Biodiversity Means Business

Concerns about sustainability and carbon reduction have forced nearly every business to rethink and revamp how to approach extended supply chains. Yet, except for a relatively small group of companies that see their business models directly threatened by climate change, few have devoted much attention to biodiversity.

The situation is about to change. “Biodiversity hasn’t been front and center for the vast majority of organizations but there’s a growing recognition, particularly among companies in areas like food, pharma and agriculture, that it is going to play a crucial role in their business models,” says Steve Schmida, founder and chief innovation officer at sustainability consulting firm Resonance.

Over the last couple of years, several biodiversity initiatives have taken shape. Most notably, in December 2022, the United Nations biodiversity conference in Montreal (COP 15) elicited a multi-national pledge to focus on saving endangered plants, animals, and insects that could further amplify the impacts of climate change.

In addition, the Science Based Targets Network (SBTN) recently established a strategic framework for addressing biodiversity, and the European Union (EU) and other entities are developing stricter biodiversity reporting regulations that will reshape business in the years to come. Others, including S&P Global, are introducing tools to help companies navigate the space.

Says Richard Gilchrist, managing director of the ESG Practice at PwC. “It’s critical for businesses across a spectrum of industries to begin exploring sourcing and dependencies -- and how they impact nature and will likely be impacted by climate change.”

By the Numbers

Biodiversity isn’t an abstract issue. About one-third of the world’s topsoil has been degraded and 85% of wetlands have been lost over the last half century. During the same period, a 60% decline in vertebrate species has occurred, according to a 2020 report from the World Economic Forum.

The fallout will likely range from serious to catastrophic. A 2019 Global Assessment Report produced by the independent Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services found that upwards of 1 million animal and plant species face extinction over the next several decades without urgent action.

Diminished biodiversity would likely hit the food, pharma, and agricultural sectors hard. However, no industry is likely to remain untouched. Clothing companies could struggle to obtain a steady supply of essential fibers, and even heavy industries such as energy and mining could face major disruptions caused by environmental impacts.

A May 2023 analysis of the S&P 1200 found that 46% of these companies have assets located in Key Biodiversity Areas. In addition, more than 85% of the world’s largest firms are directly dependent on nature across their direct business operations.

So far, the vast majority of businesses haven’t recognized the gravity of the problem. One 2022 study conducted by UK researchers found that only 10 of the world’s largest companies have established specific biodiversity commitments. It labeled the progress “insufficient” and recommended that governments, companies, non-governmental organizations, and others begin working more collaboratively toward nature-positive outcomes.

“Businesses must play a central role in this race by aligning biodiversity targets with planetary boundaries,” states Pamela G. Katic, Associate Professor of Economics in the Natural Resources Institute at the University of Greenwich in the UK. “The loss of nature poses a direct threat to economic activities currently responsible for generating over half of gross domestic product.”

Likely pain points, Katic says, include increased costs arising directly from natural events; reduced revenues and profits due to supply chain and operations disruptions; higher insurance premiums; increased costs arising out of a greater need for resilience; and, in some cases, shorter lifespans for existing assets.

Although biodiversity may seem a bit abstract at the moment, Gilchrest says, the current trajectory will likely unleash significant and widespread problems in the years ahead. “Organizations must begin adding biodiversity data measurement and collection methods to ESG programs,” he states.

Visibility Matters

Designing a strategic ESG framework that illuminates how a business is impacting nature -- and how nature is impacting a company’s operations -- is critical. “Consumers, investors, employees, government regulators and others are all beginning to focus on this space,” Schmida says.

Technology can play a key role in navigating biodiversity issues. Predictive analytics, machine learning, digital twins, blockchain and the Internet of Things can deliver insight, visibility and measurability into sourcing, supply chains and environmental impacts. However, Katic emphasizes that these tools must be used to drive real change. “They must support a paradigm shift to new, sustainable models of development, rather than entrenching business as usual. They must deliver enhanced transparency and accountability,” she says.

Ultimately, companies must imbed biodiversity deep into their business strategies and daily operations, Katic says. This includes the use of science based methods that revolve around the UN’s Sustainable Development Goals and its Global Biodiversity Framework. It can also incorporate tools such as the S&P’s scoring system, part of its UN-linked GlobalSustainable1 initiative, which provides dependency scores, ecosystem footprint insights, and other biodiversity data that can guide decision-making.

In addition, the SBTN framework can serve as a valuable resource. More than 200 organizations helped shape the initial set of methods, tools, and guidance. This includes 115 companies representing more than 20 sectors, 25 countries, and over US $4 trillion in market cap. The SBTN framework provides methods for assessment, prioritization, and setting targets, along with technical guidance and tools. The group is also developing tools for data validation and stakeholder engagement.

It's also wise to track emerging and evolving regulations, Gilchrist says. For example, starting in 2025, multinational companies with a €20 million balance sheet and more than 250 employees must submit a detailed report that address biodiversity factors if they have a presence in the EU. “This is a sign of things to come,” he says. As a result, “Some companies are recognizing the importance of biodiversity in ESG documentation and starting to voluntarily report on it.”

Beyond Nature

In the end, a focus on biodiversity may force an enterprise to rethink sourcing and readjust supply chains to reduce risk. It may prompt a company to reexamine its environmental impacts and how they lead to less biodiversity. A holistic view is crucial, and an understanding of how biodiversity intersects with other ESG element is paramount. “There’s a need to grasp environmental issues, socio-political factors and other considerations when sourcing from different regions and countries,” Schmida says.

In fact, organizations must understand biodiversity dependencies and how it impacts nature on a granular level -- and, ultimately, at every location it touches. The goal is to create a map of interactions and outcomes that stretch across the value chain, Katic says. With a quantitative and qualitative assessment framework in place, a business can view its progress in metrics that truly matter. “This is what steers a company toward understanding and disclosing its progress for both biodiversity risks and opportunities.”

To be sure, understanding how organizations impact nature and how they affect biodiversity is rapidly gaining traction -- and becoming a key part of ESG reporting. The initial pilot phase of the SBTN program includes a group of 17 companies, including H&M, Nestlé and Tesco. The companies are currently submitting data, which will be assessed and validated in 2024.

Meanwhile, the UN is requesting that businesses assess and disclose their impact on nature by 2030, while addressing other biodiversity risks. Says Gilchrist: “Organizations can leverage technology, components, and expertise that’s already in place to determine how best to incorporate biodiversity into a forward-thinking business framework.”

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