- Sustainable Finance Solutions
- Sustainability Perspectives - ESG Podcast by Refinitiv
- Episode 45: Biodiversity Loss: Measuring Impact & Assessing Financial Risks
Joël Houdet, Managing Director at the Biodiversity Footprint Company.
Biodiversity Loss: Measuring Impact & Assessing Financial Risks
Episode 45 | Duration: 24 minutes
Biodiversity loss was ranked among the top global risks by the World Economic Forum. However, few financial institutions and corporations have a deep understanding of how nature-related risks can affect businesses and their portfolios. We discussed how (and why) companies should measure and report on biodiversity. And just as importantly, how can investors encourage them and help them to do so.
Keesa Schreane [00:00:00] Welcome to the Refinitiv Sustainability Perspectives podcast, where our goal is to engage and inform our audience. From investors to asset managers and portfolio managers, to sustainability leaders and those involved in ESG and sustainable finance. This is Keesa Schreanne.
Keesa Schreane [00:00:20] According to the Intergovernmental Science Policy Platform on Biodiversity and Ecosystem Services, around one million animal and plant species are now threatened with extinction, many within decades. More than ever before in our human history. Now, what's behind this? Well, changes in land and sea use for one, climate change and pollution, among other factors. Also, biodiversity loss was ranked among the top global risks by the World Economic Forum. And while factors like climate change have already started having a material impact on asset values across the globe, few financial institutions have a deep understanding of how nature related risks can affect businesses and their portfolios. Today, we're going to discuss how and why companies should measure and report on biodiversity. And just as importantly, how can investors encourage them and help them to do so? Here with us is Joel Houdet managing director at the Biodiversity Footprint Company. Thanks for joining us, Joel.
Joel Houdet [00:01:42] Thank you Keesa, it's a pleasure to be with you.
Keesa Schreane [00:01:45] So, what exactly do we mean by the term 'biological diversity', and why should corporations and investors care about it?
Joel Houdet [00:01:53] All right. Well, biodiversity is about all living things from species and genetic diversity and the ecosystems that all of it lives in. And these things interact together, and they provide lots of benefits and services to companies and people. For instance, bees provide pollination services to our culture. Fish is used by fisheries and different types of companies use that for different products along the supply chain. And all of these different uses also generates impacts along the way. And that leads to many types of risk from a business perspective. We see more and more companies facing physical constraints, typically access to biological resources being constrained. And more and more company also are facing what we call ecosystem diservices, where ecosystems fail to function properly, and air and water fail to be treated properly so that it generates extra costs for companies. But more and more importantly, I guess from a financial perspective, it's becoming a permitting issue to get product approval, to get products off the ground. There's more and more constraint from a policy perspective to get biodiversity taken into account and sometimes in a no net loss framework, which means that you cannot degrade more than is possible from a conservation perspective. And at the end of the day, all of that is about, I guess, stranded assets. More and more people are calling, including more than 40 leaders just a few weeks ago, for 30 percent of land and seas to be protected from development. And that actually could rise up to 50 percent if we listen to scientists. What does this mean for business? It means that you need to think creatively about how you develop land, how you develop the seas. You cannot just expand continuously, and places where people expect future development, like, let's say Canada or Russia, are probably going to become places where it's a no go area in the future. So from a pure business perspective, it's, I guess, both constraints right now in terms of access to resources, new laws and regulation, and especially in terms of the future. How can you develop? How can you grow in a constrained world? That's a key question from my perspective.
Keesa Schreane [00:04:07] So, Joel, now that we're talking about stranded assets becoming an issue. Air and water are not being treated properly, that becoming an issue. What are the tangible risks and potential losses that corporations and investors should be thinking about in light of this?
Joel Houdet [00:04:21] Well, there are quite a few of them. So typically in our company, we are facing quite a number of clients, especially in the mining sector. They want to expand their operations, for instance, in the coal sector, in many, many mining commodities. And the issue becomes, how can I expand and into that wetland, into a place where there's wetland growing or that mobile species is leaving, and there's so many stakeholder pressure to actually take that into account. But in some cases, approval for expansion is completely refused by authorities. We've seen that a number of times in South Africa and throughout the world. So, just in terms of growing concern and business expansion, it's becoming already a key issue. And now in terms of a more positive outlook, it's becoming also a new perspective for innovation. How can I design products or services that take bioversity into account? How can I grow my business using the same area without expanding into new ones and be more resource efficient, essentially? So, it's both sides of the coin, it's not just negative. And we see that in many, many sectors, especially in the agribusiness sector, how can I become more efficient without destroying new wild nature, and use what I've got already and make use of wild nature to pollinate or provide clean water.
Keesa Schreane [00:05:42] So, if I were to categorize those risks, would you consider these systemic risk? It sounds like they have the potential to become reputational risk. What types of categories would you put that in?
Joel Houdet [00:05:52] So historically, it was more reputational, especially when a threatened species, a well known species, which was threatened by a business, you had your business reputation at stake. But more and more, I think it's a resource physical constraint, that is occurring in many places in the world, especially from a community perspective. If, for instance, you talk about renewable energy and you need metals to to actually grow your business, where are you going to source them? It's going to be a major issue of physical constraint because you cannot expand into wild areas for the future. That's one side. From a systemic perspective, the federal ecosystem generates so many systemic risks. From a failure of providing team water throughout the watershed also for climate change, covering all the different categories in which we've seen from natural disasters to rising sea level, which has huge impact I'm not going to go into. And from a policy perspective, as I said, there's a growing call from world leaders to protect 30 percent of land and surface area within the next 20 years. What does this mean for your business? How can you expand next door if there is a policy, and it forces you to offset your damages it is going to be very, very expensive.
Keesa Schreane [00:07:13] So, it sounds like these risks are already considered material risk. This is not something that's in the works. It's already there in terms of material.
Joel Houdet [00:07:18] For many companies, it is already a material risk now.
Keesa Schreane [00:07:23] So, let's switch gears and talk about firms that are successfully reporting on biodiversity, the ones that are just getting it right. Tell us about how they measure impact and what their disclosures look like.
Joel Houdet [00:07:35] So, unfortunately, I cannot say that we're getting it right. Let me just comment on that. What I mean is more and more companies have got a system to report. About most of the major, largest companies out there, they do report on an annual basis on a number of topics. And typically it's based on the management approach to systemic risk and the disclosure of some quantitative metrics, for instance, water use, greenhouse gas emissions. When we talk about biodiversity, there's a limited number of companies that actually mentioned biodiversity. And there's a recent report that was published just two years ago, out of the top 100, 2006 Fortune 500 Global Companies, the assessment that was recently published. Only 31 of those companies had actually biodiversity targets that were measurable, specific and time bound. So those few companies do have targets and KPIs, key performance indicators, but, however, what's missing for almost all of them is the basic starting point of how much impact do they have. Nobody talks about their surface area that they control in their own. And what is the state of biodiversity on them? How much biodiversity is left? How much has been impacted, historically through the last year and over time, essentially. So, we're missing the magnitude and the scale of that impact is missing from this report still. And I guess at the end of the day, there's been, from a business perspective concern that we didn't have the right measurement tools, the right indicators to actually put together those datasets at a company level. These things are changing. There are more and more companies providing services in terms of biodiversity footprinting. There are more and more solutions out there, and for instance, I encourage you to have a look at the EU Business and Biodiversity Network. They do an annual regular follow up of all the different tools out there for companies and they provide reports on what's progress. So basically the solutions are there, but we are still missing that quantitative data in those reports.
Keesa Schreane [00:09:43] So, let's dive deeper into that. I'm thinking, where does this biodiversity data even come from? What are the different sources? You talked about the EU business and biodiversity information, what other sources, how reliable are those sources and what's being done to improve the quality of the data?
Joel Houdet [00:10:01] So, when we talk about biodiversity, we need to understand there's a value chain of information. First, there's raw data sets, for instance, maps of vegetation, information about the occurrence of specific species in the landscape. This raw information has varying quality across different countries. For instance, we know quite well what's there in Europe, but we know very little about Amazonia or Central Africa or Southeast Asia. So there's disparity, and most of those datasets are managed either by some global organization like Unif, World Conservation Monitoring Center or national entities. But for those countries without any resources to to get and manage those data, obviously, it's a big challenge. But that's one side of a value chain, the raw data, then it's about measuring the impact. It's about how do you measure the change in biodiversity over time? And a number of organizations have developed different tools and there are basically two models. One group of people focus on measuring the actual change through satellite imagery, through on site surveys of different experts, and that's one side of one approach. And the other is based on modeling through clever algorithm you can generate biodiversity footprints using what we call intact drivers, which are typically climate change information or resource use information. So those two approaches are being used. And I guess what matters is how do you want to use this? If it's for eye level risk screening, typically a modeling approach can work. But if you want to get your product approval by a permitting authority, you need to have real data on site. Is biodiversity actually present? Is that wetland really threatened? You can't rely on just model information, you need real data. So, it's a mixed basket. But at the end of the day, I want to reassure your audience. It's the same with climate change data. You've got global datasets managed by different people, but you also need a real internal data if you want to make any meaningful decision. You need to measure your own emissions, and that requires working through that process yourself.
Keesa Schreane [00:12:13] So, in terms of the increase of this data, I know there are different types, we have the real data versus the model info, have you seen increases in the demand for data over the last couple of years?
Joel Houdet [00:12:24] Yes, indeed. More and more nations are putting together what they call ecosystem accounts. There's a standard being finalized right now at the UN. It's basically everybody that sets accounting standards at the level of nations, and we are calling for each country to put together databases on biodiversity change. And that requires, obviously, input from business and it can also supply information to different companies. But that's one side of things, on the other hand, more and more stakeholders are asking companies about what is the scale of biodiversity footprint if you're a retailer, if you are a mining operator, even if you're a financial institution, what is the biodiversity risk in your product and your services throughout your supply chain? More and more clients, even consumers, are asking about this on product labels. So there's definitely a growing trend and I'm just going to mention a couple of examples. There's more and more pressure, typically at the EU level, even UK level, for product labeling regarding deforestation, regarding the loss of specific species. There's more and more demand for that type of information and is growing. Just to add a couple of things that are linked to that. First of all, there's been some very interesting development at the level of CDP, which collects data privately from an organization historically on climate and water, and they are expanding into biodiversity since last year. So that's also a new thing, so they're asking, especially the mining sector, for biodiversity impact information. And there's also in 2021, there's going to be the adoption of a post 2020 global biodiversity framework, which is going to be agreed upon by all the nations that are part of the UN. And as part of this process, we're going to have international and national targets for biodiversity mainstreaming. And it will mean that companies, some will have to start measuring the impact report and disclose them as well so that they can actually contribute to national targets. Similarly to what has happened with climate change is nationally determined contributions and budget that has been done for climate change. We're going to see the same process for biodiversity coming up very soon.
Keesa Schreane [00:14:41] So, bringing that along into the same realm as climate change, that global biodiversity framework in 2021. That sounds very interesting. Let's talk about the importance of corporate disclosures for investors. Specifically, what are the top three to five things that investors need to look for?
Joel Houdet [00:14:58] Well, from a pure risk perspective, I think there are two main approaches. First of all, you have to understand whether the asset category of a company you want to look at is actually operating at a high risk region. And there's a number of datasets out there that actually map for those biodiversity important areas, typically the Amazon or even Southeast Asia, like Indonesia and its islands, are really high risk. That's an example. But on the other hand, it's also about specific commodities and products. So it's quite easy, actually, to red flag them and understand whether these are high risk assets and commodities. However, going beyond that, any business actually relies on biodiversity and impacts biodiversity. So what they should ask for, first of all, is there any actual company policy beyond following up what the business requires? Because what we see coming up more and more, is that proactive business of a very specific biodiversity polices. And this is going way beyond than just seeing that we respect the law. These companies are thinking ahead and are talking about, I think, no net loss or net positive impact. We've seen a number of companies, if I recall a report mention published just last year, that's about, yeah, believe it's almost 40 global companies with no net loss or net positive impact targets regarding biodiversity. It's quite a lot, it's a challenge, but they should actually look for such commitment to find companies that are actually really trying to make a difference. And going beyond that, I think what the future really is all about is what companies actually embrace this challenge and find new ways to make business and find new opportunities, especially in the agribusiness sector, especially in the finance sector. How can you finance new business models that actually protect our city and have actually positive impact?
Keesa Schreane [00:16:59] That's amazing. The last question, Joel, there are loads of projects that you've already started to talk about, but I'm just wondering what other sorts of projects can we expect to see in 2021 happening around driving change in biodiversity?
Joel Houdet [00:17:13] So I think there's a number of activities happening. As I said, there are more and more service providers providing solutions to companies to to assess biodiversity footprint. There's a number of governments actually asking the private sector to contribute and to come up with their own solutions. And we've seen a group of organizations coming together on a specific project which is called biodiversity protocol. It sounds like the greenhouse gas protocol, and it's similar in concept. It's about providing an accounting framework to help companies measure, consolidate their net biodiversity impact data at the group level. This was something that was missing. We had a data about impacts on a specific site or a specific product or company. But it was always a challenge for companies to pull together the data and that specific project was developed through collaboration by many organizations over the past few years, and it's going to be released very soon over the next few months. And the goal of that is to provide the private sector a free resource. And any consultant can develop their own solution, a solution actually using the standard based on that. And at the end of the day, it's basically about providing an accounting framework to assess the biodiversity footprint of companies. Of any sector, any supply chain, any kind of business. And that was really missing. And I want to highlight a couple of things in it. First of all, it's focusing on changes in ecosystem, changes in species. It's about actually helping companies quantify that specific impact. We're not talking about impact drivers like resource use or water use or climate change emissions. No, we're talking about changes in ecosystem condition and extent. We're talking about changes in population of species. It's possible to quantify it, to measure it and to put it together. And that specific accounting framework is actually an adaptation of double entry bookkeeping, which originates from financial accounting. So we're putting together a statement of biodiversity position, statement of biodiversity performance, but it's not in financial monetary values, it's in biodiversity metrics. But it helps companies actually keep track of what's happening within their operations. And as part of that process, I just want also to highlight why this project has actually been put together. It is developed from one of my part organisations which is Natural Wildlife Trust based in Johannesburg, South Africa. With me actually assisting the Johannesburg location of this company for the past three years, we've been looking at the quality of a discussion on biodiversity and we've been making that information public. And what we found is that there is no quantified, consolidated impact data at the level of a company. And that specific tool aims to address that gap, providing a framework which is freely available and makes it easy to compile biodiversity impact data for all report users, from investors to broader stakeholders. And at the end of the day, it's really about asking companies to assess and talk about their biodiversity footprint. In a nutshell, it's about what ecosystem they control, they are on the ownership, and how much of it is in good condition or in bad condition.
Keesa Schreane [00:20:36] Joel such great information here. So starting off talking about really what risks look like. Historically, there was a lot of reputational risks involved, in terms of threatening species, etc. But now we're seeing more systemic risk in the area of biodiversity, failure in providing clean water, the climate change that accompanies that and risks are already material for many companies. One issue is that there's a limited number of companies that are even mentioning biodiversity and having a measurable, specific, time-bound biodiversity targets. So something that's emerging but many firms don't have this in hand yet. And what's missing from many of those targets, and from many of those measurements, is magnitude and scale of impact. In terms of data, there is real data, as well as model info. And we really need to understand how the data is to be used to make the best decision about which data approach to take. Whether using real data or model data. And also worth noting here, definitely more nations are putting together ecosystem accounts, so creating accounting standards. Putting together databases on biodiversity change and that's definitely hitting an uptick as we see more and more of that. Also, more stakeholders are asking about the scale of their biodiversity footprint, as well as, biodiversity risk throughout their supply chains. What should investors look for? You mentioned Joel understanding the asset category that they're operating in and understanding what the risk of the region is. So whether they're operating in a high risk region or a lower risk region. And also, the specific commodities and products. Are those commodities consider high risk? If so, we need to be mindful of that. Finally, one of the most important questions that an investor should ask, what is the company policy? Is the company thinking ahead, being forward thinking in terms of financing new business models that are protecting and improving biodiversity footprint. The projects that we expect to see in the near term, lots of those just going to name a couple, global biodiversity framework in 2021. And with that one, international targets are in play, as well as, the biological diversity protocol, an accounting framework to measure net biodiversity footprint. Joel Houdet, thank you so much for joining. Such a great and interesting conversation.
Joel Houdet [00:23:01] Thank you Keesa, It's a pleasure.