Business needs a transformative mindset to tackle nature risks

By Günes Ergun ,

Engagement Manager, Marsh Climate & Sustainability Strategy

25/09/2023 · 5 minute read

The publication of the Task Force on Nature-Related Financial Disclosures framework signals the dawn of a new era in how businesses need to understand their dependence and impacts on nature, and the risks posed by nature to their business success.

Understanding Nature at a time when many organizations are still trying to understand climate risks may seem overwhelming. However, climate and nature issues should be understood in partnership. The discussion at New York Climate Week illustrates how nature risks cannot be separated from climate risks, they are two sides of the same coin.

Nature risks are not new, but they are growing in severity and therefore pose an increasing risk to business resilience, especially as regulation around them continues to grow. It is important to note the distinctions between carbon-related risks, which are global, and nature risks, which are intensely local. However, the two are symbiotic. Businesses must have the right risk management strategies in place to mitigate these growing threats, but they shouldn’t dwell on the difference too much. They should view nature as their ally in building resilience and tackling our biggest challenges.

An equipped and united front

There is a growing global awareness about the need to protect nature and the risk we pose to it. At COP15, the 2022 UN Biodiversity Conference, 196 countries signed a pledge committing to halt and reverse biodiversity loss. The Global Biodiversity Framework, meanwhile, includes a target which asks countries to require organizations of certain size – plus financial institutions – to disclose their nature risk dependencies. The framework of the Task Force on Nature-Related Financial Disclosures now gives organizations the tools to do this.

The framework provides a toolbox to help organizations to think about and measure nature risks. At the moment, its recommendations on which risks to disclose are voluntary. After regulators wait to gauge market reaction, however, they are expected to become mandatory in many jurisdictions – as happened with the sister initiative, the Task Force on Climate-Related Financial Disclosures.

The full picture

Like climate risks, nature risks can be seen as having two aspects. The first is physical risks to business operations caused by the breakdown of ecosystems: One study found nature underpins $44 trillion of economic value globally each year. Second, there are transition risks, which are related to changes in policy, regulations and market dynamics, with effects in areas such as reputation and financing.

Insurance plays a key role in supporting businesses to mitigate both kinds of risk. It is essential that businesses understand how they impact, and are impacted by, nature risks, and build in adequate resilience. Five points are key:

First, businesses must understand that they are operating in complexity, with increasing pressure on their supply chains, including the provisioning and pricing of commodities.
Second, businesses need to adapt their process and product design to accommodate pressures such as water scarcity and comply with targets in areas such as pollution across their value chains – right up to the end of a product’s life.
Third, businesses should consider how the fragmentation of natural habitats and soil artificialization will affect sectors from agriculture to infrastructure and real estate, and how urban areas can adapt to climate change while also reversing nature loss.
Fourth, businesses will have to look at their procurement practices to understand how they may be contributing to the problem of invasive alien species, one of the biggest threats to nature, food security and human health.
Finally, businesses will have to integrate nature-based solutions in their net-zero transition plans. Nature-based solutions are nature’s existing and proven technologies for carbon capture and storage.

Organizations need a transformative mindset to see nature as an ally in the climate fight, and to collaborate with nature in building resilience against climate risk and dealing with challenges such as food security and human health.

The way forward

While some nature risks are already painfully visible, others will require new perspectives to identify. As explored in Marsh’s 2022 report, Embracing Nature: How Businesses Can Engage with New Environmental Imperatives, there is likely to be a period of considerable policy and regulatory unpredictability in the near term as governments balance conflicting stakeholder pressures on nature risk – which makes it critical for businesses to get ahead of the curve.

In anticipation of mandatory disclosure requirements, organizations should start assessing their interactions with nature through a risk lens. The insurance industry will continue to support businesses through the development of structured and streamlined ways for organizations to explore nature-related risks across their business lines and identify where these risks are material. With a clear roadmap and forward-looking, scenario-based analyses, businesses can better understand how nature risks can affect them, and how they can be best mitigated.

New nature risks are emerging all the time, and regulatory responses are becoming more rapid. While nature risks have always been a part of business, how organizations respond to them can no longer be a case of business as usual.

Aerial view of cement factory with high concrete plant structure and tower crane at industrial production site on foggy morning. Manufacture and global industry concept.

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Business needs a transformative mindset to tackle nature risks