The investment community is increasingly considering the environmental, social and governance (ESG) aspects of their investments. This is driving companies to recast their sustainability focus. In our last blog, we looked at the differences and similarities between ESG and Sustainability through a carbon and climate lens, and concluded that investors will have to learn to understand and accommodate system level risks and thresholds. The ability to do this requires expertise beyond understanding the various components to ESG. We also explored the difference in intent between an ESG approach and a sustainability approach, together with the overlap and interplay between them which is the essence of dynamic materiality.

This blog uses the distinction between ESG and sustainability as well as the concept of dynamic materiality to open out discussion beyond carbon and climate, and extend it to another area where understanding systems risks and thresholds is essential: nature and biodiversity.

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Nature and biodiversity are concepts that can be understood in many ways - for example, a science or knowledge-based approach, or using an ecological or economic framing. In high level terms Nature refers to the natural world. It includes biodiversity as well as all the aspects of the Earth as we experience it, such as oceans, mountains, weather systems and such like. In this respect nature is broader than biodiversity which refers to diversity and variability of life at different levels. Where we are talking about nature and how it exists in a particular place, the term ecosystem would be used and, related to this, at times the idea of eco-system services (the benefits that flow to societies from eco-systems) comes into play. The Pentland Centre will further detail these different concepts and perspectives in a future report.

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The understanding of, and disclosure about, nature and biodiversity in financial and non-financial reports is currently less mature than that on climate. However, companies are starting to develop approaches and strategies, and to prepare for more comprehensive reporting requirements. Guidance in this area exists through the World Benchmarking Alliance, and will continue to develop through the Task-Force on Nature Related Disclosure (TNFD). TNFD has recently launched a consultation for its proposals as well as having produced a business and biodiversity ‘how to’ guide called LEAP. TNFD explicitly recognises the double materiality issue by designing its proposed standard to require both ‘inside-out’ and ‘outside-in’ reporting. This is partly based upon a tight connection between the inside-out impacts of a company on nature and biodiversity, and its medium- and longer-term business success.

Questions still abound: how will investors deal with the system level risks and thresholds? Will nature and biodiversity prove to be the topic upon which ESG evolves a more nuanced approach? Here are some of the challenges that we currently foresee in business and biodiversity conversations.

1. Targets and Strategy

The idea of ‘Net-Zero’ has catalysed corporate sustainability action with increasing numbers of companies setting climate targets. Whilst these are ‘science based’ in theory, they actually tend to focus on what an individual company believes it can do to address emissions. At the same time, the investments by companies to deliver the targets appear to be what management believe investors will accept without compromising financial returns. The consequence is that there is no way to know if these sums will either build the necessary resilience at the individual corporate level, or will collectively add up to what is actually needed to effectively address climate change regionally or globally.

Nevertheless, the fact remains that any reductions made will contribute to the global goal of atmospheric emissions reductions, and so incremental movements in that direction are seen as good, even as we understand that they are not sufficient.

In contrast, critically addressing nature and biodiversity concerns depends on the physical context in which impacts on nature take place, or where there is a clear dependency on the ecological health of an area on a company’s activities. As such, corporate actions on biodiversity will need to vary from place to place. This will create a direct connection between these places, corporate actions, performance and impact. Scrutiny and accountability may be improved, yet there may not be a simple consensus about what ‘good’ and ‘sufficient’ action means.

Addressing nature and biodiversity challenges will require a shift away from simple-to-communicate targets that drive corporate strategy. It will require companies to better understand how their mission and strategy affect biodiversity in both a physical sense, and value creation more broadly defined. This has been effectively detailed in a recent paper on water by Will Sarni and Alexis Morgan that has parallel lessons for biodiversity.

Key to this will be how a company is collaborating with other organisations and groups operating in the same location, where biodiversity impacts or dependencies may be evidenced (such as a landscape, ecosystem or jurisdictional domain – whichever makes the most ecological sense). Such collaboration includes between actors within the same sector (an example of this would be the Seafood Business for Ocean Stewardship - SeaBOS), across sectors, and with governments and local communities; all collaborating for mutual benefit.

2. ESG and Sustainability

A requirement to report on the presence and effect of spatially based initiatives would be found within a sustainability reporting framework. The challenge, however, is how such a physical basis for action would be translated into an ESG construct. That is, how would companies ‘roll up’ their reporting on such geographically and ecologically diverse programmes? And how would asset managers assess the risk reduction/resilience delivered by such programmes reported by even one of their portfolio companies?

This may be especially difficult if there are threshold effects in ecosystems whereby impacts on biodiversity appear to be linear until a critical threshold is reached, after which an ecosystem might function in quite a different manner. This kind of dynamic might be especially challenging where a company that an investor is interested in is not itself driving movement over thresholds, but who will experience the changing operating conditions regardless.

This will require more ecological literacy than is required to pursue a carbon reduction target. The need for this systems perspective, knowledge of what is happening on the ground, and potentially across several companies operating in the same location may best be addressed by both ecological education and employing data scraping software and analysis tools. We may get to the point therefore, where asset managers, through their understanding of systematic risk, are ahead of their portfolio companies in understanding nature and biodiversity risk. This could be a valuable advancement of ESG based evaluations, facilitating a two-way dynamic dialogue between asset manager and company management.

3. Science and Knowledge

Business and biodiversity evaluations also need to appreciate and fully embrace the fact that nature and people are intertwined and that there are different knowledge systems that can be brought to bear on understanding nature. This has implications for the dominant approach to nature and biodiversity, which is rooted in scientific knowledge and processes, as well as the dualism of nature and humans that is rooted in Western thinking.

A parallel process to the TNFD is the Science Based Targets Network that aims to set targets for nature based upon science, and particularly Western science. Yet there is increasing pushback on science being the only way to understand humanity’s interconnection with nature. Corporate action for nature will likely not only be about following a ‘just transition’ (that is, moving to a sustainable economy in a way that’s fair to all) but will need to (at least) blend different perspectives and knowledge systems. As Jennifer Wilkins has recently discussed: “This combinatory approach is crucial to establishing local level planetary boundaries that are scientifically and ethically defensible”.

This will mean that we have to look beyond the knowledge systems that are prioritised by the Global North. There are many different indigenous peoples around the world, representing 6% of the global population, living on about a quarter of the world’s land, who are safeguarding 80% of the world’s biodiversity. Repairing the damage done by centuries of oppression and economic exploitation, and fully embracing the agency and legitimacy of indigenous peoples and their local stewardship/guardianship practices is essential, and will require a very different approach than the traditional ‘consultation’ of local communities by corporate bodies.

These observations connect to another ‘task-force’ in development, the Task-Force on Inequality-related Financial Disclosures (TIFD). TIFD is explicitly seeking to include historically marginalised people in the process of creating their framework. Watch the Pentland Centre blog space for something on this in the near future.

Informing Progress

This blog has proposed that the ESG framing that has characterised corporate approaches to climate change will need to evolve and develop a different dynamic to address nature and biodiversity. Companies and investors in turn will need to shift back more towards a sustainability framing to authentically demonstrate progress and performance on nature and biodiversity. This is due to the inherent complexity, spatially relevant and culturally imbued features of nature and biodiversity. Complicating this will be the overlap and connections between action on climate and nature. Sustainability professionals across all sectors will need to understand and navigate these nuances.

The Pentland Centre for Sustainability in Business at Lancaster University will be preparing a series of reports over the coming years that highlight progress, best practice and leading approaches on nature and biodiversity. The work is intended to help guide corporate executives (enterprise risk management, sustainability and ESG teams), asset managers, insurance sector, accountants, regulators, industry platforms and academics active in this topic.

Jan Bebbington is the Director of the Pentland Centre for Sustainability in Business

Duncan Pollard is an Honorary Professorial Fellow in the Pentland Centre for Sustainability in Business

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