Corporate Australia is well aware of the concept that climate change poses a financial risk to the global economy, but more recently biodiversity loss has become an equally important risk.
In fact, climate change and biodiversity loss are now often referred to as the âtwin crisesâ facing the global financial system and awareness of the role the financial sector plays in this is growing rapidly.
Importantly, a recent UK government-commissioned global study on the economics of biodiversity, often referred to as the âDasgupta Study,â concluded that our economic system depends on biodiversity. This fact is rightly worrying for the financial sector, given that the world’s biodiversity is declining faster than at any time in human history, and around 1 million species are threatened with extinction. .
Last month, G7 climate and environment ministers recognized “with deep concern that the unprecedented and interrelated crises of climate change and biodiversity loss pose an existential threat to nature, people, prosperity and security â.
There are potential parallels between natural risk and other responsibilities of financial institutions, such as anti-money laundering requirements. Just as financial institutions have a responsibility to ensure that they are not a conduit for money used to cause damage through criminal activity, there is a growing sense that the financial sector has a responsibility. to manage the economic risks associated with the degradation of nature – and to ensure that they are not a financing channel that destroys nature.
In this context, an International Nature-Related Financial Disclosure (TNFD) Working Group was launched last month. Over the next two years, TNFD will develop a framework for businesses and financial institutions to report on physical and transitional risks related to nature, which include immediate financial and material risks, as well as dependencies and impacts. the nature and the associated organizational and societal risks.
This ambitious scope of work has already been endorsed by G7 finance ministers and, with the TNFD officially underway, nature risk will rise rapidly to claim its place alongside climate risk at the top of board agendas.
This is relevant for Australian business leaders because, like the Climate-Related Financial Disclosures Task Force before it, the TNFD recommendations are likely to catalyze the expectation of regulators and investors that companies will make increasingly sophisticated disclosures about natural hazards.
Ultimately, TNFD also has the potential to divert capital flows through the global financial system from activities that cause the destruction of nature, or are “natural negative”, and towards those which are “natural positive”.
Perhaps most important to Australian business leaders, the discourse on natural risk now appears to be at a similar point to climate risk half a decade ago – when the founding legal opinion of Noel Hutley SC and Sebastian Hartford-Davis on Directors’ Duties and Climate Risk has been published.
This means that, depending on the particular facts of the case, it is possible that a court will find that natural hazards are capable of posing a foreseeable risk of harm to the interests of Australian businesses today. It follows that a director who does not properly take into account these risks could be held personally liable for the breach of his “duty of care and due diligence” to the company under the Corporations Act, in the to the extent that the risks interfere with the interests of the company.
Arguably, this obligation already exists because many of the factors that informed the climate risk opinion of 2016 are now also true for nature-related risks, or could be in the near future.
For example, there is ample evidence to show that Australia is exposed to physical risks associated with nature given the fragile state of ecosystems such as the Great Barrier Reef and the Murray-Darling Basin. Reduced ecosystem function (e.g. reduced ecosystem services such as pollination, temperature regulation or water purification) and its effects – i.e. associated physical risks – already overlap with Australian business interests.
An example of a risk associated with physical nature is the collapse of pollinator colonies. About a third of our food is pollinated by bees, and their pollination services generate billions of dollars a year for the agricultural sector. However, bee populations across Europe, the United States and China have been devastated, and it is predictable that Australia could be next.
Our bees are threatened by epidemics and parasites, as well as a long list of other pressures such as pollution, the use of pesticides, intensive agriculture, the introduction of exotic species and climate change. This is a significant risk for many Australian businesses along the agricultural supply chain, and directors should consider how this could affect the financial condition of their businesses.
In terms of transition risks, one must take into account the potential change in investor and consumer behavior. Consumer preference for sustainability-conscious products has been increasing for some time.
On the investment side, the general interest in Climate Asset Management – a recent joint venture between Pollination and HSBC that aims to invest more than US $ 6 billion in natural capital – has demonstrated that there is an emerging appetite for large-scale investment in natural assets. It is probably only a matter of time before the divestment of negative natural assets ensues.
Finally, if a new biodiversity framework is agreed at the United Nations Biodiversity Conference in October this year, as planned, directors may also need to consider the risk of regulatory transition in the context of the Australia and our major trading partners.
When all of these factors are taken together, it is clear that natural risk will become the next climate risk. Australian filmmakers should take action now to avoid being caught off guard about nature’s risk.
Geoff Summerhayes is a Senior Pollination Advisor and a former Board Member of the Australian Prudential Regulation Authority (Apra). Laura Waterford is an environmental lawyer and partner at Pollination