Biodiversity loss is a risk to the global financial system

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Geoff Summerhayes and Laura Waterford

The world’s biodiversity is declining faster than at any other time in human history, and an estimated 1 million species are at risk of extinction

Koalas Climate change and biodiversity loss are now often referred to as the ‘twin crises’ facing the global financial system. Photograph: Lisa Maree Williams/Getty ImagesClimate change and biodiversity loss are now often referred to as the ‘twin crises’ facing the global financial system. Photograph: Lisa Maree Williams/Getty Images

Corporate Australia is familiar with the concept that climate change presents a financial risk to the global economy, but more recently biodiversity loss has emerged as an equally important risk.

In fact, climate change and biodiversity loss are now often referred to as the “twin crises” facing the global financial system and awareness of the role the financial sector plays in this is rising swiftly.

Crucially, a recent global review on the economics of biodiversity commissioned by the UK government, often referred to as “The Dasgupta review”, concluded that our economic system is dependent on biodiversity. This fact is rightly of concern to the financial sector, given the world’s biodiversity is declining faster than at any other time in human history, and an estimated 1 million species are at risk of extinction.

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Just last month the G7 climate and environment ministers acknowledged “with grave concern that the unprecedented and interdependent crises of climate change and biodiversity loss pose an existential threat to nature, people, prosperity and security”.

There are potential parallels between nature risk and other responsibilities of financial institutions, like anti-money-laundering requirements. Just as financial institutions have a responsibility to ensure that they are not a conduit for money used to do harm through criminal activity, there is a growing sense that the finance sector has a responsibility to manage the economic risks associated with nature degradation – and ensure they are not a conduit for finance that is destroying nature.

In this context, an international Taskforce on Nature-related Financial Disclosures (TNFD) launched last month. Over the next two years, the TNFD will develop a framework for corporations and financial institutions to report on nature-related physical and transition risks that include immediate, material financial risks, as well as nature dependencies and impacts and related organisational and societal risks.

This ambitious scope of work has already been endorsed by the G7 finance ministers and, with the TNFD officially under way, nature risk will ascend quickly to claim its place alongside climate risk at the top of board agendas.

This is relevant to Australian company directors because, like the Taskforce on Climate-related Financial Disclosures before it, the recommendations of the TNFD are likely to catalyse an expectation from regulatory authorities and investors that corporates will make increasingly sophisticated disclosures on nature risk.

Ultimately, the TNFD also has the potential to divert the flow of capital throughout the global financial system away from activities that cause the destruction of nature, or are “nature-negative”, and towards those that are “nature-positive”.

Perhaps most importantly for Australian company directors, the discourse on nature risk now appears to be at a similar point to climate risk half a decade ago – when the seminal legal opinion by Noel Hutley SC and Sebastian Hartford-Davis on directors’ duties and climate risk was published.

This means that, depending on the particular facts of the case, it is possible a court could find that nature risks are capable of representing a foreseeable risk of harm to the interests of Australian companies today. It follows that a director who fails to properly consider these risks could be held personally liable for breaching their “duty of due care and diligence” to the company under the Corporations Act, to the extent that the risks intersect with the interests of the company.

It is arguable that this duty already exists because many of the factors that informed 2016 climate risk opinion are now also true for nature risk, or may be in the near future.

For example, there is a body of evidence which demonstrates that Australia is exposed to nature-related physical risks given the fragile state of ecosystems such as the Great Barrier Reef and the Murray–Darling basin. Reduced ecosystem function (for example, a reduction in ecosystem services such as pollination, temperature regulation or water purification) and its effects – that is, the associated physical risks – are already intersecting with the interests of Australian companies.

One example of physical nature-related risk is pollinator colony collapse. Around one-third of our food is pollinated by bees and their pollination services are worth several billion dollars a year to the agriculture sector. However, bee populations across Europe, the US and China have been devastated, and it is foreseeable that Australia could be next.

Our bees are under threat from outbreaks of disease and parasites, as well as a long list of other pressures such as pollution, the use of pesticides, intensive agriculture, the introduction of alien species and climate change. This is a material risk for many Australian businesses throughout the agricultural supply chain, and directors should be considering how it could affect the financial position of their companies.

In terms of transition risks, there is the potential shift in investor and consumer behaviour to consider. Consumer preference for sustainability conscious products has been growing for some time.

On the investment front, widespread interest in Climate Asset Management – a recent joint venture by Pollination and HSBC that aims to invest more than US$6 billion into natural capital – has demonstrated that there is emerging appetite for investment in nature-positive assets at scale. It is likely only a matter of time before divestment from nature-negative assets follows.

Finally, if a new biodiversity framework is agreed at the UN Biodiversity Conference in October this year as expected, directors may also need to consider regulatory transition risk in the context of both Australia and our major trading partners.

When all of these factors are taken together, it is clear that nature risk will become the next climate risk. Australian directors should take steps now to avoid being caught flat-footed on nature risk.

Geoff Summerhayes is a senior advisor at pollination, and former executive board member of the Australian Prudential Regulation Authority (Apra). Laura Waterford is an environmental lawyer and associate at Pollination

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