At a glance
- Nature-related risks include physical, transition, and systemic risks.
- These risks can affect business resilience and capital access.
- Small businesses lag in addressing nature-related risks but can adapt quickly with guidance.
- Investors increasingly view nature and climate change as interconnected, and so are pushing to have businesses report nature-related risks.
Society and businesses increasingly recognise the urgency of protecting nature, yet it’s often confined to the too-hard basket.
This is because nature is “intrinsically complex”, says Guy Williams, former global head of nature at Deloitte and now head of nature-based solutions and advisory firm Ziranjiti.
“Nature is beautiful and it’s wonderfully complex, so it’s often pushed down the list of priorities — below things like human rights and climate change — as something many businesses plan to get to later.”
Estelle Parker, co-CEO at Responsible Investment Association Australasia, says our natural world isn’t something we can ignore.
“We’re destroying nature at a faster rate than it can replenish itself. No one has gone far enough to address the risks.”
Nevertheless, it’s not all doom and gloom. In recent years, there have been incredible advances in addressing nature-related risks. The Taskforce on Nature-related Financial Disclosures (TNFD) offers a framework for assessing and addressing nature-related risks and opportunities, while the Nature Positive initiative outlines how businesses can transition to a nature-positive economy.
Smaller businesses tend to lag behind large ones in nature positivity, posing risks to both the environment and their future success.
“Nature-related risks are hidden gremlins for every business and will actually affect the resilience of their business and the ability to access capital,” says Williams.
Here’s an outline of what nature-related risks are, how they impact businesses, how we can address them — and how finance professionals can assist.
What are nature-related risks?
Nearly all businesses depend on nature and the services it provides, either directly or indirectly, explains Parker.
“Supply chains depend on clean air, available water and thriving ecosystems.”
There are three types of nature-related risks. Physical risks impact natural resources like water scarcity or soil degradation; transition risks emerge from regulatory, technological or market shifts, requiring businesses to adapt to new rules or innovations; and systemic risks occur when local actions, such as deforestation, affect broader environmental conditions.
The World Economic Forum estimates that over half of the global GDP is highly or moderately dependent on nature and the services it provides. It also believes human-caused environmental issues, including biodiversity loss and extreme weather, pose the greatest long-term threats to the global economy.
While climate is a part of a healthy functioning natural system, climate risks and nature risks are distinct concepts, explains Williams.
“Climate risk is global in terms of the targets and the emissions, while nature is hyper-local. Nature risks play out very differently in every different location.”
How do nature-related risks impact businesses?
Nature-related risks can significantly impact companies by reducing valuations, deterring shareholders, alienating consumers, compromising supply chain resilience, and increasing insurance premiums.
“In the same way that climate change has made some assets basically uninsurable, the same will apply to nature in the not-too-distant future,” says Parker.
She says factoring nature-related risk into valuations can expose uncomfortable truths about a company’s dependencies and impacts.
“Investors are scrutinising these risks, considering potential regulations that could hinder operations or controversies like oil spills affecting biodiversity, and they’re exploring efficient ways to protect and restore nature.”
Small business lagging behind
Assessing nature-related risks often requires expert consultants and large data resources, typically affordable only to big businesses, with smaller businesses at risk of falling behind, says Williams.
“This allows larger businesses and financial institutions to make decisions to reduce their risk exposure, which could lead to them withdrawing capital from high-risk sectors. This could have direct financial implications for smaller businesses, which are still struggling in this regard and haven’t been part of these other-end-of-town discussions.”
On the upside, smaller businesses can adapt quickly, says Parker.
“They’re often more agile and closer to the interface with nature.”
What can small businesses do?
Addressing nature-related risks might seem daunting, but small businesses may already be doing more than they realise, says Williams.
He advises starting with a stocktake of current activities, guided by a financial professional.
“If you’ve sourced sustainable products or mapped your supply chain for climate risks, invested in eco-friendly agriculture or switched to renewable energy, you’re not starting from scratch. This is all part of a nature-positive strategy.”
Next, conduct a “heat map” alongside your financial expert of your business activities or products to identify high impact or high dependencies on nature.
“Nature-related risks are hidden gremlins for every business and will actually affect the resilience of their business and the ability to access capital.”
Guy Williams, Founder, Ziranjiti
Williams recommends ENCORE (Exploring Natural Capital Opportunities, Risks and Exposure), as a good place to get started. ENCORE is a free online tool for exploring nature-related risks. He also recommends the Taskforce on Nature-related Financial Disclosures (TNFD) frameworks, which help businesses manage nature-related risks and opportunities.
A team effort
Parker says governments have an important role to play in creating robust environmental laws and regulatory incentives, encouraging the reporting of nature-related risk, and removing misaligned incentives and harmful subsidies that promote destructive behaviours.
Williams emphasises the need for diverse expertise: lawyers to mitigate risk, communications experts to simplify messaging for executives, boards and customers, and financial advisors and accountants to make all these efforts financially accountable and relevant.
“Accountants and financial advisers play a key role in guiding small businesses through this process,” he says, adding that engaging with the people who manage the assets, including First Nations leaders, is also crucial.
As important as climate
Parker says investors are starting to see and treat nature in tandem with climate change.
“The two go hand in hand. We’re hearing more and more investors talking about the “climate-nature nexus,” she says.
She expects nature-related reporting to soon become mandatory, which is a service financial professionals can provide.
“Investors are already calling for it, and the International Sustainability Standards Board is working to integrate nature into global reporting standards,” she says.
“Those who begin identifying opportunities to improve nature early will have an advantage.”
