Step 2: Understand the basic nature risk framework
In this step, we introduce some basic concepts that comprise the nature risk framework.
Double materiality
Double materiality simply considers both sides of your relationship with nature. On one side are the impacts that your firm's operations have on nature – these are usually negative, sometimes neutral, and hopefully increasingly positive going forward. On the other side are the implications for your firm related to nature, or financial materiality. This usually comes in the form of dependencies on natural resources (e.g., water, fish, or timber), ecosystem services (e.g., pollination or flood control), or transition risks (e.g., legal, reputational, or market risks).
Both impacts and dependencies on nature can result in material financial risks for a company, as well as opportunities. Figure 1 on the following page summarizes these.
Biodiversity materiality should be measured from the bottom up
The CSRD ESRS (European Sustainability Reporting Standards) mandate that companies shall disclose both known and potential material impacts. In reality, there are very few industries that have zero impacts to nature. While many companies currently complete their double materiality assessments using top-down or survey-based assessments, those methods are not fully CSRD-compliant and may yield misleading results in regard to biodiversity materiality – even if they end up being permitted in the first year of reporting.
On the topic of biodiversity specifically, impacts and dependencies are localized to particular ecosystems, so biodiversity materiality can only be properly assessed from the bottom up, meaning by assessing each individual location where a company operates. This aspect of materiality is different from all others in a double materiality assessment.
At first, the topic of biodiversity may not seem to apply to your industry (e.g., if your company does not source organisms directly from nature). However, what many companies don't realize is that regardless of the outcomes of the double materiality assessment, under the CSRD ESRS, companies must disclose locations that are in proximity to biodiversity-sensitive areas.
Double Materiality
Figure 1. The double materiality of a firm’s relationship with nature. Source TNFD.
The scope of nature risk disclosures
Nature risk disclosures frameworks, and the TNFD in particular with its "LEAP" approach (Locate, Evaluate, Assess, Prepare), guide a company to answer three basic questions:
1. What are you doing and where are you doing it?
To answer this, companies must identify the local ecosystem for each location where they (and the companies in their value chain) operate, and the Ecosystem Pressures (land/ocean area used, pollution emitted, resources used) they apply at those locations. Most companies already have much of this data, even if not collected in a central place or reported in a centralized way. This is the easier question to answer, and comprises the "Locate" step in the TNFD LEAP approach.
2. What do your activities mean for the ecosystems in which you operate?
This is a question most companies have never been asked before. A firm's responsibility has typically been limited to compliance with local regulations, not monitoring for the environmental impacts they may be having. Now they are being asked to measure impacts using scientifically appropriate methods to enhance transparency on externalities. This is the "Evaluate" step in the TNFD LEAP approach.
3. How does that translate to risks and opportunities for the firm?
If compliance with local regulations was sufficient, then trillions of dollars' worth of natural resources and ecosystem services would not be destroyed every year. The depletion of natural capital has reached a point where it presents a serious financial risk to businesses and the economy, and with climate change, is set to get worse in the coming decades. To prevent economic instability – or worse, economic collapse – we need a mechanism to identify and manage the risk. Thus, it is in the long-term interest of every company to embrace nature risk measurement, management, and disclosures.
Why compliance with local regulations is no longer sufficient
If compliance with local regulations was sufficient, then trillions of dollars’ worth of natural resources and ecosystem services would not be destroyed every year. The depletion of natural capital has reached a point where it presents a serious financial risk to businesses and the economy, and with climate change, is set to get worse in the coming decades. To prevent economic instability – or worse, economic collapse – we need a mechanism to identify and manage the risk. Thus, it is in the long-term interest of every company to embrace nature risk management, and disclosures.
"To prevent economic instability – or worse, economic collapse – we need a mechanism to identify and manage the risk."
About Dunya Analytics
Dunya Analytics is a SaaS platform offering companies science-based risk analytics for biodiversity and nature, enabling them to meet ESG disclosures requirements, and empowering them with insights in actionable financial terms to drive sustainability strategy.