Viken Chinien, Head of Department, Enterprise Risk, DNV
'It’s the economy, stupid’ (1). Economic performance and GDP growth drive political agendas. But there is a major blind spot in the way we measure such performance. The very foundation upon which our whole economic system is based on, i.e., nature and its natural capital, is not factored in the performance valuation. Our basic assumption in our economic models is that all the services that nature provides are effectively free; free to destroy ancient woodlands to make way for infrastructure, free to use as much freshwater as we want, etc. But things are about to change.
Why Nature matters
‘‘We are embedded in Nature…without Nature’s services, life as we know it would not be possible’ (2). Our whole economic system is underpinned by nature, using its natural capital – namely land, water, and biodiversity. However, the failure to account for the full economic values of the natural capital and its associated biodiversity and ecosystem services is a significant factor in their continuing loss and degradation.
December 2022 saw the ratification of the Kunming-Montreal Global Biodiversity Framework (GBF) by 188 countries as part of COP15 on biodiversity. The GBF aim is to halt and reverse biodiversity loss and put nature on a path to recovery by 2050. The framework includes 23 global targets for urgent action over the decade to 2030.
Target 15 of the GBF is particularly relevant for large and transnational companies and financial institutions as it requires such organizations to regularly assess, monitor and disclose their impacts and dependencies on biodiversity along their operations, across their value chains and their portfolios.
Integrating climate and biodiversity actions
Mitigation efforts to reduce the level of greenhouse gas emissions are ongoing with deployment of renewable technologies albeit not fast enough to meet the Paris Agreement ambition of keeping global warming to 1.5degC. Globally, our Energy Transition Outlook (ETO) 2023 forecasts a 13-fold growth in solar capacity, a 7-fold growth in wind capacity to 2050, as well as significant growth in electricity grid infrastructure. However, such capacity growth will require land and ocean space thereby affecting biodiversity through their placement, construction, operation, and decommissioning, as well as through their supply chain for manufacture of components including mining for raw materials.
An evolving regulatory landscape for corporates and financial institutions
To halt and reverse biodiversity loss, companies and developers need to understand the impact of their activities on biodiversity and on ecosystem services. Companies depend on nature through the set of ecosystem services that nature provides, such as freshwater and climate regulation, but have impacts on nature through exploitation of land/ocean resources, for example.
Financial institutions are connected to natural ecosystems through the activities of the companies that they finance, insure, or invest in. Therefore, financial institutions have a crucial role to play to stop and reverse the global loss of biodiversity. They can provide the incentive structure for companies to avoid and reduce negative impacts whilst restoring and regenerating ecosystem health. This will require a transformational shift in the way markets value nature.
The starting point for this shift is for companies and developers to evaluate and assess their biodiversity impacts, dependencies, risks, and opportunities. A raft of frameworks and standards have been developed to support such assessments.
The recently published recommendations from the Taskforce on Nature-related Financial Disclosures (TNFD) aims to harmonize approaches and has proposed a framework for corporates and financial institutions to assess their biodiversity footprint, as well as metrics and targets for reporting and disclosure.
Regulations are evolving fast to deliver on the ambition of the GBF. For example, in the EU, biodiversity-related disclosures are included in the Corporate Sustainability Reporting Directive (CSRD) for large companies and listed SMEs. Similarly, the Sustainable Finance Disclosure Regulations (SFDR) which applies to financial institutions requires those institutions to disclose activities that negatively affect biodiversity sensitive areas.
Biodiversity challenges for corporates and investors
DNV recently interviewed investors, corporates, and project developers across North America, Scandinavia, and the UK, to understand their key challenges and opportunities on biodiversity. Some of the key findings were:
Biodiversity issues are causing costly delays in planning, permitting, and financing, as well as operational delays, due to lack of proper biodiversity management leading to hold-ups in construction and operations for some operators.
Regulations are evolving quickly and are increasingly complex. Companies lack robust tools for setting targets/metrics, precise risk assessments and need more comprehensive guidelines for regulatory compliance.
Biodiversity data analysis, sharing and verification is challenging, creating obstacles to effective biodiversity management. Moreover, turning biodiversity data into insights and actions is a major challenge.
The above findings are not surprising given that nature is far more complex and interrelated than carbon emissions measurement. Biodiversity impact is generally local and requires local data on species, habitats, and ecosystems to assess the actual impact. Such data is, in many cases, not available and requires site surveys to be carried out. Seasonality will also play a part in such assessment given migratory and hibernation patterns of certain species and plant growth cycles. In addition, translating the findings from site data into clear actions plans can be challenging given that the assessment methodologies to quantify net gain and/or offset strategies are still evolving.
Biodiversity assessment in practice
A staged biodiversity materiality assessment tailored to meet the specific requirements of projects and/or organizations can address the above challenges. The biodiversity materiality assessment would aim to answer key questions in a series of steps:
What do we have to worry about? Screen for material impacts and dependencies by identifying the interface with nature along a company’s operations and across its value chains and evaluating the material impacts of those interfaces. The screening will identify high impact and / or high dependency sites based on biodiversity heat maps and local knowledge as far as available.
To what extent should we be concerned? Deep dive at the high impact/high dependencies locations to assess the actual state of nature. This can be carried out as a combination of site surveys and satellite data. The outcome would be a detailed view of the species and ecosystem status at those specific sites.
How do we turn the biodiversity data into insights and actions to deliver a positive solution? Build a clear risk and opportunity picture by integrating the findings on the state of nature at the high impact/high dependencies locations and the potential impact on relevant stakeholders (through open dialogue) such as local communities, regulators, NGOs, etc.
How do we ensure we are doing the right things? Develop the company’s biodiversity strategy, targets, and metrics. Implement appropriate mitigation and monitoring programs and ensure transparent reporting and disclosure of performance.
This assessment will enable organizations to understand their potential level of biodiversity risk exposure and their readiness (in terms of resources, data availability, internal capabilities, etc.) to address those risks and deliver positive solutions. The approach will necessarily vary between organisation types and will support them in meeting regulatory requirements in various jurisdictions.
Valuing biodiversity
Both climate change and biodiversity loss pose significant risks to our whole economic system and to our way of life. The energy transition will require a significant build-out of infrastructure over the next decades to deliver on the ambition of keeping warming to 1.5degC. It is important to recognize that technologies, such as solar and offshore wind farms, are in the ‘overriding public interest’. Early consideration of nature impacts at potential site locations for these projects can avoid and/or minimize biodiversity loss and identify best ways to integrate nature positive solutions into schemes from the outset.
Ultimately, we need to fully understand the risks to nature of our economic activities to effectively manage them. A biodiversity materiality assessment is the starting point and eventually, this needs to feed into the valuation and pricing of assets to make sure we put value on the natural capital.
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1. Catch phrase from James Carville, political adviser to Bill Clinton in the 1992 presidential election
2. The economics of biodiversity: The Dasgupta review, 2021, https://assets.publishing.service.gov.uk/media/602e92b2e90e07660f807b47/The_Economics_of_Biodiversity_The_Dasgupta_Review_Full_Report.pdf
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Viken is Vice President and Head of the Department – Enterprise Risk Management within DNV. He is a Chartered Civil Engineer and a transaction expert with extensive experience in the energy and utilities sectors, where he advises asset purchasers and sellers, as well as acting as independent lenders’ engineer on project finance deals. His expertise includes energy transition and sustainability with focus on the integration of transition plans and environmental, social, governance risks and opportunities in relation to companies’ investment strategies or business plans. He is also experienced in project finance, corporate finance, and is a certified ESG analyst.