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Top 5 reasons Australian corporations should act on biodiversity loss and management – Environmental Law

Climate change and its impacts are increasingly on the
radar of corporate boards as a risk that requires integration into
short and long term ESG strategies. However, intrinsically related,
and often overlooked, are the risks to corporations associated with
biodiversity loss.

The establishment of the international Taskforce on
Nature-related Financial Disclosures (TNFD),
representing financial institutions, corporates and market service
providers with US$19.4 trillion in assets, is a move closer to the
development of a risk management and disclosure framework for
organisations to report and manage evolving nature-related risks.
In light of the release by the TNFD of its framework beta version
0.2, we have identified 5 reasons why boards should be thinking
about, and acting on biodiversity.

The economic value of biodiversity is clear given that the World Economic Forum’s 2020 Nature Risk Rising
found that US$ 44 trillion of economic value generation
– over half the world’s total gross domestic product – is
moderately or highly dependent on nature and its services.

Internationally, there are significant steps being made to embed
biodiversity considerations into policy frameworks. US President
Joe Biden signed an executive order on 22 April 2022, which seeks
to support the development of nature based solutions to combat
climate change and to better account for natural capital. There is
a high likelihood that there will be steps made by Governments,
including in Australia, to increase regulation in this area,
including via corporate reporting, disclosure and accountability in
respect of biodiversity loss.

With this background, we have identified the top five risks
associated with biodiversity loss and management for corporations
in Australia.

1. Operational risks arising from dependences on

Apart from any impacts a corporation’s activities may have
on biodiversity, the corporation will also have dependencies. Many,
if not most, companies’ operations depend on a biologically
diverse ecosystem to conduct their business in both the short and
long term, including within a company’s supply chain. There are
the obvious examples such as:

  • agriculture industries, which rely on soil health, water and
    bees for pollination;

  • pharmaceutical companies, which often rely on biodiverse
    ecosystems to develop new products; and

  • eco-tourism, which of course relies on biodiversity for its
    main offering.

As with climate change, as part of an ESG framework, identifying
those biodiversity and ecosystem dependencies is crucial to
ensuring that a corporation manages any risks into the future.

2. Investor expectations and access to finance

In line with the strong shift towards environmental social
governance (ESG) responsibility, investors are
increasingly cognisant of the potential effects of biodiversity
loss on their investments. For example, BlackRock, an investment management company
with operations in Australia, recently stated that its approach in
identifying investment opportunities involves trying to
“identify companies that embrace good practices around
biodiversity given potential environmental and societal benefits
and our belief that the value of these companies’ impact is yet
to be priced in”.

There is also growing momentum in the sustainable finance
sector, with lenders looking to shift their funding allocations to
ensure a more ESG-focused portfolio. Many of the major banks now
have specialist ESG and sustainable finance teams who assess
proposed loans having regard to the sustainability strategy and
credentials (or lack thereof) of the companies seeking finance
(including whether those companies consider and address their
biodiversity impacts). Companies who fall short on these metrics
will likely be subject to less flexible terms, less favourable loan
pricing, or limitations on accessing funding.

Sustainability linked loans (SLLs) are now
common in the market. SLLs are loan facilities where the borrower
is incentivised through the loan pricing to achieve pre-agreed
sustainability performance targets (SPTs). Where
SPTs are achieved, the borrower is rewarded with a decrease in the
applicable interest rate (and conversely, a failure to meet SPTs
may result in an increased interest premium). We look closer at
SLLs in our Insight Sustainability linked loans: key considerations
for borrowers and treasurers

Some financial institutions are going even further, directly
calling on governments to urgently halt and reverse biodiversity
loss. For example, prior to the first meeting of the Convention on
Biological Diversity COP15 (CBD COP15) in October
2021, 78 financial institutions representing over US$10.61 trillion
in assets urged the adoption of a more ambitious Global
Biodiversity Framework
with an expectation for financial
institutions and businesses to align financial flows to global
biodiversity goals. The pressure from the private sector to take
action on biodiversity is akin to what occurred for climate change
in 2021 in the lead up to COP 26.

3. Transparency and biodiversity-related disclosures

There are growing expectations from investors, shareholders and
other stakeholders for companies to be transparent and financially
account for biodiversity-related impacts and dependencies. The
expectations coincide with creation of the TNFD. As indicated
above, the TNFD is developing a risk management and disclosure
framework for organisations to report and manage evolving
nature-related risks, with the ultimate aim of supporting a shift
in global financial flows away from nature-negative outcomes and
toward nature-positive outcomes.

This increasing focus on biodiversity loss risk in corporate
disclosures is outlined further in our Insight The latest ESG frontier: biodiversity loss risk
, which includes our reasons for why biodiversity
loss risk reporting is likely to infiltrate Australia’s
corporate reporting standards within the next five years. In
addition, our Insight Over the climate change horizon: corporations must
prepare now for biodiversity loss risk disclosures
what we know about the TNFD so far and provides practical and
proactive steps for how boards can start to prepare themselves to
disclose and financially account for biodiversity loss risk.

Since publication of the above Insights, the TNFD has now
released its beta version 0.2 Risk and Opportunity Management and
Disclosure Framework for consultation, which can be found here.

The proposed framework implements a LEAP approach, being:

  • Locate: interface with nature;

  • Evaluate: dependencies and impacts;

  • Assess: material risks and opportunities; and

  • Prepare: to respond and report.

There is an emphasis on integrating biodiversity and climate
change reporting and to report not only dependencies on nature, but
impacts of business operations on nature.

4. Reputational risks

Given the growing expectation for companies to implement robust
ESG frameworks, those who fail to address biodiversity impacts may
face serious reputational risk and associated financial risk.
Conversely, those who address the issue will likely improve their
reputational standing, preserve their social licence to operate and
increase their competitiveness.

These risks are particularly acute given increasing consumer
preferences towards products and services which are environmentally
conscious. Specifically, recent research by The Economist Intelligence
Unit, commissioned by the World Wide Fund for Nature, concluded
that consumers are changing their behaviour, with searches for
sustainable goods increasing globally by 71% since 2016.

Other recent research undertaken by Deloitte found that
ethical and sustainability concerns are key considerations for many
UK consumers, with 32% of consumers highly engaged with adopting a
more sustainable lifestyle and 28% of consumers claiming they have
stopped buying certain products due to such concerns.

Accordingly, those companies who fail to address biodiversity
concerns and the associated reputational risk will potentially lose
customers, and may even be subject to targeted product or natural
resources boycotts (as with palm oil and Bluefin tuna) and civil
society organisation campaigns. Addressing this risk is also
particularly important to those corporations who depend on their
reputational standing and social licence to operate in local
communities to undertake their key activities (e.g. mining and
infrastructure development).

5. Environmental activism and the threat of litigation

Biodiversity litigation, being litigation which is concerned
with conservation of, sustainable use of and equitable access to
biodiversity, is not yet as prolific as climate change litigation.
(See further discussion of climate change litigation in our
Insights: Court decisions herald dramatic evolution of
climate change litigation
; From the courtroom to the boardroom: climate
change risks and remedies
; and Sharma appeal decision: end of the road for novel
duty of care?

However, it is likely that activists, non-government
organisations and even shareholders, will employ litigation as a
strategy to secure the protection of biodiversity and to drive
change in corporate practices. This new form of ‘biodiversity
risk’ or ‘nature risk’ litigation will share many
similarities with the typical types of climate change litigation
and include:

  • misleading and deceptive claims against companies who overstate
    their biodiversity actions and/or credentials (greenwashing) or
    understate their biodiversity risks;

  • actions against directors who fail to address biodiversity or
    nature related risks and therefore potentially breach their
    director duties under common law and the Corporations Act

  • challenges to project approvals and/or proponent appeals, where
    biodiversity risks and impacts are inadequately addressed;

  • actions based in negligence, particularly given that
    biodiversity impacts are likely to be more immediate and
    establishing ‘breach, causation and damage’ is more
    achievable when compared to climate change cases; and

  • product liability claims, where the same issue is potentially
    causing negative impacts to the health of people and the

Conclusion and emerging opportunities

While there are numerous biodiversity related risks for
Australian boards to consider when developing ESG frameworks and
setting short and long term strategies, there are also
opportunities to demonstrate innovation and leadership in this
space and proactively take action to minimise biodiversity

An example of opportunities in Australia is the development of
nature markets, including biodiversity and other offset markets.
Whether it is through carbon farming, blue carbon projects or
biodiversity conservation on private landholdings – the rise of
these nature markets will provide businesses (and individuals) with
opportunities to develop new income streams and assist with
mitigating biodiversity loss impacts.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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