Understanding biodiversity-related risks and corporate exposure
This article’s goal is to explain what we mean by biodiversity risks and biodiversity risk assessments for companies. It mainly focuses on understanding accumulated risk exposure (no dynamic view).
What are biodiversity-related risks? How should we go about measuring exposure?
Biodiversity-related risks refer to the potential adverse effects on businesses and economies resulting from biodiversity loss and ecosystem degradation. These risks are typically categorized into:
Physical risks: these arise when biodiversity loss and environmental changes disrupt ecosystem services, affecting human capital, economic activity, and ultimately financial valuation. You can read here our article explaining what are ecosystem services.
Transition risks: these stem from shifts in policies, consumer behaviors, or technologies aimed at mitigating human activity's impact on biodiversity. For example, new regulations or changing market preferences can create compliance costs or disrupt existing business models.
It is possible to assess biodiversity-related risks by analyzing dependencies on the 21 ecosystem services (i.e. proxy of the direct exposure to physical risk) and to measure the positive or negative impacts on biodiversity (i.e. proxy of the exposure to transition risk). Indeed, strong dependencies highlight an organization’s vulnerability to ecosystem degradation, such as disruptions to water or pollination services, while high impacts reflect its contribution to biodiversity loss, exposing it to regulatory, market, and reputational risks.
Most reporting frameworks such as the TNFD (Taskforce on Nature-Related Financial Disclosures) and the CSRD thus highlight a "double materiality" approach, emphasizing the need to assess both how nature affects an organization's financial performance and how the organization impacts nature.
What is the current level of biodiversity-related risks & associated global exposure?
The risks associated with biodiversity loss often interact with those posed by climate change. Despite this, it is only recently that financial institutions have begun recognizing biodiversity loss as a potential economic and financial risk, initiating projects to address it.
A few figures on where we currently stand using the proxies mentioned above:
On physical risks: approximately 50% of global GDP (the equivalent of $44 trillion) is moderately or highly dependent on nature and its services (World Economic Forum). Conversely, in France, approx. 42% of the value of securities held by French financial institutions is issued by entities highly or very highly dependent on at least one ecosystem services (-> check out this very interesting study co-writen by our own Antoine Vallier in 2021). In the Netherland, it’s more around 36% (Van Toor et al., 2020). It thus seems we have a strong dependency to ecosystem services, indicating a significant exposure to physical shocks arising from biodiversity loss.
On transition risks: according to the same studies, in France, the accumulated biodiversity footprint of French financial institutions is equivalent to the loss of at least 130,000 km² of pristine nature— which corresponds to the complete artificialization of 24% of the area of metropolitan France. Such impacts highlight the scale of transition risks faced by businesses with high biodiversity footprints.
Why are biodiversity risks even more complex to assess than climate-related risks?
Assessing biodiversity risks presents a broader set of challenges, making it even more complex for organizations than evaluating climate-related financial risks:
Complexity and specificity: ecosystem processes are highly complex, and biodiversity-related impacts and dependencies are location-specific: for example, the loss of a hectare of rainforest in the Amazon cannot be offset by preserving a hectare of wetland in Africa. Conversely, climate change is a global phenomenon with one shared atmosphere where GHG emissions are mobile and fungible.
Lack of global scenarios: unlike climate scenarios with a clear global target (i.e., limiting warming to 1.5°C), biodiversity lacks a single overarching goal. The Kunming-Montreal Global Biodiversity Framework (GBF) offers multiple goals and targets but integrating them into scenario analyses remains in its early stages.
Our approach at darwin
That being said, organizations still have tools at their disposal. At darwin, we approach biodiversity-related risk assessment by quantifying of businesses’ risk exposure. This involves intersecting areas of high biodiversity impacts and strong dependencies with financial exposure. Once a company understands its exposure, it can then develop forward-looking scenarios to anticipate risks and opportunities effectively.
In our next article, we will delve deeper into the importance of scenario planning and how it can help companies build resilience in the face of biodiversity challenges. Stay tuned!
Bibliography
A "Silent Spring" for the Financial System? Exploring Biodiversity-Related Financial Risks in France” - Svartzman Romain et al, including our own Antoine Vallier; Banque de France (2021)
“Global biodiversity scenarios: what do they tell us for Biodiversity-Related Financial Risks” - Julie Maurin et al (2022)
