Navigating the Unknown: Managing Nature-Related Risk in a World of Incomplete Data
📈 What we know about nature, and how we can act now to halt the negative impact of corporations and financial institutions on biodiversity
Last month, we shared a primer on how data from the natural sciences is being applied in the real world.
In this follow-up piece, we’ll be diving deeper into the application of nature data to assess the material nature-related risks on businesses and financial institutions. We’ll also discuss how we might approach this challenge, with reference to guidance provided by the Taskforce for Nature-related Financial Disclosures (TNFD).
Part One: The data we have, versus the data we need
A good place to begin our discussion is to understand: What data do we already have, and what might their limitations be?
A number of global biodiversity databases have been compiled by academics and NGOs, covering different aspects of biodiversity. Some focus on species occurrence records. The Global Biodiversity Information Facility (GBIF), for example, has collated data on 2 Billion species occurrences based on species description papers and scientific surveys, while the Ocean Biodiversity Information System (OBIS) hosts over 108 million presence records of marine species. Other databases record DNA-based information, such as the International Barcode of Life, whose first programme delivered a foundational DNA database of 500,000 species DNA barcodes, with the intention of growing this to 2 million species by the next couple of years.
A screenshot from GBIF, which compiles and references species occurrence data from around the world.
The significance of this work should not be understated. DNA-based databases, for example, can enable eDNA analyses to rapidly and cost-effectively identify species using direct samples from the site.
Recognising this, however, doesn’t negate the fact that these databases weren’t built with the sole intention of assessing the impact of business activities on nature, nor the effectiveness of interventions to protect or restore nature. Since species occurrence databases like GBIF and OBIS are dependent on scientific papers to source their data, the frequency, spatial coverage, and resolution of said data is highly irregular.
That means that while a business might know that a certain rare species was recorded within a 100 mile radius of their operating site 50 years ago, for example, it is far less likely that they have information readily available about whether that same species ever occurred within the operating footprint of their site, and if it did, whether it was still found there up to 10 years ago.
The above databases also do not illuminate questions about a business’ dependencies on nature. Just because a database may record the presence of a pollinator in an area where a crop of interest grows doesn’t mean that said crop is dependent on that pollinator. Further studies would have to be done to answer that question.
In other words, existing biodiversity databases are limited in their ability to line up the interface between nature and business neatly. They cannot, using standardised methodologies, provide up-to-date baselines for assessing impact and dependencies, especially without on-the-ground work being done as well. For large businesses with large footprints and supply chains, this presents obvious challenges.
Part Two: How much data is good enough?
Given the above, let’s ask ourselves: what data is sufficient to inform decisions for mitigating and managing nature risks?
Let’s return to the example above on the rare species. This highly specific example employs an individual species-level assessment of biodiversity, which is just one way to think about the health of our natural world. Ecosystem-level data, such as habitat rarity, are also important for a holistic view of biodiversity and nature, and in general, broader metrics prove useful when granular data is unavailable, especially to inform early action.
To begin with, tools such as the SBTi Materiality Screening Tool, GRI Sector Programme, and ENCORE tool have been developed to which provide higher level insights into relative impacts from varying business activities. Large scale beef and dairy production, for example, scores poorly on things like water use and climate change impact, while the provision of healthcare scores moderately on pollutants from the chemicals used in hospitals. While this doesn’t necessarily provide insight for site-level action, it is certainly helpful guidance at the portfolio level.
To this end the TNFD has released guidance on three “levels” of nature risk assessment approaches which vary in their utility across decision areas.
Example of decision areas relevant for investors, and the applicability of different nature risk assessment approaches outlined by the TNFD.
At the most basic level when quantitative data availability is low, qualitative assessments can still be made to prioritise areas to focus a nature strategy on based on a balance of impact, dependencies, and proportion of Assets Under Management - what is known as “Heatmapping”.
Example of a heatmap that might be used by a financial institution, reflecting both nature dependencies and impact (Credit: TNFD).
In the diagram above, for example, while utilities and electricity generators carry high risk across multiple impacts and dependencies, they only make up 3% of the total AUM. Extractives and mineral processing scores slightly better, but make up a larger proportion of total AUM. Managers might decide to focus initially only extractives and mineral processing investments within their portfolio.
Asset tagging enables more granular insights, as reflected in the graphs above (Credit: TNFD).
Nature risks assessments can be taken a step further using an approach known as “Asset-tagging”.
In asset-tagging, the depth of the analysis depends on the amount of qualitative and quantitative data that is available from counter-parties, including suppliers or investees: What products do they use? Which companies, in what countries, and which specific coordinates, are they sourced from? Procurement managers might already have some of this data available.
With company- and coordinate level production data, managers can pursue diversification and risk strategies, and engage with individual suppliers and portfolio companies on high-risk assets.
If you only take one message away from this section, let it be this: No matter what an organisation’s data limitations are, action is possible today.
Part Three: The end goal for assessing nature risk
Beyond the approaches highlighted above, in their highest form, nature risk assessments take a scenario-based approach. Similar to how one might analyse a financial model, this approach translates exposure to nature-related risks into financial implications for organisations.
For example, the financial institution UBP, together with the Cambridge Institute for Sustainability Leadership (CISL), conducted an analysis on the transition risks for fertiliser companies based on the EU’s Farm to Fork Strategy, which aims to reduce fertiliser use by 20%. They used discounted cash flows to calculate a base case, as well as three different scenarios where a 20% reduction in fertiliser was adopted in the EU only, in the EU as well as in countries that export to the EU, and globally, and found that polices reducing fertilizer usage could lead to valuation declines of between 12-46% for two major fertiliser producers. If extrapolated to listed fertilisers globally, they projected that equity value across the sector could decline by USD 25–67 billion.
Such conclusions are clearly very granular, requiring quantitative modelling with strong supporting assumptions in order to provide meaningful insights. Because of its complexity and relatively nascency of world of reporting and managing nature-related risks, scenario-based approaches have not yet seen significant uptake across organisations.
That being said, we remain hopeful in its potential and future uptake, especially as the TNFD’s early adopters reports begin to release their reports by the end of this year.
Concluding thoughts: Takeaways for investors and innovators
From where we stand as investors focused on driving biodiversity-positive impact, we’ve looked hard at how we can support the world as it looks to mature it the way it manages its nature-related impacts and dependencies. We’ve also turned to the world of climate-related risks with it’s modest head start, to glean insights on what we might expect from the nature-risk space.
Beyond the information outlined above, here are three key takeaways for us at Silverstrand, and companies we look to support and invest in:
Action-oriented solutions are key, especially as reporters progress through the LEAP process and look for value beyond simply reporting obligations. Solutions providers that can provide relevant and actionable recommendations, balancing cost and effectiveness, will differentiate themselves in the market. Analogous references in the climate risk space include ClimateAI, which offers recommendations for things like maximising shipping efficiency based on weather, as well as Tomorrow, which helps retail and sporting establishments use climate analytics to reduce their energy expenses.
Strategic relationships should be developed early, as acquisitions in the space can happen early in a company’s life cycle and the pathway to exits can take years to develop. In the carbon space, for example, Carbon Delta was acquired by MSCI after only 2 rounds of fundraising.
Because of the nature of this work and the relative nascency of the industry, tech alone (like AI and large language models) is not yet ready to conduct scenario-based analyses. A number of consultancies and non-profits begin to offer their own nature-risk solutions (Such as S&P Global’s Nature & Biodiversity Risk Data Intelligence and BCG’s Quantis), and start-ups and tech providers would do well to align themselves with such consultancies as clients, rather than compete with them directly for business operators and financial institutions - at least, for now.
Thanks for making it this far. If you have any insights you’d want to share with us, or if you share our mission and are active in this space, we’d love to connect and hear them.
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