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Why is nature loss a governance issue?

By Lisa Crowley, Associate Director, Audit Assurance Risk, Zoe Crawford, Consultant, Enterprise, and Ariana Dickey, Senior Consultant, Audit Assurance Risk, KPMG

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  • Nature loss is an increasing risk for business.
  • Nature governance frameworks are being developed.
  • Nature-related risks that are foreseeable and that intersect with the interests of the company should be considered.

Nature is a hidden risk for business

Nature loss still appears to be a hidden or unexplored risk to business.[i] Biodiversity and ecosystem degradation is occurring at an unprecedented rate, and this presents physical, transitional, and systemic risks for businesses. Australia’s 2021 release of the State of the Environment report, shows the health of Australia’s environment has deteriorated within the past five years and is in poor condition.

As nature declines, so too do the prospects for business growth and wider prosperity. This will lead to increased scrutiny of a corporation’s biodiversity-related risks, opening up a view that may deem those risks as foreseeable and intersecting with the interests of the company.

A decline in nature impacts business

To frame the current risks further, biodiversity, the level of diversity in the natural world, at the ecosystem, species, and genetic levels, is being destroyed at an unprecedented rate.

Human activity has altered 75 per cent of land and 66 per cent of marine environments. It is estimated this has led to a reduction in the productivity of 23 per cent of the global land surface and that fertilisers entering coastal ecosystems have produced more than 400 ocean ‘dead zones’ — a combined area greater than that of the United Kingdom.

Across Australia, we have lost more mammal species to extinction than any other continent.[ii] Our list of threatened species has grown and critical thresholds in many natural systems are likely to be exceeded as global warming continues.[iii],[iv]

The decline in ecosystem services and biodiversity loss will impede the ability for nature to continue to contribute to our economic prosperity. The 2022 Nature Dependency Report estimates that approximately half of Australia’s GDP (49.3 per cent or $892.8bn) has a moderate to very high direct dependence on ecosystem services.

The climate/nature nexus

While carbon abatement, meaning reducing the level of greenhouse gas emissions in the atmosphere, is widely understood, the pathway to reverse biodiversity loss and ecosystem decline is not as well established.[v] Even less so is the link between climate change and nature. Climate change is one of five drivers of nature loss, and it is estimated that a third of carbon abatement aligned with the Paris Agreement could be achieved through nature-based solutions. [vi],[vii]

Global governance frameworks

Global governance frameworks for measuring, monitoring and reporting nature related risks and opportunities are emerging internationally. It is likely these will provide guidance for organisations in setting nature targets, assessing nature related risks, and disclosing nature related financial risks.

Targets for nature: In July 2021, the Secretariat of the United Nations Convention on Biological Diversity (CBD) released the first draft of the Post-2020 Global Biodiversity Framework (the CBD Framework) for adoption at the upcoming fifteenth meeting of the Conference of the Parties to the CBD (COP15) in December 2022.[viii] The CBD Framework seeks to ‘preserve and protect nature and its essential services to people’ and sets a pathway to ‘living in harmony with nature’ by 2050.[ix]

The targets of the CBD Framework should be watched closely as it is likely they will form the basis for businesses to set nature-related targets. It is expected this will be achieved through the Science Based Targets Network (SBTN), which provides support to organisations to set science-based targets for nature and climate. These include nature-related targets aligned to the CBD Framework and climate-related targets aligned to the Paris Agreement.[x]

Nature risks and disclosures: In recognition of the complexities of developing nature-related disclosures, the Taskforce for Nature Related Financial Disclosures (TNFD) has been established to deliver a framework for organisations to report and act on nature-related risks. The TNFD is aligned with the Taskforce on Climate-related Financial Disclosures (TCFD) and will broadly seek to align with the two targets of the CBD Framework of ‘no net loss by 2030 and net gain by 2050’. The TNFD has set a deadline of 2023 for the creation of a reporting framework addressing the risks attached to the natural world. Alongside the TCFD, the TNFD will also inform the International Financial Reporting Standard Sustainability Disclosure Standards (IFRS SDS) being developed by the International Sustainability Standards Board (ISSB).[xi] This global baseline of sustainability-related disclosure standards will enable companies to provide investors and capital market participants with information about their sustainability-related risks.

Consider and account for your nature-related risks

There is a growing expectation for companies to report on biodiversity loss and nature-related opportunities.

Establish a governance framework

Adopting strong governance frameworks will be key however, new governance frameworks are not necessarily the solution. Existing frameworks can be put to use, such as those established for managing climate or sustainability-related issues, to identify and manage nature related risks and opportunities.

Understand your risk exposure and opportunities

Understanding the impact of a business on nature, and likewise nature’s contribution to the business, will enable an organisation to understand the full implications of the choices they make and capitalise on the opportunities these may present.The TNFD’s LEAP framework provides guidance for identifying the short-, medium-, and long-term nature related risks and opportunities.[xii]

Key developments to watch

  • Natural Capital Accounting, as a leading financial accounting method for nature.
  • The TNFD framework, as guidance for nature related financial disclosures.
  • The Australia Accounting Standards Board and its potential release of the IFRS SDS in Australia.
  • The fifteenth meeting of the Conference of the Parties to the CBD (COP15), to be held in December 2022, endorsement of the draft Global Targets for Nature.
  • The Australian Government’s recently announced national Biodiversity Certificates Scheme, to create monetisable opportunities to enhance, protect or prevent nature loss.

 

A focus on nature-related reporting and governance frameworks can help deliver positive outcomes for businesses. Now is the time to put nature on the ledger, to consider the nature-related risks that are foreseeable and that intersect with the interests of the company.

Lisa Crowley can be contacted on (03) 9288 6230 or by email at lisacrowley@kpmg.com.au. Ariana Dickey can be contacted on (03) 9838 4374 or by email at adickey@kpmg.com.au and Zoe Crawford  can be contacted on (03) 6230 4002 or by email at zcrawford3@kpmg.com.au

[i] World Economic Forum, 2020, These are the hidden risks to business caused by nature loss.

[ii] State of the Environment Report – The Australian Museum

[iii] Commonwealth of Australia, 2022, EPBC Act List of Threatened Fauna.

[iv] Commonwealth of Australia, 2021,Key findings | Australia state of the environment.

[v] Kurth, Wubbels, Portafaix, Meyer zum Felde & Zielcke, 2021, The Biodiversity Crisis is a Business Crisis.

[vi] Taskforce on Nature-related Financial Disclosures, 2022. The TNFD Nature-related Risk & Opportunity Management and Disclosure Framework | Beta v0.1 Release.

[vii] International Union for Conservation of Nature, 2022, Nature-based Solutions.

[viii] Convention on Biological Diversity, 2022, Preparations for the Post-2020 Biodiversity Framework

[ix] Convention on Biological Diversity, 2021, A new global framework for managing nature through 2030: First detailed draft agreement debuts.

[x] Science Based Targets Network, 2022 SBTN Interim Targets.

[xi] International Financial Reporting Standards, 2022, International Sustainability Standards Board.

[xii] Taskforce on Nature-related Financial Disclosures, 2022, The TNFD Nature-related Risk & Opportunity Management and DIsclosure Framework

 

Material published in Governance Directions is copyright and may not be reproduced without permission. The views expressed therein are those of the author and not of Governance Institute of Australia. All views and opinions are provided as general commentary only and should not be relied upon in place of specific accounting, legal or other professional advice.

 

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