Business should be aware of the broader risk implications of the destruction of our global “natural capital”.

    During our lifetimes, we have all borne witness to the crisis of nature loss in Australia. Memories of long summers set against a soundtrack of cicadas, and green tree frogs singing at the tops of their lungs on rainy days, are precious because they are the baseline against which we can measure what we have lost and what is at stake. Cicadas and green tree frogs — and many other creatures that are part of our collective memories of growing up in Australia — already seem to be few and far between, and the threat that the nature-loss crisis poses to our biodiversity and ecosystems is worsening.

    Australia is renowned for its incredible biodiversity and ecosystems. Many of our native species are found nowhere else in the world and, as a result, Australia is considered one of the world’s megadiverse countries. However, the most recent federal State of the Environment report concluded that “the outlook for Australian biodiversity is generally poor, given the current overall poor status, deteriorating trends and increasing pressures [and] our current investments in biodiversity management are not keeping pace with the scale and magnitude of current pressures”. This prognosis is concerning for many of us on a personal level, but it could also have broader implications for Australian businesses and directors.

    Paradigm shift

    Over the past 18 months, we have seen the beginnings of a profound global shift in the way policymakers and investors think about nature. There is a growing awareness of the fact that biodiversity is our “natural capital”, and that we are economically reliant on it. This has, in part, been prompted by the findings of the landmark Dasgupta Review on the economics of biodiversity, commissioned by the UK Treasury and published earlier this year. The review not only called for a paradigm shift to recognise that “we — and our economies — are ‘embedded’ within nature, not external to it”, but also concluded that our current economic system is fundamentally flawed because it does not account for the externalities of our economic activity on the environment — that is, the degradation of our natural capital.

    In response, the G7 leaders have recently announced that “our world must not only become net zero, but also nature positive, for the benefit of both people and the planet”.

    As the G7’s statement suggests, the concept of nature positive goes well beyond the need to address climate change. Rather, it is based on the understanding that nature provides a multitude of invaluable services to humankind, which underpin our economic activities — just one of which is the regulation of our climate.

    The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) provided a succinct explanation of the contribution of these ecosystem services to modern society in its 2019 Global Assessment Report on Biodiversity and Ecosystem Services:

    “Most of nature’s contributions to people are not fully replaceable, and some are irreplaceable. Nature plays a critical role in providing food and feed, energy, medicines and genetic resources and a variety of materials fundamental for people’s physical wellbeing and for maintaining culture. Nature, through its ecological and evolutionary processes, sustains the quality of the air, fresh water and soils on which humanity depends, distributes fresh water, regulates the climate, provides pollination and pest control, and reduces the impact of natural hazards.”

    Economic impact

    From an economic perspective, the World Economic Forum (WEF) has reported that over half of the world’s GDP (US$44 trillion) is moderately or highly dependent on nature and its ecosystem services, which is clearly cause for alarm given that as of 2019, an estimated one million species were at risk of extinction. As a result, there is little doubt that nature loss poses an enormous risk to the global financial system, and nature risk now consistently achieves top billing alongside climate risk as a systemic threat to the economy. For example, biodiversity loss and ecosystem collapse has been rated in the top five global risks by the WEF in its annual Global Risks Report for 2020 and 2021.

    So, as momentum for a “nature-positive” future builds, it is important for Australian businesses and directors to turn their minds to what that will mean for the future of capital in this country. Nature positive is an ambitious and potentially disruptive goal. It will require both a shift away from activities that harm nature and a corresponding shift towards those that enhance natural capital. Critically, the time horizons for achieving these outcomes are not far off. The global nature targets currently under discussion are — nature positive by 2030 (against a 2020 baseline), and full recovery by 2050. This would require a seismic shift in the allocation of capital in our lifetimes — approximately US$700b per annum by 2030.

    Nature positive

    In order to facilitate this reallocation of capital, the Taskforce on Nature- related Financial Disclosures (TNFD) was launched on 10 June this year. Over the next two years, the TNFD taskforce will develop a reporting framework for 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. Importantly, like the Taskforce on Climate-related Financial Disclosures (TCFD) before it, TNFD recommendations are likely to set the benchmark for nature risk disclosure in Australia and it follows that disclosure will ultimately influence the ability of Australian companies to access capital.

    This holds the promise of both great risk and great reward for Australian directors. The nature positive movement is emerging as a global megatrend set to fundamentally reshape the global financial system, and the WEF has estimated that the shift to a nature positive economy could unlock US$10 trillion of business opportunities by 2030. As shareholders, regulators and investors grapple with how best to understand and manage nature risk over the next few years, ambitious Australian businesses that move early to get ahead of the curve and align their businesses to the nature-positive goal are likely to emerge as the winners at the end of this critical decade for nature.

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