Biodiversity influences 36% of the capital of Dutch banks, pension funds and insurers. What does that mean for the CFO?
For the first time, scientists have mapped the planetary limit of chemical pollution. A planetary limit is the point at which the amount of plastics, chemical pesticides and antibiotics makes our living environment dangerous and unstable. The conclusion of the study: we are well past the limit value. Since 1950, the production of chemicals has increased fifty-fold (!) – and by 2050 it will have tripled again. From plastic soup to anti-bee poison – chemical pollution destroys everything and especially biodiversity; the variety of life and nature on earth.
Why is this important for the CFO?
Biodiversity is also important to financial professionals, even if it is sometimes difficult to map out. For example, how do you report on your impact on – and dependence on – the environment and biodiversity? With the new EU corporate reporting rules ‘CSRD’ coming into effect this year, 1,000 companies in the Netherlands will have to address this question.
But there is another reason that biodiversity is important to the finance department. Companies are, in fact, more dependent on biodiversity than they are often aware of. For example, the Dutch Central Bank has calculated that 36% of the capital of Dutch banks, pension funds and insurers – in total some 510 billion euros – is directly and indirectly dependent on biodiversity. Think of the crucial role that clean ground and surface water play in all kinds of business processes, or how diverse flora and fauna contribute to the healthy growth of crops. The bee alone, through its role in pollinating all kinds of plants, is worth 28 billion euros in financial capital!
Decreased biodiversity risk for businesses.
To emphasize the urgency of biodiversity, the population size of species has declined by an average of 68% in just 46 years (WWF). According to the Intergovernmental Platform on Biodiversity and Ecosystem Services (IPBES), this threatens the progress of more than 80% of the Sustainable Development Goals (SDGs) that companies set themselves. The irony: companies themselves are the main cause of this. In particular, the food, infrastructure, construction, energy and extractive industries. Worldwide, they are responsible for 80% of endangered or near-endangered species, according to nature organization IUCN.
Biodiversity loss can translate into three types of risks:
1. Physical risks. That is, threatening the availability of ecosystem services while business activities depend on them. Consider excessive nitrogen use in agriculture, which affects soil life and reduces productivity.
2. Transition risks. These are risks resulting from technological, regulatory or customer demand changes aimed at reducing damage to ecosystems. Example: consumers may shun “sprayed” fruits and vegetables en masse as awareness grows about the harmful effect of chemical pesticides on health and toxins continue to be found on supermarket shelves.
3. Reputational risks. The loss of brand value for customers if a company itself contributes to undermining biodiversity. For example, Shell was recently in the news for carrying out seismic surveys in a vulnerable marine area near South Africa. This kind of fuss not only frightens off customers, but also makes it more difficult than ever for Shell to attract young talent.
What can you do as a CFO to address this?
As a CFO you can do a number of things to mitigate these risks around biodiversity (loss).
1. Map your activities and their impact on biodiversity. Within your organisation, but also those of suppliers and customers. This can be done by means of interviews and sector reports, for example on the loss of biodiversity due to chemical fertilizers and pesticides. Express this in a relevant unit, such as the percentage of ‘natural pollinators’ that is threatened by your business activities. And value this based on the value of the loss of ecosystem services to the company. Sources like monetization coefficients published by True Price Foundation can be helpful.
2. The next step is: reporting. There are several standards that help understand and communicate impact, such as GRI, IIRC and the recently launched Impact-Weighted Accounts Framework from the Impact Economy Foundation and Harvard Business School, among others.
3. Another important step is: translate your findings into management and business information, for marketing or integration into financial models. How does the business case for different investments change when you factor in the impacts on biodiversity? For example, already in 2016 AkzoNobel had quantified the social, natural and human costs for investments in their (former) pulp chemicals operations in Brazil and those of their forestry and pulp and paper value chains. Using the right data for this is important – the Global Impact Database provides guidance here.
4. Finally, it is important to show leadership in the sector. Not all biodiversity disclosures, reporting and improvements lead directly to short-term financial benefits. In fact, in the short term it often costs money and in a competitive market you run the risk of pricing yourself out of the market. It is therefore important to urge regulators to make disclosure mandatory for as many companies as possible and to abolish or prohibit destructive operations.
As well as risks, there are opportunities.
On the other hand, biodiversity-friendly solutions offer a potential $10.1 trillion business opportunity. Yet although biodiversity is increasingly a hot topic, on the overall scale of the economy there are few companies that operate in a completely biodiversity-friendly way.
Interesting examples of Dutch companies that want to protect biodiversity directly are Aardpeer or De Fruitmotor. Aardpeer buys land and rents it to farmers at a lower rate, leaving more money for nature inclusive agriculture. And De Fruitmotor, among others, makes apple ciders from discarded apples and charges just a little more – the real price – so they can help growers reduce pesticide and water use.
Another way companies can reduce their pressure on biodiversity is by making material flows circular, through the eight “R’s” of circularity: Rethink, Repair, Reuse, Reduce, Refuse, Recycle, Recover, Regift. These actions prevent waste pollution, mining, land use and poisoning. Startups such as the packaging-free supermarket Pieter Pot www.pieterpot.nl and the Delft-based mustgel startup Gorespyre are doing it. But buildings too; ABN AMRO’s Circl event space and Triodos Bank‘s headquarters are a kind of material bank, because the parts in the building can be taken apart and reused.
Nevertheless, there is a great risk that seemingly biodiversity-friendly projects, nevertheless contribute to biodiversity loss. Take, for example, sneakers made from recycled fishing nets from plastic soup in the ocean. When the sneakers end up in landfills after use, the problem is moved from the ocean to land. The best way to prevent this kind of unintentional damage is not only to focus on the eight “R “s, but also to value the impacts on – and dependencies on – nature and biodiversity during the entire life cycle. In this way you can, on the one hand, identify the extent of the damage. On the other hand, you can derive maximum benefit from the financial value of ecosystem services.