Australian corporations’ reporting on climate change has gained significant traction in the last decade. For listed entities in particular, it is becoming an increasingly integral part of complying with the obligation to disclose risks to investors under Section 299A of the Corporations Act 2001 (Cth).
Focus is now turning to another aspect of Environmental, Social and Governance (ESG) reporting, referred to as ‘biodiversity loss risk’ or ‘natural capital’.
What is biodiversity loss risk and why is it relevant?
The objective of biodiversity loss risk disclosure is to financially account for biodiversity-related impacts or dependencies of businesses. To date, these factors have not formed part of the valuation of a business over either the long, medium or short term.
Climate change is now generally considered a risk that requires board-level strategic attention. The loss of species and ecosystem collapse not only contribute to rising global temperatures but of themselves, form a very real material exposure for businesses in the same way as climate change. The risks are systemic, transitional, legal and physical.
Biodiversity encompasses all species and the ecosystems that support them. Business functions rely on stable species numbers and ecosystems for production processes, waste management, and water, soil and air quality. Stability is undermined by deforestation, desertification, erosion, extinction of species, pests and pollution. Take insects, for example, their survival is crucial to many agricultural processes.
While appearing to be unrelated, the COVID-19 global pandemic is probably the most recent example of biodiversity loss risks impacting business. The loss of habitat has allowed viruses to move from nature to humans which has impacted the financial sector severely.
Sir Robert Watson, Chair of the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), puts biodiversity loss in context:
“Biodiversity and nature’s contributions to people sound, to many people, academic and far removed from our daily lives … Nothing could be further from the truth – they are the bedrock of our food, clean water and energy. Humans rely on biodiversity in fundamental ways, from pollinating crops to curing diseases. Biodiversity loss has also come to threaten the foundation of our economy: one attempt to put a monetary value on goods and services provided by ecosystems estimates the worth of biodiversity at US$33 trillion per year – close to the GDP of the United States and China combined.”
Why is biodiversity loss risk likely to filter into Australian corporate reporting?
There are four reasons why biodiversity loss risk reporting is likely to infiltrate Australia’s corporate reporting standards in the next five years:
1. International attention
Awareness of biodiversity loss as a threat to humans and their activities is gaining momentum on an international stage. The UN General Assembly’s 75th Session hosted a Biodiversity Summit in 2020 and acknowledged that biodiversity loss was among the top threats facing humanity.
Further, there is renewed focus on setting new biodiversity targets and achieving them given the wholesale failure to reach any of the 20 Aichi Biodiversity Targets agreed in the 2010 Strategic Plan for Biodiversity.
In October 2021, the UN Biodiversity Conference will take place in Kunming, China (originally proposed to have occurred in October 2020 but delayed due to the COVID-19 pandemic). It is anticipated that a decision will be made on the post 2020 biodiversity framework and targets. Any targets are likely to influence domestic policy in Australia and, as with climate change, inform metrics and targets of corporations themselves.
Giving this issue elevated importance is that the World Economic Forum has listed biodiversity loss as the fifth highest risk by ‘likelihood’ and the fourth highest risk by ‘impact’ in their 2021 Global Risks Report.
Some nations have already started taking proactive steps to report on bio-diversity risks. For example, France recently introduced a new financial reporting framework called ‘Article 29’. This requires financial institutions to report on biodiversity related risks (in addition to climate change) and to disclose strategies for reducing biodiversity impacts.
2. Task force established
One of the largest barriers to biodiversity loss risk reporting is a lack of consistent and standardised data and reporting tools. This has specifically been highlighted as an obstacle to the implementation of Article 29 in France.
Such is the growing emphasis on this area of reporting that an international task force has been formed, called the Taskforce on Nature-Related Financial Disclosures (TNFD), to develop tools and a framework for this new category of risk disclosure.
The TNFD is expected to:
- develop reporting and governance frameworks in the second half of 2021;
- test those frameworks in early 2022; and
- disseminate the frameworks in 2023.
The formation of the TNFD is notable particularly given that the actions of the International Task Force on Climate-Related Financial Disclosures (TCFD) and its final report directly informed the Governance Institute of Australia’s widely used climate change risk reporting guide.
It is anticipated that any frameworks produced by the TNFD may be used to inform Australian practices and standards. The TNFD is aiming to finalise its reporting frameworks in 2023.
3. A Real Material Exposure
Given the increasing awareness of the risks around biodiversity loss at an international level, it will be difficult for Australian corporations to ignore those risks in the future when reporting material exposures to environmental risk (see Recommendation 7.4).
A listed entity’s ability to create or preserve value for security holders over the short, medium or long term is, at some level, dependent on biodiversity stability. Even if that dependency is not direct, supply chains and the interconnectedness of business means that material risks arise indirectly.
4. Recent Extreme Loss of Biodiversity
Australia’s recent drought, bushfire emergency and floods have severely impacted biodiversity. In his final report on the review of the Environment Protection & Biodiversity Conservation Act 1999 (Cth), Professor Graeme Samuel said:
“Australia’s natural environment and iconic places are in an overall state of decline and are under increasing threat. They are not sufficiently resilient to withstand current, emerging or future threats, including climate change.”
It is likely the calls for action to stem biodiversity loss across the country will become increasingly more urgent.
What will biodiversity loss risk reporting look like?
Climate change reporting is likely to influence and inform biodiversity loss risk reporting for Australian corporations.
As with climate change risks disclosure, four key elements will form the foundations of reporting:
- Risk management
- Metrics and targets
It is also likely that the concept of double materiality will apply which will require a corporation to report on how the corporation depends on biodiversity and how that corporation impacts biodiversity.
As noted above, the difficulties in reporting will come with measuring biodiversity dependencies and identifying metrics and targets.
This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.