An introduction – Nature is the new climate

Dominique Barker: Welcome to the Sustainability Agenda, a podcast series focusing on the evolving complexities of the sustainability landscape, with a view on addressing current issues in a concise format to help you navigate and take action. I’m your host, Dominique Barker. Please join me as we explore today’s most pressing matters with special guests that will give you some new perspective and help you make sense of what really matters.

Dr. Gemma Cranston: So the loss of nature and its ecosystem services from raw materials and food to climate regulation and flood protection brings high financial as well as social and environmental risks.

Dominique Barker: Hello and welcome to our three part series leading into COP15. We’ve just returned from COP27, which took place in Sharm el-Sheikh, Egypt, which had an overarching theme about the global south and about reparations and loss and damage. Basically, how do we get money from developed countries into emerging markets and how do we protect countries from further damage? COP15 is concerned with biodiversity, and frankly, I didn’t know anything about it until this past year. And I wondered what is the difference between COP15 and COP27? So COP15 is about biodiversity. COP27 is really for climate change. It came on my radar for two main reasons this past year. The first is that it was originally taking place in Kunming, China, this past April 2022, but with China’s zero COVID policy, a decision was made this past June 2022 to instead of deferring the conference, to move it from China to Canada. So it’s now taking place in Montreal from December 5th to 17th this year, 2022. Second reason is related to something called TNFD, which you’re going to hear about in the series, and that’s the Task Force on Nature-Related Financial Disclosure. It’s disclosure recommendations that will be coming out next year that relate to how we disclose the impact that businesses have on nature. And it really starts to show a path on how we can incorporate biodiversity into financial products. And I’ll give you a good example of that. There is something called the Rhino bond. And yes, you heard me right, that’s a rhino as in rhinoceros. It was issued by the World Bank’s Wildlife Conservation Fund this past March 2022, and it measured success or its KPI or key performance indicator was a measure of the rhino population increasing. So we can see a potential growth in these type of products as this sort of disclosure becomes more defined. So today we’re launching a three part series. Our first one will be with Gemma Cranston. I will note that at the time we recorded this episode, she was with the Cambridge Institute for Sustainability Leadership, but she’s just recently taken a role and she started as an Executive Director at Pollination. So she’ll be doing an intro into the concept. Our second will be with Camille Maclet and he is part of the biodiversity consultancy with the UN Convention on Biological Diversity. And that’s where we’ll talk about the TNFD framework and you’ll hear a little bit more about that or the Dominique Barker: Task Force on Nature-Related Financial Disclosure. And third, and finally, we’ll be speaking to Brandon Lewis, who’s with Manulife Investment Management and will be speaking about the practical implications of investing in natural capital. So as we approach COP15, I do believe this will become a topic of increasing importance to the financial community and also to our clients. And so hopefully this gives you a little bit of an overview as we approach COP15 and as TNFD disclosure becomes public next year. And as we have definitions around how we can incorporate nature into some financial decisions. Today we welcome Dr. Gemma Cranston, Director of Business and Nature at Cambridge Institute for Sustainability Leadership. In her role, Gemma supports business leaders to develop nature positive strategies and commitments. On today’s episode, we’re going to be discussing nature loss and how it poses both risks and opportunities for businesses and financial institutions now and in the future. Good morning, Gemma. Thank you for joining us on today’s episode of The Sustainability Agenda.

Dr. Gemma Cranston: Hi Dominique. It’s a real pleasure to be here. Thanks so much for inviting me.

Dominique Barker: And by the way, just a shout out. Gemma hosted one of our panels at our recent Sustainability Conference. Please take a look at the replay. It was a fantastic panel on Natural Capital. So Gemma, first let’s start by taking a stab at defining nature and by extension, biodiversity. Why is it so important to society?

Dr. Gemma Cranston: It’s a really great question. When we think about biodiversity and about nature, we often think of things like tigers, polar bears, humpback whales, the dulcet tones of Sir David Attenborough. But it is so much more than that. Biodiversity or biological diversity is the multitude of living things that make up life on earth. It encompasses 8 million or so species on the planet, from plants and animals to fungi and bacteria and the ecosystems that housed them, such as oceans, forests, mountain environments, coral reefs and so on. Human societies and economic activities rely on biodiversity in fundamental ways, and research has actually shown that $44 trillion of economic value generation, more than half of the world’s total GDP, is moderately or highly dependent on nature and its services and is therefore exposed to nature loss. It’s easy to think about nature and biodiversity in the abstract, but only by thinking about tigers, polar bears and those humpback whales, it’s easy to miss the importance of nature in the day to day functioning and engagement of our businesses and our global economy.

Dominique Barker: And the $44 trillion. Who calculated that? What’s the source on that number?

Dr. Gemma Cranston: So the $44 trillion was calculated by WEF, the World Economic Forum.

Dominique Barker: Thank you. Most people might not know, but biodiversity and climate change are intertwined. Do you want to speak to that point and get into it a little bit more?

Dr. Gemma Cranston: Absolutely. So, over the last decade or so, numerous initiatives like the TCFD, the Taskforce on Climate-Related Financial Disclosure have really driven a surge in assessment and reporting of company, investor and financiers, climate related financial risks and what we call carbon footprints. However, climate change is just one pillar of an environmental market failure. Nature is also in dramatic and sharp decline, and without rapid and systemic change, landscape degradation and subsequent biodiversity loss will disrupt the world’s economy in a massive and unpredictable way. As I mentioned, climate change and nature loss are deeply interconnected, intertwined. So what do we mean by that? Temperature rises, changes in precipitation patterns and extreme weather events have a range of impacts on nature. Furthermore, the decline of nature affects weather patterns and the resilience of ecosystems in the face of impacts from climate change, as well as their ability to capture and store carbon, which also is able to provide benefits to society. So by working with nature, this is a clear way to reduce the costs of nature loss and can be beneficial to businesses and also provides long term resilience, security of supply, enables license to operate and of course provides the usual reputational gains that we’re all so familiar with.

Dominique Barker: Thank you. And why should businesses engage with nature loss and what is their critical role? A lot of our audience today will be from the C-suite or from boards of directors. Why should they care?

Dr. Gemma Cranston: So the loss of nature and its ecosystem services from raw materials and food to climate regulation and flood protection brings high financial as well as social and environmental risks. With more than half of the global GDP highly or moderately dependent on nature, as I’ve mentioned. Yet the world’s natural resources do continue to decline. Unless this trend is reversed, it has been estimated by the World Economic Forum that at least 10 trillion USD of GDP will be lost by 2050 as ecosystem services declined and global financial institutions are actually among sectors exposed to businesses risks and their potential losses as a result. So really, to avoid irreparable damage, the value of nature needs to be integrated into every financial decision. This has implications for the finance sector and also for the corporate sector and their finance teams. This integration can ensure that capital is mobilized away from destructive activities and towards those that restore and protect nature so we can deliver this so called nature positive economy.

Dominique Barker: And I think one thing that’s maybe misunderstood by people is that once nature is lost, it’s really hard to bring it back. And so that’s why that protection element that you’ve just discussed is so important. So as I think we can all imagine for business, this is a really complicated area to navigate. This is not what corporates are used to doing. Can you point to some tools that can be used by corporates to understand their nature impacts? Any advice you would give? I mean, this is an overwhelming area for them, I’m sure.

Dr. Gemma Cranston: Absolutely. It’s a huge and complex area, but we shouldn’t shy away from that. We have the opportunity to take action now and not be afraid of things being complex. It’s about taking, taking the first steps and being brave to deliver change and transformation. And financial institutions and companies really want to understand fundamentally how nature impacts on an organization’s financial performance, right? And are looking for ways to consider longer term nature related financial risks that may result from decisions made by an organization. So financial institutions are now beginning to consider how to incorporate nature related risks and opportunities into their strategic planning, risk management and asset allocation decisions. However, they require information to flow from companies to do this, and that information is currently not necessarily available. In terms of the sorts of tools that you might need, I mentioned TCFD. We now have TNFD, the Taskforce on Nature-Related Financial Disclosure. And this taskforce is aiming to enable financial institutions to be able to report on their dependence and on their impacts upon nature by developing a risk management and disclosure framework for organizations to report and to act on through assessing their nature related risks. Really what they’re trying to do there is to support a shift in global financial flows away from areas that have negative nature outcomes towards nature, positive outcomes.

Dominique Barker: And so let’s talk about risks and opportunities that nature loss pose to the financial sector. Can you get into those a little bit?

Dr. Gemma Cranston: Of course. So as nature declines and continues to decline, there are essentially three key points to consider when thinking about why businesses and investors should look at their relationship with nature loss. The first is quite simple. Nature is fundamentally being damaged and is continuously being put at risk. That’s the first point. The second is that degradation reduces nature’s capacity to provide ecosystem services, the things that we as business, as society, as financial institutions need and depend on. And that happens either temporarily or permanently. So I’m talking about things like agricultural commodities that are traded, the water that’s needed in factories, the clean air required for a healthy workforce and so on. And the final, the third point is that these companies are the recipients of finance and investment sources of tax revenue and key links in supply chains. So there is a real vulnerability to nature loss, and that is therefore passed on as a vulnerability to investors, lenders, insurers, governments, connected companies and by extension, a source for potential instability. So that’s just the first potential error of risk. Those are the physical risks, if you like. So in parallel to those physical risks, we also have transition and liability risks which are emerging. So these include things like policies that are being designed to protect nature. Despite their positive impact on nature, such policies can cause economic harm to some companies and in turn those financial institutions connected to them. So that’s something to be aware of. Now, these physical transition and liability risks can drive a reorientation of portfolios and economic activity. And as I’ve mentioned, this can result in financial flows being redirected to boost ecosystem services that can provide benefits, positive benefits to people, and really support and drive transition to a nature positive economy.

Dominique Barker: And what is disturbing about everything that we’re talking about today is that the value of nature is only felt once it’s lost. So, you know, that’s going to be a challenge. And maybe I’ll just finish with the last question, which is the role of financial institutions in mitigating nature loss. And I mean, I am aware that there’s a lot falling on financial institutions in terms of helping to solve societal issues, but why not pile it on? What can we do?

Dr. Gemma Cranston: So there’s actually quite a lot that could potentially be done. So first of all, I talked about these baby steps. So first of all, financial institutions can identify the nature related sources of financial risk and then begin to embed nature into their operations, risk frameworks and portfolio strategies. Once we’ve got that embedded and the logic of financial decision making can be rewired, that’s when we’re going to get the much needed private capital that can be mobilized towards nature based solutions. And that transition to a nature positive economy can be catalyzed. So to accelerate nature integration, there are few things that you could consider. So I’ve talked about broadening environmental risk into thinking about nature and climate together. You can think about improving supply chain transparency, recognizing that that is often hailed as something that’s very difficult and challenging to do accurately. But I would recommend that you can at least get a high level macro idea of where those supply chains are coming from and tracking the value chain. There’s been much discussion around creating tools to automate risk assessments. You know, use cases are really time consuming, so we need to speed up that process. The options to include nature and portfolio company engagement. So when you’re out talking to your clients, make sure you’re having those conversations with portfolio companies as required. Data, data, data.  That’s what everyone always says, let’s generate more open access environmental data. Intelligence about nature related risks needs to be economy wide. Otherwise, smaller companies risk being more exposed, and then that transition to nature positive is not going to be inclusive. And then finally, think about how to embed and support motivated risk analysts. We need the right active mindsets with appropriate expertise to be able to ensure that the integration of nature into financial models is actually going to be possible. So a few things to think about.

Dominique Barker: Great. Well, that does seem overwhelming. I do know there’s quite a bit of work going on in terms of data, in terms of measuring biodiversity by hectare, for example. There’s by DNA. I mean, it’s amazing the technology and what some of the innovation happening in this area. Gemma, thank you so much. I think there was one comment you made it our conference. What was the sentence about the bees sending us a bill yet?

Dr. Gemma Cranston: We don’t get a bill from the bees. So, so much of this is hidden. They’re called externalities. So we don’t consider nature in our P&Ls, in our profit and loss. We’re not being invoiced by nature. So we need to ensure that we value it, whether we monetize it or not. I don’t think that matters quite so much, but we have to account for it in some way, shape or form.

Dominique Barker: Gemma, thank you so much for taking time today to discuss this with us in our inaugural three part series on Natural Capital. And hopefully maybe we’ll see you at COP15. And thank you very much for all that you do in this area. And thank you for our listeners for tuning in. Please join us next time as we tackle some of sustainability’s biggest questions, providing different perspectives to help you move forward. I’m your host, Dominique Barker, and this is The Sustainability Agenda.

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