Managing biodiversity loss – another piece of the ESG puzzle

accWhile sustainability has been pursued as a broad objective over the past decade, the last 12-24 months has seen a significant shift towards managing climate risk. This view is supported by the World Economic Forum’s 2021 Global Risks Report, which rated ‘climate action failure’ as second greatest risk by both likelihood and impact. However, not too far behind is the threat of ‘biodiversity loss’, listed as the fifth most significant risk by likelihood and the fourth by impact.

Biodiversity refers to the variety of living things on Earth and is an umbrella term that can be broken down into species diversity, genetic diversity, and ecosystem diversity. I will assume that most of society appreciates biodiversity from a recreational perspective – going for a hike in a national park, knowing that pandas are not extinct – although the maintenance of biodiversity is critical for humans in two important ways:

 Consumption needs: We depend on biodiversity for adequate food supply and other resources such as timber.

Human life-support: While it may never be at the forefront of our minds, there are various functions and services within ecosystems that are essential for our ongoing survival, such as nitrogen fixation. The loss of an ecosystem or even one irreplaceable species within an ecosystem, can lead to significant imbalances and consequences.

A November 2021 report from the Australian Council of Superannuation Investors (ASCI) has announced biodiversity loss as the next ESG issue of focus. ASCI has called for biodiversity loss to be approached with comparable “scale and urgency” to climate change, although emphasises that biodiversity loss needs to be treated as a separate business risk.

Some of the drivers of biodiversity loss presented by ASCI are the following:

So, what does this all mean for business? There are various potential financial risks for firms that are directly or indirectly accelerating biodiversity loss across their supply chain. Some identified by ASCI include:

Credit rating: The use of harmful pesticides could drive biodiversity loss, which in turn results in a lower crop yield. Decreased revenue is expected to worsen their liquidity, thus harming their credit rating.

Investment and capital: With many banks and financiers considering ESG, it is increasingly difficult for firms contributing to significant biodiversity loss to secure funds for future projects.