Nature, business and financial analysis: How can we identify our dependencies?

A number of relationships exist between the natural world, people and the economy. Humans, through our activities and endeavors, both depend on nature and impact nature: we depend on and use nature’s assets and services for survival, growth, and fulfillment; Nature, in turn, can only provide these benefits if we do not overuse it, and impact it to the point where it is unable to sustain and regenerate itself.

Most people and businesses understand this, even if not all of them act accordingly. 

The businesses that do look at their relationship with nature mostly look at their impacts – what type of pollutants are being generated and where; how is my waste management; what is my carbon footprint? This makes sense as impacts are often regulated and may carry reputational risk. But what does impact management do to nature? If all businesses are impact neutral, the status quo is maintained and nature is allowed to regenerate or maintain itself at its natural rate. Few businesses are impact neutral, so there is inevitably a degradation rate of impacted ecosystems that is higher than without the business. Nevertheless, well-managed businesses can limit their impact on nature.

Few businesses consider their dependencies. This ignores the possibility of significant future changes happening in the natural world. Environmentalists’ alarm bells may be ringing at that statement. To explain – nature is always changing and global warming is accelerating that change. Impact management is important to maintaining natural processes and avoiding stressing the system, but the system will still change. Businesses that depend on natural inputs (and that is most of them, even if it is somewhere in the supply chain) need to understand the relationship between the natural world and their production processes. Where does my water come from, will the provision change in the future by becoming more expensive or less reliable? Is my supplier of wood fibre aware of the impact of climatic shifts? How do the ecosystems that supply the services I or my suppliers use themselves rely on other ecosystems?

How do we know that most businesses don’t look at dependencies? We tried to find the evidence, and there is a lot more work done on impacts. Which is why, in order to look at the relationship between natural capital-related risk and performance of financial assets in a systematic way, we had to build our own database of natural capital dependencies by sector (or more accurately by production process).

So far we have covered 167 sub-sectors with 220 processes, relating them to 48 different types of dependencies on nature. We have developed fact sheets describing the characteristics of these dependencies and their vulnerability to various drivers of change and compiled data available to analyze them. This will be a public resource for businesses, policymakers and others to use. We will use it to analyze the relationship between changes in the health of ecosystems and financial performance, in order to link natural capital-related risks to financial decision making.

We call this Advancing Environmental Risk Management because we are tackling risks that are currently underappreciated or not analyzed, it is complementary to the work on environmental impact, and we are linking the risk to financial performance. We see this as a step to allowing nature, businesses and people to coexist in a positive manner, both now and in the future.

 

Anders Nordheim is the Lead on the Ecosystems and Sustainable Land Use thematic work at UN Environment Finance Initiative. The Initiative works with over 200 financial institutions, including banks, insurers and investors, to understand today’s environmental challenges, why they matter to finance, and how to actively participate in addressing them.