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Impact standard for biodiversity accounting is the first step in averting $2.7 trillion in annual losses

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The shift towards a better understanding of how to account for nature, both in its consumption and in terms of our impact, has taken a step forward with the release of a biodiversity impact standard by the Partnership for Biodiversity Accounting Financials (PBAF).

Systemic risk in destruction of nature and biodiversity

As the financial community is waking up to the potential dangers of systemic climate risk, there is mounting appreciation of the importance of nature. Impacts and dependencies on biodiversity play an important role in the overall economy, both from a risk and an opportunity perspective.

Calls are rapidly increasing for the protection of nature and biodiversity, and recent studies show that life and ecosystems worldwide are being negatively affected by deforestation, the intensification of agriculture, overfishing, hunting, pollution and climate change.

In a review of ten years of research at the European Academies’ Science Advisory Council (EASAC), Professor Michael Norton, environment programme director EASAC, warned that “Biodiversity loss and dangerous climate change potentiate each other in their disastrous consequences. It’s a vicious circle not only leading to extreme weather but also collapsing food systems, and increasing risks of dangerous pathogens, zoonoses and other health impacts.”

Nature positive policies are a must but global agreement is delayed

Significant economic, political and social change is going to be required to prevent the extinction of over 1 million plant and animal species in the next few decades, and to reverse the decline in nature and biodiversity.

The UN Convention on Biological Diversity (CBD, sister to the UN conventions on climate change and desertification, (UNFCCC)) meeting in 2022 has an opportunity to agree on how best to address the challenges posed in the protection of nature, with a need to reverse biodiversity loss by 2030.

Nature smart policies will be crucial to implement the post-2020 global biodiversity framework, as the importance of finding a solution to biodiversity loss and natural depletion has never been higher. Yet the meeting to agree a post-2020 framework has already been significantly delayed by the pandemic, and two years into the ‘Decade of Action’ and nothing has been agreed.

The deployment of a standard through which stakeholders can assess the impact of a company’s operation on nature may be a core lever for necessary change.

Through their investments, financial institutions can play an important role in the conservation and sustainable use of biodiversity, contributing not only to the biodiversity targets of the Convention on Biological Diversity (CBD), but also to the reduction of investment risks.

Economies rely on healthy biodiversity which is in decline globally

Economies rely on the flow of goods and services generated by nature, whether that is in terms of food, raw materials, water filtrations, pollination or climate and therefore weather regulation. No country can create economic services for its citizens outside nature.

The World Economic Forum (WEF) has estimated that $44 trillion of the world’s total economic output is dependent on nature and ecosystem services.  In its paper The Economic Case for Nature, the World Bank estimates that protecting nature could avert global economic losses of $2.7 trillion a year.

According to IPBES, 14 of the 18 assessed categories of ecosystem services have declined since the 1970s, with 75% of food crops relying, at least in part, on animal pollination.

$235 billion to $577 billion of the annual crop output is directly attributable to animal pollination. The report highlights that sub-Saharan Africa and South Asia would suffer the most relative contraction of real GDP due to a collapse of ecosystem services by 2030: 9.7% annually and 6.5% respectively.

This is due to a reliance on pollinated crops, and in the case of sub-Saharan Africa, on forest products, as well as a limited ability to switch to other production and consumption options that would be less affected.

Such an impact on crops would be devastating far beyond the borders of those countries most affected. It’s only necessary to look at the conflict in Ukraine, and the impact of Russia’s intervention in the food supply chain, to see how dramatic such impacts could be.

Beyond the direct economic implications, there are other wide-reaching concerns. Following the impact of COVID-19, estimates suggest that 70% of all emerging infectious diseases are zoonotic (transferred from animals to humans) and several studies have shown a link between natural habitat destruction and increased risk of zoonoses.

And the World Bank has also estimated that crimes affecting natural resources and the environment inflict damage on developing countries worth more than $70 billion a year.

Standards are critical for understanding impact

Addressing impact on nature and biodiversity is going to become increasingly important to corporates, as legislation proliferates and as consumer pressures continue to increase. There is growing support for disclosure of impact within the business community as well.

In May 2022, Business for Nature ran a business consultation on Target 15 of the Post-2020 Global Biodiversity Framework and 91% of respondents agreed that such a mandatory requirement for business is needed, including from both SMEs and large companies. According to PBAF, every bank, asset manager or pension fund can use this new standard to measure and act in a targeted way towards reducing their negative impact and protecting and restoring biodiversity.

The standard is not a solution to understanding the complexities of our impact on nature. Rather, it provides guidance on how to carry out a biodiversity footprint, which is an assessment for financial institutions to measure, manage and report on the negative and positive impact of their loans and investments (e.g. shares, bonds and green bonds) on biodiversity.

For example, fund managers can estimate the loss of biodiversity from an investment in an international food company and gain insight into the underlying causes.

PBAF is harmonised with proposals under TNFD

Besides important preconditions, the standard explains various methodologies and tools that financial institutions can use to map out their impact. Innovative examples are the use of satellite images to map deforestation and the detection of certain animal species through DNA traces in rivers.

Most importantly, the standard is harmonised as much as possible with other initiatives in the financial sector, such as the Science Based Targets Network (SBTN) and the EU Align project and the Taskforce for Nature Related Disclosures (TNFD).

It’s important to note that while the TNFD is still in development, it calls for double materiality considerations (the consideration of impact) and if the framework follows the path of the TCFD, its sister framework on climate change risk, it could be driving mandatory disclosure within a few years.

The impact on biodiversity and nature is a growing concern for many stakeholders, and companies that fail to address such concerns are going to be left by the wayside.

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