Your Firm’s Most Undervalued Asset? Try Nature

When you think of sustainability and business, your mind likely zips to climate change. By now, companies and investors are well-versed in the imperative to decarbonize and pursue net-zero objectives — whether they want to or not. 

But the planet is also facing another environmental crisis — one of biodiversity loss. Three-quarters of Earth’s land surface has been significantly altered by the actions of people; 66 per cent of ocean area now shows the effects of human activity. With their habitats transformed, degraded and/or destroyed, monitored populations of wildlife have declined by an average of 69 per cent in the past 50 years. One million of the planet’s estimated eight million species of plants and animals now face extinction. 

This is very much a business matter. Economic activity is now operating beyond the threshold of safety in six of the nine “planetary boundaries”  defined by the Stockholm Resilience Centre — zones within which humanity can thrive and sustain our development. More than half of global GDP is moderately or highly dependent on nature. The World Bank forecasts that ecosystem collapse will prompt annual declines in global GDP of 2.3 per cent by 2030. Moody’s has pegged the risk of nature loss to business in the trillions. As the authors of a 2021 Boston Consulting Group report sum it up: “Biodiversity loss has massive implications for business.” 

It’s increasingly clear that a healthy economy hinges on a healthy living planet. Yet biodiversity remains something of a missing link in corporate environmental, social and governance (ESG) strategies. In fact, fewer than one in four businesses have policies in place for how to measure, manage and mitigate their impacts and dependencies on the natural world. 

Smith Business Insight contributor Deborah Aarts spoke with Ryan Riordan, professor of finance and director of research at the Institute for Sustainable Finance housed at Smith School of Business, about the increasingly pressing need for businesses to recognize the value of biodiversity — and the competitive advantages of doing so.  

To begin, what are we talking about when we talk about biodiversity? 

From a sustainable finance perspective, what we’re talking about is healthy, intact, productive ecosystems that generate some sort of economic or social benefits for humanity. These benefits take all sorts of forms: It could be that we get clean air, that we get spaces for recreation, that we get clean water, that we have pollinated crops. 

Those are all lovely things, but how do they add value from a business point of view? 

Organizations are sitting on all these natural assets whose values are currently being reflected at zero on their balance sheets. Think about a company that owns some land that is not currently developed. They might look at that and see something that’s not producing any economic activity. But that land has great value. It’s doing a lot of things. It’s cleaning the air, it provides habitats, it might be a place for recreation. It has all these ancillary benefits. The problem is, until very recently, businesses had no framework to value that.

How is the work of the Taskforce on Nature-related Financial Disclosures (TNFD) changing that? 

The TNFD is a multinational coalition of industry experts that provides a voluntary disclosure framework for businesses and financial institutions around biodiversity. Its goal is to put some structure around how organizations can disclose and manage risks around everything related to their natural assets. You know the old adage that what gets measured gets done? In this case, it’s kind of like what gets measured gets protected, and what gets measured gets improved. 

The Institute for Sustainable Finance is, along with CPA Canada, the secretariat of the TNFD in Canada. We’re pulling together resources for businesses. We’re helping to organize some information sessions. We’re helping to collect questions and funnel them towards the global TNFD group. 

The TNFD only officially launched its disclosure framework late last year. Right now, we have a handful of early adopters in Canada.

A company’s impact on nature doesn’t seem to be as easily quantifiable as, say, the greenhouse gas emissions it produces. What is involved in accounting for biodiversity? 

I think the first step is for organizations to recognize that, broadly defined, nature and ecosystems are useful inputs to economic activity. 

We have hundreds of years of understanding how to measure some parts of business. Think about a factory: We know how to tabulate what is useful inside it, and we know how to measure productivity. We know what goes into making something, how long it takes, what steps are involved, what machines or tools are used, how it’s delivered. It’s not hard to tally the value of all of the outputs that we get out of that factory, whether it’s money or number of units produced. We are very good at understanding how a factory produces economic benefits for humanity or for society. 

We can think of an ecosystem the same way. We can think about every one of its individual components and measure them as we would in a factory. We can quantify the value of things like biomass and species. We can start using nature as an asset that adds value instead of something to be bulldozed over. It’s a bit less straightforward, but it’s doable.

Biodiversity does seem to get a lot less airtime than climate change and decarbonization. Is it safe to say nature isn’t talked about enough in business? 

That’s a fair assessment. We’re in early, early days when it comes to businesses prioritizing biodiversity. Think of it this way: A lot of firms are still in the early stages related to decarbonization, and we’ve had carbon taxes for at least half a decade now — longer in some provinces. When it comes to nature, they’re much further behind. Of course, there are some companies that have been paying attention to nature forever, as part of their ethos. But for most others, it hasn’t really crept in yet. 

Putting aside the motive that everyone loves butterflies and trees: Why should businesses add biodiversity to their already-long list of priorities — and why now? 

I mean, I’m a pretty green guy, but you don’t even have to see it through that lens. 

Here is my pitch: Natural assets currently aren’t even reflected on the balance sheets of most companies, or on those of jurisdictions like municipalities, provinces and countries. Because they’re not really recognized as assets — real, financial assets — businesses aren’t really thinking much about how to protect them. Many businesses are sitting on a wealth of natural assets that they’re just ignoring. 

That means that companies that start thinking about biodiversity as something that has value have a chance to recognize an asset that most others don’t yet see. 

So, does that make biodiversity a competitive advantage? 

This is almost like an arbitrage opportunity. All you have to do is generate a little bit of information that other people don’t have and you’re going to have a better insight on the value of your own company — and in your competitors, and your industries and across industries. Of course, there’s no free money, and doing this isn’t free. But it’s as close to free as you can get. And that informational advantage is not going to be there forever, so take it while it’s there. 

If you can tell a story about how your company is caring for and investing in its resources, and if the markets hear it, it might help you to raise capital at better prices. You’ll be farther along when and if disclosure does ever become mandatory, or when large groups of investors start to really care about this stuff. It’s much easier to be credible if you’ve been doing it for a while. 

Then, of course, it really is the right thing to do. I mean, if you can make some money by doing something relatively straightforward, and it offers so much benefit to everyone — including the planet, and your kids, and my kids — it just seems to me like an easy win. 

In Canada, biodiversity disclosure is all voluntary, for now at least. Is it mandatory anywhere else? 

Not yet, at least not in any major jurisdiction. 

Do you see that changing? 

Either that’s going to change or the planet’s going to change. 

Still, we know most companies struggle to do the right thing if they don’t have to do the right thing. How do you create a sense of urgency? 

It can be hard to put a fire under people for this type of thing, yes. That’s why I really like to tout the benefits businesses can get from doing this early. 

On that note: What advice can you share for business leaders looking to start taking on the biodiversity crisis? 

The scope of a lot of the conversation around biodiversity is big. But I’d challenge people to look for some small things that they can do at their own companies, or in their own industries, to address whatever is being unrecognized from a nature perspective. 

Maybe there’s a little field next to a factory. Maybe the plan is for the company to develop it in 10 years, so maybe it’s sitting barren and empty. Why don’t you just put in some trees or throw some seeds down? There are all sorts of little things you can do to increase the value of the natural assets that you already have, and these things can have other benefits, too. So I’d say: Think big, yes, but also think small. 

The Institute for Sustainable Finance is hosting a webinar to explain the TNFD’s recommendations on April 25 at 12 p.m. ET. Learn more and register to attend here.