The urgency for the global economy to become “nature-positive” has intensified in the past few years, with calls for corporates to act on nature disclosures — the next frontier of ESG transparency.
More than half the world’s GDP is estimated to be dependent on the natural world — yet natural ecosystems are rapidly deteriorating, representing an annual loss of at least US$479b, according to the UN Environment Programme Finance Initiative. At the same time, restoring nature can make a powerful contribution to mitigating climate change. The potency of its potential risks and returns puts nature firmly in the frame of directors’ fiduciary duties. But what is often harder for directors to grasp is where to start.
It’s not straightforward to measure nature dependencies and risks, as flagged by the Australian Climate Leaders Coalition in its recently released guide to integrating nature into business strategy. But it’s “entirely achievable” says the group of about 50 Australian company CEOs, originally formed to push decarbonisation. Adding extra impetus to do the “heavy lifting” now the group predicts global nature-related disclosures will become mandatory within two to five years.
Framework momentum
While there is an undoubtedly steep nature-risk learning curve for all players across the global business ecosystem, among the trailblazers is a cohort of 320 organisations — 12 from Australia — which recently became the first to commit to report against the Taskforce on Nature-related Financial Disclosures (TNFD) recommendations within the next two reporting years.
Finalised last September, the TNFD recommendations will likely underpin forthcoming international nature disclosure standards, just as the now disbanded Taskforce on Climate-related Financial Disclosures (TCFD) culminated in the International Sustainability Standards Board climate disclosure standards (known as IFRS S2) and, in turn, Australia’s.
Healthy start
Among the early TNFD adopters is the new owner of Australian-based health supplements company Blackmores, Kirin Holdings. Blackmores was one of the first companies to pilot the beta version of the TNFD framework in 2022. “It’s not a very long bow to draw to understand our deep connectedness
to nature given our naturopathic heritage as a healthcare company,” says Blackmores head of sustainability Sally Townsend. “Participating in the pilot really helped us learn about the risks and opportunities and, from there, we’ve started building capability and considering how we approach valuing nature strategically across our portfolio of natural ingredients and through a systems lens.”
While Blackmores initially thought the work would compete with its plans to decarbonise as it targets net zero emissions by 2030, Townsend notes it’s become increasingly apparent that the two are inextricably linked. “We can’t get to net zero without nature-based solutions,” she says. “We’re mindful that some of the interventions to decarbonise at scale — such as investment in large- scale renewable energy projects and monoculture plantings for carbon credits — could negatively impact nature, but we also see some of the most effective carbon sequestration initiatives are nature-based solutions.”
Townsend says the starting point for Blackmores was the assessment of one of the botanical ingredients sourced by the company from among its 1000 or so ingredients, 98 per cent of which are from offshore suppliers. With help from advisory Pollination Group, the assessment tested the business’ reliance and impact on the ingredient against a range of parameters such as water, soil and pollination. From the insights gleaned, Blackmores developed a “nature materiality matrix” to help scale its approach, along with a roadmap to become nature-positive.
“We know we can’t do it if we don’t embrace systems-based thinking and collaborate across our value chain,” says Townsend. “Not only do we need to look to address any inherent risk, but to uncover opportunities for value creation as well. This isn’t sustainability side hustle, it’s about rewiring our business.”
Preparation exposure
While the budding list of companies tackling nature risk is set to expand, board director Christine Holman GAICD says the global nature- related movement is advancing at a much faster clip than climate, leaving many boards unprepared to manage the developments.
“Climate and environmental risks are now the most significant risks identified by global executives for the next decade, but they’re also the risks for which we seem to be the least prepared,” says Holman, whose directorships include AGL Energy, Metcash and Collins Foods. “In some boards, there is a knowledge gap in the link between the crisis that’s happening in nature and the financial implications — some think that somehow their companies are not impacted, or that their board’s agenda is too full to prioritise it. But inaction and failure to identify, consider and assess the nature- related risks likely to harm companies will not insulate boards from exposure to liability, given that regulatory requirements and expectations appear likely to tighten.”
According to Virginia Malley FAICD, for many boards, propensity for action is dependent on their company’s proximity to nature-related risks, but pressure is growing in step with investor and community aspirations for better environmental protections. “Different organisations that are voluntarily addressing the Sustainable Development Goals, whether because the change is necessary to better mitigate risks to natural capital or because they have an explicit mandate or obligation, have that close proximity,” says Malley, a director of Icare, chair of the Carbon Industry Code Review Panel and former deputy chair of the NSW Biodiversity Conservation Trust.
“Even if a company might think it has a distant relationship or dependency on natural capital today, those impacts are only going to become more pronounced. I do see pressure growing and any initiative that makes transparent companies’ dependencies and impacts on the environment will get traction.”
Sowing change
Tasmania’s largest private forest manager, Forico, is another TNFD pioneer. As the manager of around 173,000ha of land — just over half of which is plantation, the rest mainly natural forest — the company has been collecting data on its natural assets since it formed in 2014. In 2020, it took a leap, becoming one of the first organisations to put a value on its natural capital and publish a trailblazing annual “natural capital report”.
Forico board member Tracy Matthews FAICD says the initiative was spurred by a desire to reflect the company’s work as a custodian of land assets in a way that investors and stakeholders could easily understand — while also informing board decision-making.
“It’s about looking at the material improvements and detriments across our estate and how we’re increasing the value — and reflecting that in a familiar format,” she says.
Forico’s approach no doubt contributed to last year’s decision by major Australian superannuation fund UniSuper and two European pension funds (the UK’s Pension Protection Fund, APG Asset Management, acting on behalf of Dutch pension fund ABP) to acquire the business, given its snug fit with their sustainability-focused investment mandates. “The ultimate goal is to allow us to uncover the impacts and dependencies, the risks and opportunities,” says Matthews. “This then drives board decisions about the organisation’s long-term direction to drive better financial outcomes alongside world-leading sustainability practice — and we strongly believe those two outcomes correlate.”
Holman is also a proponent of the link between these two objectives, despite contrary views she’s heard in some pockets of corporate Australia. “There is no justifiable reason why the management of natural capital cannot be positioned alongside profit maximisation as one of the primary objectives of a company,” she says.
Progress, not perfection
Like many other companies, a big challenge for Forico has been in determining what to measure and how. But the company “didn’t let perfection get in the way of starting the process”, says Matthews, a seasoned company director and chartered accountant. “In many ways, it’s no different from financial accounting. There’s been a lot of thinking around the detail of measurement, consistency and concepts of materiality — and getting assurance over all that has been critical for us. The robustness of the procedures and valuation methodologies are still evolving as our natural capital reporting matures.”
Matthews acknowledges that while Forico is well advanced, many boards are struggling to get ready for imminent mandatory climate reporting, let alone nature reporting. Her advice to all directors is to make a start now. “You don’t need to be a climate scientist, but boards as a whole need to be upskilling. You may not need to report yet, but to fulfil your directors’ duties, you need to consider the risks and opportunities and, at the very least, get a baseline.”
Partnering up is paramount
To grapple with the unfamiliar terminology and concepts inherent in managing nature and stay on top of fast-moving developments, experts agree keys to success include engaging closely with value chain stakeholders and experts, forming sectoral partnerships and adopting existing frameworks rather than reinventing them.
“The credibility of the information sourced is also paramount,” cautions Malley. “I really had to think long and hard about whose advice I believe is the most credible. In my case, it’s the AICD and the Carbon Market Institute. Advisers, lawyers, accountants and auditors can also be great sources of expertise.”
Malley also urges directors to keep an open mind to change and be willing to have uncomfortable conversations. “You’ve got to lift the lid and work out what the board’s stance is, what values are we applying in our decision- making and have we made those values transparent?” she says. “It might be an uncomfortable conversation, but I’m a big believer in putting uncomfortable issues on the agenda and saying it would be wrong not to address it.”
Townsend adds the importance of acknowledging that new systems and skills required will evolve and could take years to build — so there’s a clear benefit in getting started now. “The bigger the runway we can give ourselves to work on the solution, the lower the risk will be for our business and the greater chance we’ll have to unlock those opportunities for value creation.”
The analyst perspective
It’s understandable that some directors are not fully prepared to deal with the emerging governance challenges around nature risks, but that needs to change, says financial analyst Timothy King.
“If you look at the climate reporting standard, it’s immensely complex — and then nature adds a whole new dimension of complexity, way beyond climate reporting,” says Timothy King, co-founder and CIO of Melior Investment Management. “The demands on companies are fast-moving, it’s complicated and overwhelming, so there are good reasons why many companies aren’t prepared. But they’re going to have to be — we’re moving quickly towards a nature disclosure standard.”
King believes the first question boards need to ask themselves is whether they have the appropriate skillsets to guide the company, strategise and oversee nature- related disclosures. “Historically, you have accountancy and legal experience on your board to make judgements around the adequacy of your traditional financial statements, cash flow, balance sheet and so on,” says King, who also serves on the board of the NSW Biodiversity Conservation Trust. “But do boards have the skills to sign off a set of nature-related accounts? That’s a significant challenge.”
Beyond assessing boards’ proficiency, King says investment analysts are increasingly evaluating the ability for companies to manage nature risks in their operations. He cites the example of the recent outbreaks in Australia of the varroa mite, an invasive, bee-killing parasite. It’s a new nature-related issue for producers of crops reliant on pollination — such as almonds, avocados and berries — with a distinct influence on their financial viability. Another example is the drought plaguing Taiwan, home to Asia’s biggest semiconductor industry. Computer chipmakers are heavily reliant on water, raising the obvious question, what is the effect on businesses sourcing semiconductors from Taiwan?
“There will be increasingly heavy investor focus on the resilience of businesses related to climate and nature risk,” says King. “Companies will need to report their assessment of those risks and that’s extraordinarily complicated.”
To build up relevant skills, his advice is to take advantage of the myriad resources offered by the likes of TNFD and the AICD, engage with experts and read widely on the issue, beginning with The Economics of Biodiversity, the independent review led by Cambridge University economist Professor Sir Partha Dasgupta.
“There’s no doubt nature risk is complicated, but this will only dial up, so my advice is to prepare yourself and your C-suite,” says King.
This article first appeared under the headline 'Natural Progression’ in the April 2024 issue of Company Director magazine.
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