Why Valuing Nature Matters for Decision-Making?

As indicated in the previous blog by Christian Heller, a double materiality assessment is key for understanding a) how business activities impact society and nature (value to society / inside-out perspective) and b) how sustainability performance affects the financial performance and enterprise value (value to business / outside-in perspective).

The Value Balancing Alliance (VBA) has been actively engaging with the recent developments around integrating nature into decision making, for example, by bringing together key standard setters on sustainability reporting in a side event at the UN Convention on Biological Diversity (CBD) COP 15 in Montreal and by signing the Frankfurt Declaration demanding sustainability regulations that promote nature-positive business practices. The VBA methodology on impact valuation reflects this by including all five major impact drivers contributing to biodiversity loss (IPBES 2019), which can be used to inform strategic decision making on more nature-positive businesses practices. On the topic of nature, the VBA collaborates with the Bio-Mo-D research project funded by the German Federal Ministry of Education and Research (BMBF).

Business activities and nature are often highly intertwined in particular when considering the entire value chain. While reducing the impacts of business activities on nature have long been the focus of environmental regulations, the dependencies of businesses on nature have come into focus more recently. In particular since central banks identified the loss of nature (i.e. biodiversity loss) and the related loss of ecosystem services as a systemic risk to the financial system (NGFS 2021), nature risks have gained attention within financial institutions. The Global Risk Report by the World Economic Forum (WEF) identified the top four risks for the next decade to be relate to extreme events and the loss of nature (WEF 2024), highlighting that climate and nature related risks are interlinked and need to be addressed together.

Given these developments, there is increasing demand for assessing the risks that the loss of nature and its services can pose to business activities and financial assets. A study by PWC estimates that more than half of global GDP as well as more than half the market value (about US$45 trillion) of listed companies is subject to nature-related risks (Evison et al. 2023). The European Central Bank found that “… almost 75 per cent of bank loans to companies in the euro area are granted to companies with a high dependency on at least one ecosystem service” (ECB 2023). Hence, financial institutions were instrumental in creating the Taskforce on Nature-related Financial Disclosures (TNFD) and developing the TNFD-framework for assessing and addressing risks related to the loss of nature (TNFD 2023).

With the awareness of the role of nature for the economy, international and EU policy makers have created policies on disclosing nature related impacts and dependencies. The Kunming-Montreal Global Biodiversity Framework (GBF) demands governments to develop policies for large corporates and financial institutions to disclose their impacts and dependencies on nature and related risks (GBF Target 15). Similar to TNFD being a market-led initiative, this policy was supported by more than 400 companies asking the GBF to make such disclosure mandatory (Business for Nature). This indicates the increasing awareness among businesses and financial institutions for the need to address nature in their strategic assessments and decision making.

In accordance with this development, the EU Corporate Sustainability Reporting Directive (CSRD) established the European Sustainability Reporting Standards (ESRS) including the standard on Biodiversity and Ecosystems (ESRS E4). Besides addressing impacts and dependencies on nature as part of the materiality assessment and reporting, the ESRS E4 also recommends businesses to use the TNFD approach on locating and assessing nature related impacts, dependencies and risks (ESRS E4 AR6).

In line with scientific best-practice as well as to ensure alignment with relevant regulations and reporting requirements , the VBA Nature team is working on the extension of the methodology by including impact pathways on natural resource use and invasive alien species. There are multiple ways in which business activities may impact nature and environmental regulations already aim at reducing the impact drivers contributing to biodiversity loss including greenhouse gas emissions, land use, resource use, pollution and invasive alien species (IPBES 2019). Accounting for these impact drivers is critical when assessing and valuing externalities.

VBA recently piloted the Impact Pathway on Resource Use with a focus on Forest Resources, since deforestation is a key driver for biodiversity loss. The pathway also aligns with the EU regulation on deforestation-free products, which demands companies to assess their supply chain for possible products that may contribute to deforestation. Hence information required for EU reporting is also being used for impact valuation and can inform decision making on using more sustainable forest products or alternative production processes.

The topic of invasive alien species is often overlooked. However, invasive alien species can create large costs, for example, when the spread of a species impacts agricultural production or infrastructure, requiring additional investments into species management and infrastructure maintenance. A recent assessment of the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) estimates global annual costs caused by invasive alien species to exceed US$423 billion (IPBES 2023). The spread of invasive alien species can cause costs to own operations and the value chain. Business activities involving transportation across large regions and the trade of organic material can also contribute to the spread of invasive alien species. Hence risks can relate to costs caused by invasive alien species to businesses but also costs related to policies demanding to mitigate their spread.

In summary, impacts and dependencies on nature as well as related risks are increasingly recognized to be material for many business activities in particular when assessing the entire value chain. Given the systemic relevance of nature for the economy, it is critical to integrate impacts and dependencies in strategic and financial decision making. Thereby the VBA approach contributes to expanding the perspective of value to society (impacts) with the value to business (dependencies) perspective, which is in particular relevant when assessing nature risks. By offering a proven and tested methodology that aligns with relevant reporting standards, but most importantly translates this information into information relevant for strategic and financial decision making by means of monetization, our member companies already show that the change towards a truly sustainable future is both possible and sensible from an impact as well as financial perspective.

Authors: The Nature Team at VBA