates around the environmental degradation and forest clearing required. The closet alternatives, such as soy, coconut, sunflower, and rapeseed oil, each present significant sustainability and technical challenges. He continues: “Many oils, such as soybean, are [made from] single plantation crops, meaning that other crops cannot grow in harmony alongside. This limits the biodiversity of the area, contributing once again to environmental degradation.”

Certain plant-based beverages, which are used to replace cow milk, can pose environmental risks as well. They also require more ingredients to produce and cause pesticide residues in the field. The high water-use intensity in their production can adversely affect groundwater and biodiversity.

A Just Transition

The solutions to this conundrum must take into account the impact on humans. For instance, a complete ban on the use of plastic could negatively impact low-income people’s ability to afford packaged food and sanitary products alike, these items are typically served in sachets made of plastic.

“There's a human development need that is being met by these [consumer product] companies providing affordable, necessary products and services. But there’s an incredibly significant environmental issue from plastic waste,” says Stewart Investors’ Berrutti.

Meanwhile, as the world is transitioning away from commodities associated with deforestation and forest degradation, such as beef, cocoa, and coffee, the transition should not be regarded as independent of the social and economic challenges facing smallholder farmers, a group of 500 million people that supply 80% of the world’s coffee and cocoa today.

Berrutti says: “When we talk about TNFD and biodiversity risks and these types of issues, if you take the human element out of it, we are going to struggle to find any real solutions. We cannot solve for deforestation without solving for the social plight of smallholder farmers. We can't solve climate change without stopping biodiversity loss. The sustainability and health of the food system depend on all of these things; they are intertwined and interlinked.”

Solutions Have to be Business-Relevant and Creative

With multiple complex issues happening at once and interacting with each other, investors think creativity is all-important. Cathay’s Cheng says investors also need to think through the issues giving more thought to how this would pan out in the ground realities. “We also see the necessity for sustained efforts to comprehend all issues.”

On top of that, Stewart Investors’ Berrutti thinks the work is to prioritize and pick the most relevant for the companies the firm’s invested in. “To ensure security around their own supply chain and continue to sell products and services isn't just a nice-to-have corporate social responsibility (CSR) activity for a company. This is a business resilience and longevity issue of for companies.”

Case studies of ‘Creative Solutions’ Provided by Stewart Investors:

• India’s cooking and hair oil maker, Marico is the largest coconut buyer on the sub-continent. By paying farmers promptly and educating farms on intercropping, Marico secures its supply chain while benefiting local communities and the environment.
• Similarly, by distributing beehives to farmers, Dabur in India helps promote biodiversity through increased pollination and empowers farmers to become beekeepers. This approach brings additional income to farmers while securing herb supply for Dabur.
• Banks play a crucial role in driving sustainable farming. India’s HDFC fosters a sustainable rural economy in multiple ways. Through initiatives such as a mobile app providing fair commodity pricing information and a milk ATM that offers instant payments to farmers, this builds a financial history for farmers, which could open them up to future access to loans for productive machinery.
• In Brazil, Natura & Co, the owner of The Body Shop and the Natura brands, uses 40 different berries, fruits and nuts in their products. They have agreements with indigenous people and smallholder farmers and incorporate the value of protecting the forest in the contract and pay them to do so.

In Five Years Time, What Are We Expecting?

Thinking about what the TNFD will be like in five years, Lindsey Stewart, director of investment stewardship at Morningstar, thinks it’s expected to see the framework transposing into regulation.

He says: “If you call your mind back say five years, we have had lots of investors calling for more robust reporting on climate risks and opportunities and risk management. So that kind of morphed into action on the TCFD. Eventually, that starts to get transposed into a regulation. On the biodiversity side, we're still at the same point that [the disclosure for] climate was about five years ago.”

The positive side is that the process of stepping up scrutiny over green funds has managers more cautious about what they claim compared with five years ago. He also expects shareholder resolutions on natural assets to increase over time as investors become a bit more familiar with those areas.

Apart from regulations, Cathay’s Cheng hopes these sustainability initiatives and disclosure frameworks will converge into a more concise set of key principles.

“As the number of issues requiring attention grows, there is a need for expanded disclosure efforts for climate and biodiversity and beyond. Streamlining the various protocols makes them more accessible and affordable for all, the smaller-scale companies in particular. And, this could remove barriers to compliance.”