18 January 2023

Putting a price on the priceless

Quantifying Nature is developing a platform that will enable companies and investors to understand their assets' value at risk from degrading nature. Its CEO Adrien Firmenich and head of biodiversity Minerva Singh explain

Environmental Finance: What do you see as the critical challenge facing investors and companies in understanding the financial implications of biodiversity loss?

Minerva SinghMinerva Singh: There are three key reasons why investors and companies need help to fully understand the financial implications of biodiversity loss: lack of supply chain transparency; the absence of a single overarching climate-nature disclosure framework and valuation methodology; and an overabundance of often unstandardised biodiversity metrics.

Biodiversity impact analyses have traditionally been conducted at large, sub-national spatial scales. However, investors need clear visibility into the supply chains of the companies they have invested in: they need easy-to-understand and straight-to-the-point monetary value information that represents the extent to which each company asset is affected by nature loss.

The second and third challenges are starting to be addressed by the work of the Taskforce on Nature-related Financial Disclosures (TNFD) and of the Taskforce on Climate-related Financial Disclosures (TCFD). This work can be harnessed to make the disclosure process more straightforward. This common-ground framework can be complemented with the IPBES [The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services] methodology to value ecosystem services and the statistical natural capital accounting methodology to yield standardised, easy-to-understand metrics that investors can integrate into a wide range of scenarios.

EF: What approach have you taken at Quantifying Nature to address these challenges?

MS: We need to fully understand, identify and quantify the financial implications of biodiversity loss. Compared with climate change, biodiversity is more complex. One approach is determining the value and impact of every living entity on Earth within a highly complex intertwined system. The second is to take a more pragmatic and linear approach, as with climate change, even though it will only partially represent our dependencies and impacts on nature.

We chose the second approach. We have been assessing the implications of biodiversity loss by looking first at the most apparent cause-and-effect scenarios – such as deforestation loss on hydropower energy generation or the impact of fertilisers on the reduced output of certain crops, which is partly due to the decline of pollinators.

This seemingly simplistic approach has allowed us to start generating economic values of biodiversity loss. Our ultimate objective is to render our software-as-a-service capable of generating biodiversity insights for any desired financial risk parameter at any location on Earth.

This requires bridging data and information, which we are working towards through our consulting business, enabling us to work on many fascinating projects. For instance, we are currently studying the vulnerability of Mexico's tequila industry to climate and biodiversity change.

Tequila production represents around 1.25% of Mexico's agricultural GDP. Tequila is made from blue agave. Blue agave requires the pollination services of three threatened bat species: the lesser long-nosed bat, greater long-nosed bat, and Mexican long-tongued bat.

Our in-house analysis identified critical areas where bat repopulation efforts would yield the most benefit in blue agave pollination and hence tequila production. We then mapped these areas' spatial change through time and different climate scenarios, enabling tequila producers to adapt to climate change and biodiversity loss swiftly.

EF: What does the process involve?

Adrien FirmenichAdrien Firmenich: The first step in Quantifying Nature's Earth Engineer quantifying process involves geolocating every factory, operation centre, warehouse etc., for any company of interest to the investor. Each asset is attributed an economic value based on the impact it has on the natural environment and the risk that nature loss and climate change pose to that asset. This asset-based approach gives the investor a 360-degree view of a company's entire supply chain. It identifies the assets prone to the most significant future financial losses from climate-nature loss.

This is communicated to our clients via financial losses and gains under different biodiversity change scenarios and timelines. Its beauty lies in its simplicity, and we quickly realised that interlinkages between apparently unrelated phenomics began to appear as we progressively quantified more elements. Assessing the second-degree cause-effect feedbacks of other biodiversity elements becomes possible.

We have based our valuation methodology on a combination of three of the most popular and robust nature and climate disclosure frameworks – the TNFD, the TCFD and those developed by Global Canopy – as well as elements of other frameworks to ensure it is as holistic as possible.

We want to create standardised financial risk metrics using a sound methodology stemming from a multi-stakeholder-approved framework, enabling our clients to complete their climate-nature disclosures quickly, accurately, and cost-effectively.

EF: What outputs will the platform offer its users?

AF: Quantifying Nature's Earth Engine platform offers a wide range of outputs to its users, which can be divided into four main categories: economic losses due to climate impacts; economic losses that stem from biodiversity degradation; financial losses attributed to the collective and mutually reinforcing effect of climate change and biodiversity loss; and the double materiality natural accounting impacts.

The financial implications of climate change on companies can either be physical, due to events such as floods or typhoons, or transitional, due to external stressors from policy, such as increasing carbon taxes, especially around Scope 3 carbon emissions – those emissions generated as the result of activities indirectly generated in an organisation's value chain – and rising energy prices.

Our platform also distinguishes the financial impacts of biodiversity losses from direct physical threats (e.g., dropping population levels of agave-pollinating bats in Mexico leading to decreased tequila production) or transitional dangers. Quantifying Nature also identifies the financial impacts that stem from the reputational damages that a company can incur from causing biodiversity loss (e.g., BP's stock price going down after the Deepwater Horizon disaster).

Thirdly, our platform aims to simplify and introduce the concept of financial impacts caused by the combined effects of climate change and biodiversity loss. This is of primary importance, as you cannot have accurate climate change financial risk analytics without the concomitant integration of the biodiversity element and vice versa, given their mutually intertwined relationship. For example, without the protection afforded by forests, economic damage to infrastructure from flooding would, on average, be 30% greater worldwide.

The fourth output generated by our platform is non-financial disclosures, referred to as double materiality matrix values, which address both financial and global impact issues related to materiality. Our platform, integrated with the Global Reporting Initiative framework methodology, displays the double materiality impacts of biodiversity loss.

In short, the product offers its users granular insights into a company's supply chains, asset-specific dependencies, and its impact on biodiversity loss and ecosystem degradation. The world needs more standardised, comparable biodiversity indicators and precise reporting mechanisms. Adopting a dual approach, integrating TCFD and TNFD criteria, will equip companies with the tools for moving beyond net-zero emissions to nature positive.

The Finance for Biodiversity pledge saw 126 financial institutions with €18.8 trillion ($19.8 trillion) in assets under management make a statement of intent to direct cash flows to meet biodiversity goals. This signifies a clear appetite for measuring the value of nature loss. Quantifying Nature's proprietary platform is the secret sauce.
Users will be presented with a report directly linked to mandatory disclosures and those expected to be rolled out and come into force as early as next year. For example, our risk matrix score for deforestation alerts a given entity to the upstream and downstream impacts on operations in real time. As nascent biodiversity accounting mechanisms take shape and as nations come to grips with the new legislative landscape ushered in after the COP15 accord, Quantifying Nature is positioned to lead the charge.

EF: I understand you are planning to launch the platform in June. What are the next steps in its development?

AF: We are fortunate to be working closely with a strong network of asset managers and utility providers as we move to roll out a market-ready product this summer. Continuously improving the accuracy of our data is paramount, with ongoing advances under the watchful eye of key industry advisors.

Post-launch, we plan to rapidly scale to become the international gold standard for bespoke biodiversity metrics and automated disclosure while, at the same time, offering a tool that is accessible to large and small organisations. Rendering our service accessible to SMEs [small and medium-sized enterprises] is paramount, given their economic and environmental impacts and currently neglected value.

In the medium term, Quantifying Nature will explore linking company reporting and a transparent mode of achieving nature-positive outcomes via 'bio credits'.
We also plan to keep a close eye on the evolution of the double materiality disclosing framework. Should the double materiality movement continue to gain strength, we will revisit our current framework and create financial risk metrics representing both financial and impact risks.

For more information, see: https://quantifyingnature.com/

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