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Biodiversity loss could wreck the global financial system – and it’s only a matter of time | Geoff Summerhayes and Laura Waterford

Biodiversity loss could wreck the global financial system – and it’s only a matter of time | Geoff Summerhayes and Laura Waterford

Corporate Australia is familiar with the idea that climate change gifts a financial risk to the global economy, nonetheless more no longer too lengthy ago biodiversity loss has emerged as an equally important risk.

In fact, climate change and biodiversity loss are now often referred to as the “twin crises” facing the global financial system and awareness of the position the financial sector plays on that is rising rapidly.

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Crucially, a latest global evaluation on the economics of biodiversity commissioned by the UK authorities, often referred to as “The Dasgupta evaluation”, concluded that our economic system is depending on biodiversity. This fact is rightly of grief to the financial sector, given the world’s biodiversity is declining faster than at any other time in human historical past, and an estimated 1 million species are at risk of extinction.

Apt last month the G7 climate and atmosphere ministers acknowledged “with grave grief that the unparalleled and interdependent crises of climate change and biodiversity loss pose an existential threat to nature, folk, prosperity and security”.

There are potential parallels between nature risk and other responsibilities of financial institutions, love anti-cash-laundering requirements. Apt as financial institutions have a responsibility to be certain that they are no longer a conduit for cash ragged to achieve harm by way of criminal activity, there is a rising sense that the finance sector has a responsibility to manage the economic dangers associated with nature degradation – and be certain they are no longer a conduit for finance that is destroying nature.

On this context, an international Taskforce on Nature-related Financial Disclosures (TNFD) launched last month. Over the subsequent two years, the TNFD will manufacture a framework for corporations and financial institutions to list on nature-related physical and transition dangers that encompass immediate, material financial dangers, as successfully as nature dependencies and impacts and related organisational and societal dangers.

This ambitious scope of work has already been immediate by the G7 finance ministers and, with the TNFD officially beneath way, nature risk will ascend rapid to claim its place alongside climate risk at the top of board agendas.

Here’s relevant to Australian company administrators because, love the Taskforce on Climate-related Financial Disclosures sooner than it, the recommendations of the TNFD are more likely to catalyse an expectation from regulatory authorities and traders that corporates will make increasingly sophisticated disclosures on nature risk.

Ultimately, the TNFD also has the potential to divert the drift of capital all by way of the global financial system away from activities that cause the destruction of nature, or are “nature-negative”, and towards those that are “nature-optimistic”.

Perhaps most importantly for Australian company administrators, the discourse on nature risk now appears to be at a similar prove climate risk half a decade ago – when the seminal legal notion by Noel Hutley SC and Sebastian Hartford-Davis on administrators’ tasks and climate risk was printed.

This means that, looking out on the particular facts of the case, it is conceivable a court docket could earn that nature dangers are capable of representing a foreseeable risk of harm to the interests of Australian companies today. It follows that a director who fails to properly have in mind these dangers could be held personally liable for breaching their “responsibility of due care and diligence” to the company beneath the Corporations Act, to the extent that the dangers intersect with the interests of the company.

It is arguable that this responsibility already exists because many of the factors that advised 2016 climate risk notion are now also upright for nature risk, or may be in the near future.

For example, there is a physique of evidence which demonstrates that Australia is uncovered to nature-related physical dangers given the fragile state of ecosystems such as the Great Barrier Reef and the Murray–Darling basin. Diminished ecosystem feature (for example, a reduction in ecosystem services and products such as pollination, temperature regulation or water purification) and its effects – that is, the associated physical dangers – are already intersecting with the interests of Australian companies.

One example of physical nature-related risk is pollinator colony collapse. Around one-third of our meals is pollinated by bees and their pollination services and products are value several billion dollars a year to the agriculture sector. Nonetheless, bee populations across Europe, the US and China have been devastated, and it is foreseeable that Australia could be subsequent.

Our bees are beneath threat from outbreaks of disease and parasites, as successfully as a lengthy list of other pressures such as pollution, the exercise of pesticides, intensive agriculture, the introduction of alien species and climate change. Here’s a material risk for many Australian companies all by way of the agricultural present chain, and administrators must be pondering how it could affect the financial position of their companies.

In terms of transition dangers, there is the potential shift in investor and shopper behaviour to have in mind. Person want for sustainability awake products has been rising for some time.

On the funding entrance, widespread passion in Climate Asset Management – a latest joint enterprise by Pollination and HSBC that aims to make investments more than US$6 billion into natural capital – has demonstrated that there is emerging appetite for funding in nature-optimistic assets at scale. It is probably going only a matter of time sooner than divestment from nature-negative assets follows.

Finally, if a new biodiversity framework is agreed at the UN Biodiversity Convention in October this year as expected, administrators may also want to have in mind regulatory transition risk in the context of each Australia and our major trading partners.

When all of these factors are taken together, it is clear that nature risk will transform the subsequent climate risk. Australian administrators will have to detached take steps now to avoid being caught flat-footed on nature risk.

  • Geoff Summerhayes is a senior advisor at pollination, and earlier-fashioned govt board member of the Australian Prudential Regulation Authority (Apra). Laura Waterford is an environmental lawyer and associate at Pollination

Biodiversity loss could wreck the global financial system – and it’s only a matter of time | Geoff Summerhayes and Laura Waterford