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Nature-related risks: What risk managers need to know

Nature is declining at an unprecedented rate, with far-reaching societal, economic, and financial impacts.

Nature is declining at an unprecedented rate, with far-reaching societal, economic, and financial impacts. The World Economic Forum estimated that US$44 trillion of economic value generation, more than half the world’s total GDP, is moderately or highly dependent on nature.

Organizations increasingly are taking notice of their nature-related risks — from habitat loss to water scarcity, pollution to pollination degradation — and the operational, strategic, financial, and regulatory challenges posed. Facing growing regulatory drive and stakeholder pressure, there is more expectation on businesses to assess, disclose, and take action on their nature risks.

Frameworks and nature-related disclosures

Some organizations — even in locations where nature disclosures are not yet required — have been proactive in adopting frameworks like the Taskforce on Nature-related Financial Disclosures (TNFD). The TNFD and similar frameworks aim to develop a decision-useful risk management and disclosure process for reporting nature risks and opportunities, in order to support the flow of capital toward nature-positive outcomes.

The TNFD approach is based on the concept of natural capital — the planet’s stock of renewable and non-renewable natural resources — as a business asset. The TNFD recommends that organizations evaluate their dependencies and impacts on nature and then translate the findings into risks and opportunities. 

The TNFD’s disclosure recommendations are structured around four pillars:

  • Governance: Disclose the organization’s governance of nature-related dependencies, impacts, risks, and opportunities.
  • Strategy: Disclose the effects of nature-related dependencies, impacts, risks, and opportunities on the organization’s business model, strategy, and financial planning where such information is material.
  • Risk and impact management: Describe the process used by the organization to identify, assess, prioritize, and monitor nature-related dependencies, impacts, risks, and opportunities.
  • Metrics and targets: Disclose the metrics and targets used to assess and manage material nature-related dependencies, impacts, risks, and opportunities.

Where nature meets risk management

In the evolving nature-related risk landscape, risk management professionals have a significant role to play in understanding how their businesses intersect with nature. They also need to understand how to integrate nature into risk management processes, follow disclosure recommendations for nature-related risks, and manage the transition.

Risk management tools like scenario-based modeling and value chain assessments can be helpful in illustrating both an organization’s impact on nature and how nature’s depletion and loss impact the organization. Nature-based scenarios, however, are inherently complex, location-specific, and difficult to quantify in financial terms. Many organizations do not fully understand all the ways they interface with the natural world and potentially create material vulnerabilities in their business model: supply chain, stakeholder engagement, consumer, and customer relations.

Other challenges for risk managers include a shortage of organizational resources to dedicate to nature, the need for buy-in from senior executives, and incomplete data and loss histories.

Organizational misunderstanding of nature risk can be reduced by education on the subject, emphasizing the materiality of a business’ impact on nature — and the inverse. As well as education, some organizations have addressed a lack of data by making use of the data that is available — their own, along with well-established information on where natural assets are under high pressure or sensitive to biodiversity or other ecosystem services. Organizations can gain valuable insights from their people on the ground, who understand their specific environments and can monitor their local nature-related dependencies and stressors.

Insurance also can play a critical role in helping organizations manage and transfer their nature-related risks. Products such as parametric insurance can help provide financial protection. For example, in 2018, a Mexican state partnered with an environmental non-profit and a reinsurance company to develop a parametric insurance plan to protect the Mesoamerican Barrier Reef System. In the future, insurance companies may also incentivize nature-positive practices through their underwriting decisions, for example, by encouraging the use of nature based solutions to protect assets.

The nature opportunity

Along with challenges, nature also presents opportunities and the ability to implement cost-effective, community-based, nature-positive solutions. Examples include coastal reforestation, sustainable agriculture, circular business models including waste regeneration, and green infrastructure.

The more aligned business leaders and risk managers are on the climate and nature agendas, the better off their organizations, the global financial system, and the natural world will be. To that end, the integration of frameworks like the TNFD are intended to make nature mainstream in corporate enterprise risk management, support risk transfer, and drive capital into nature-positive solutions.

While businesses that adversely impact nature may increasingly see negative impacts to their brand and bottom line, those that can demonstrate good stewardship of nature are in a position to realize competitive advantage and potentially reduce insurable risk, while benefiting both communities and the planet.

Learn more in our webinar recording on what risk managers should know on nature-related risks.

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