Nature risk from the bottom up
S&P Global Sustainable1 has linked local nature risks and dependencies to companies and assets over the entire surface of the planet. It’s putting a powerful nature risk tool into investors hands, says its vice chair, Richard Mattison.
For more information, see: www.spglobal.com/esg/solutions/nature
Environmental Finance: S&P Global Sustainable1 recently published some striking research on corporate nature risk. What were its key findings?
Richard Mattison: Nature risk is a very large topic but, from a private sector perspective, it’s not been easy to understand why a bank or investor should care about it. The fact is, nature is at the end of every supply chain. Nature directly supports more than half of the world’s GDP. Economically, it’s incredibly important.
Secondly, we can’t meet our climate goals if we don’t protect and restore nature. We can’t be net zero if we’re not nature positive. Nature could provide around a third of the mitigation we need to stay on a 1.5ºC trajectory – and often at much lower cost than manmade interventions, such as direct air carbon capture.
We see nature as a critical part of a functioning global economy. To better understand this, we worked with the UN Environment Programme World Conservation Monitoring Centre (UNEPWCMC) to assess the ecosystem integrity of every square kilometre on the planet. S&P Global Sustainable1 then mapped that to the activity of 17,000 companies. We found that 85% of the world’s largest companies have a critical dependency on nature across their direct operations, and that 46% of the world’s largest companies have at least one asset located in a key biodiversity area.
What’s been missing in the debate is a full understanding of the connectivity between business and nature; that’s what we’re shining a light on with this new research.
EF: What are you recommending that companies and investors do in response to these connections?
RM: I’m a member of the Taskforce on Nature-related Financial Disclosures (TNFD). Its full framework will come out in September 2023. I would strongly recommend that private sector organisations look at its guidance and follow the processes it outlines. It’s been designed to be cross-linked with the recommendations of the Task Force on Climate-related Financial Disclosures, so organisations can operationalise them in the same way, and create a single report.
If companies want to understand their impacts and dependencies on nature, and compare them with others in their sector, for example, then they can use the methodology we jointly launched with UNEPWCMC.
It is open-source, and it allows users to analyse nature risk at a specific location and score and map that risk by combining company-level information with best-practice nature-related data.
By producing this methodology and making it freely available, we’re trying to drive consistency, comparability and measurability with science-based impact and dependency measurement tools.
EF: You have also recently launched your Nature & Biodiversity Risk dataset. What does the dataset track, and how might investors use it?
RM: In addition to mapping that ecosystem integrity down to each square kilometre, we’ve linked that data to 1.6 million assets, so far. That involves considering the type of asset, the scale of its impact and its future production, and then mapping the asset to who owns it, and linking that beneficial owner to securities they might have issued.
All that work is the plumbing that needs to be done before you can start thinking about nature risk and coming up with decision-useful information. That’s the Nature & Biodiversity risk dataset we’ve launched: it’s very much the start of the journey, but we see this as a foundational piece that you’re going to need if you’re a bank or an investor looking at nature risk.
EF: What challenges do you see, as a source of ESG data and analysis, in terms of tracking corporate nature risk?
RM: With more disclosure from companies in line with regulations and the TNFD recommendations, entities like us and financial institutions will be better able to map companies to the nature impacts and dependencies they have.
Getting good data on location-specific nature risk will be key, and there’s currently a lower level of disclosure from companies on location-specific information. That can present quite a challenge, because without that granularity, it’s difficult for banks, asset managers, investors, regulators and supervisors to make assessments of risk and opportunity and accelerate the shift of capital towards nature-positive outcomes.
EF: To what extent will the recommendations of the TNFD address some of these challenges?
RM: The TNFD has gone through some very thoughtful public and private consultations. And I’m very confident that, where there are challenging areas, such as creating scenarios and looking at value chain nature risk assessments, its recommendations and timelines for next steps will be very proportionate.
This is a journey. We need to go quickly if we’re to achieve global goals on both nature and climate, but we’ve already got massive amounts of data – it’s now about how that information flows, and how it is aggregated for it to be understandable by those who allocate capital. We need to find ways of protecting and restoring nature in alignment with the global agreements we have made and, as in the climate agenda, the finance sector has a big role to play.
