While the biodiversity agenda is nascent compared to the fight against the climate crisis, they are linked and investors are increasingly taking note of this. In-House Perspective reports on how in-house counsel can prepare their companies to address the threat of biodiversity loss.

Between 7 and 19 December delegates from around the world will come together at the UN Biodiversity Conference (COP 15) in Montreal. It’s hoped that COP 15, which has frequently been postponed and rescheduled because of the Covid-19 pandemic, will enable the international community to agree a framework to collectively address biodiversity loss.

According to the UN Environment Programme, the Conference will ‘convene governments from around the world to agree to a new set of goals for nature over the next decade through the Convention on Biological Diversity post-2020 framework process’.

Lina Pimentel Garcia is Co-Chair of the IBA Environment, Health and Safety Law Committee and a partner at Mattos Filho in Brazil. She says the international community is going through a process of repositioning to recognise the importance of biodiversity loss. Until now, many have considered international efforts to address the issue, for example through the Aichi Biodiversity Targets, to have been ineffectual. The COP 15 conference will aim to learn from the mistakes of the past and seek to agree and implement a new framework to regulate this area up to 2030.

It’s hoped the COP 15 conference will have a similar impact on the biodiversity agenda to the Paris Agreement on climate change, through raising awareness of the implications of biodiversity loss and accelerating action to address them. For Marina Montes Bastos, a senior associate at Mattos Filho in Brazil, the transition from previous frameworks to those to be discussed in Montreal feels much like the transition between international climate treaties the Kyoto Protocol and the Paris Agreement.

For Robert Walker, Sustainability Policy Manager at the International Corporate Governance Network, which is led by investors responsible for assets under management of around $70tn, the Paris Agreement set the standard for stating a global ambition with individual countries making their own pledges and could be a useful framework for any agreement reached in Montreal.

Seeing the connection

Walker says he expects an explosion of activity at COP 15 following a two-year period in which ‘investor recognition of biodiversity risk has really come to the fore’. According to Tara Clee, ESG Analyst at investment company Hargreaves Lansdown in the UK, ‘preventing biodiversity loss is becoming a new frontier in sustainable investment’. She adds that, ‘whilst biodiversity-focused strategies remain niche, we’re seeing more fund managers consider biodiversity metrics in their [environment, social and governance] ESG analysis’.

This increased focus on biodiversity from investors may be due to growing recognition that the climate crisis and biodiversity loss are interconnected issues posing distinct challenges. The climate crisis could be viewed as a symptom of biodiversity loss because destroying nature makes ecosystems carbon emitters rather than carbon sinks. According to the UN, ‘healthy ecosystems can provide 37 per cent of the mitigation needed to limit global temperature rise. Damaged ecosystems release carbon instead of storing it’. This link means it won’t be possible to address the climate crisis without addressing biodiversity loss. As such, there’s now a drive for organisations to become ‘nature-positive’ as well as achieving ‘net zero’.

Kiran Aziz, Head of Responsible Investments at KLP Asset Management in Norway, argues that ‘if we are able to take care of the nature risk, it will be much easier for us to tackle the climate crisis’. Aziz says investors have already done some work on biodiversity, for example targeting deforestation, but ‘what is lacking is the systematic approach’. She says investors are now trying to take a more holistic approach that makes a real impact rather than focusing on specific aspects of certain supply chains.

There are signs of this transition taking place. For example, the Finance for Biodiversity Pledge was launched by 26 financial institutions in autumn 2020 and currently has 111 signatories. Those signatories are all financial institutions that have committed to protect and restore biodiversity through their finance activities and investments.

The information gap

It can be difficult for investors, companies, governments and international bodies to know where to start when it comes to identifying and addressing biodiversity risks. According to Ipshita Chaturvedi, co-head of the Environment and Natural Resources practice at Dentons Rodyk in Singapore, ‘biodiversity is impossible to quantify because biodiversity is the interaction of every living and organic organism within an ecosystem’.

Clee explains that biodiversity loss and extinction constitute one of the nine planetary boundaries representing the limits within which human civilisation can safely operate. The biodiversity-loss boundary and three others have already been breached: disruption to these boundaries risks large-scale and irreversible changes to the planet.

There’s a lack of scientific research and data on which to build action to address biodiversity loss, in contrast to the abundance of science underpinning the agenda to combat the climate crisis. This means that advocates lack basic information with which to raise awareness.

This lack of scientific information means that boards, business leaders and general counsel don’t have the necessary tools to assess their organisation’s impact and are finding it hard to understand how the issue affects their business. Pimentel Garcia argues that when companies and other actors have this information, ‘they [will] start to think’ about it and begin to take steps to address it.

Some work has been done to link biodiversity loss, economic value and the role of business. Research published by the World Economic Forum in 2020, for example, shows that $44tn of economic value generation, or over half the world’s total gross domestic product, is moderately or highly dependent on nature and its services.

According to Chaturvedi, ‘it’s very hard to understand biodiversity in a way that can be quantified, like carbon emissions or pollution’. Walker agrees, saying that biodiversity doesn’t have ‘big indicators’ such as rising temperatures or levels of greenhouse gases in the atmosphere. ‘With biodiversity you’re looking at very location-based criteria,’ he explains. ‘Ecosystem by ecosystem, company by company, project by project […] the complexities in many ways are greater than what we have in climate change.’

Despite these complexities, it’s vital to address biodiversity loss, particularly because of how it’s linked to the climate crisis. For Pimentel Garcia, ‘it’s crucial to really integrate the discussions of biodiversity with climate issues’. For example, Walker explains that any reforestation undertaken to address the climate crisis must take biodiversity into account by replicating how forests were historically, rather than developing monocultural plantations of trees that can be weak and susceptible to fire.

Emphasising how biodiversity loss is linked to the climate crisis could also help the issue to benefit from the momentum currently building behind the agenda to combat the climate crisis, and ESG issues more broadly.

Access and benefit sharing

Chaturvedi explains that business and biodiversity converge when an organisation uses a biogenetic resource for commercial gain. She gives the example of the high-value crop neem ­– a medicinal herb derived from the seeds of the neem tree ­– by cosmetics and other companies. When a crop has such a high value, farmers are motivated to remove biodiverse forests in favour of only producing the single crop.

The Nagoya Protocol, which entered into force in 2014, forms the basis of existing biodiversity law. According to the Convention on Biological Diversity, the Protocol ‘provides a transparent legal framework for the effective implementation of […] the fair and equitable sharing of benefits arising out of the utilization of genetic resources’.

The Protocol aims to uphold the concept of access and benefit sharing: ensuring organisations that benefit from the commercial value of a natural resource return a proportion of that benefit to the local community where the resource is found. Through upholding this principle, the Protocol aims to incentivise actors to conserve genetic resources and use them sustainably.

The Protocol applies to genetic resources covered by the Convention on Biological Diversity and any traditional knowledge that may be associated with them – for example, knowledge of how to derive benefits from a resource that can be used for commercial gain. ‘It’s not only the product but also the formulation’, says Chaturvedi. ‘A lot of it is traditional knowledge […] that is also part of biodiversity.’ Walker points out that a large proportion of biodiverse resources are found on lands claimed by indigenous people. He says that ‘indigenous peoples are going to play a major role in [the outcome of COP 15) and in the future of biodiversity protection and biodiversity loss’.

Any company that uses natural resources should be compliant with the relevant access and benefit sharing laws. According to Chaturvedi, ‘the operationalisation of biodiversity law is in this. You need to pay back a certain amount if you’re using a biogenetic resource, and this is going to become more and more important’.

Chaturvedi expresses concern that many companies are not compliant with access and benefit sharing laws and says there can be a reluctance to engage with them. This can be because of issues with how the law is implemented in individual jurisdictions. For Chaturvedi, one of the most important things general counsel and their teams can be doing to address biodiversity loss is to identify where in their supply chain access and benefit sharing laws apply and ensure their company is compliant with them.

Mapping the risks

The Covid-19 pandemic and events such as Brexit have placed supply chains, particularly those for large, multinational organisations, into sharp focus. These developments have underscored the need for businesses to audit their supply chains in detail to provide a thorough understanding of the risks bound up in them. For many organisations the ability to understand their true exposure to biodiversity risk will be linked to how well they know their whole supply chain.

Bastos says it can be challenging for companies sourcing products from Brazil to truly appreciate their impact on deforestation. A beef supplier, for example, may only consider the site where a cow was slaughtered as part of its supply chain and not delve into where the cow was raised. This could leave the company exposed to the risk the cow was raised in a different, less biodiversity-friendly place to where it was slaughtered, which consequently wouldn’t be captured as part of that company’s supply chain.

According to Aziz, it’s important that organisations ‘have the sufficient awareness. They need to map if the company is exposed to a risk and [understand] how big that risk is and then to try to do a risk assessment: where are the biggest risk contributors?’ This means analysing all the company’s supply chains to see where the risk contributors are. The business should have a clear policy on biodiversity risk, carry out due diligence and map and mitigate its risks once they’ve been identified. This should all be done in conjunction with the company’s efforts to address the climate crisis. ‘You can’t just focus on the footprint and ignore biodiversity,’ she says, ‘because they are so much interlinked.’

It’s also important for businesses to remember that a lot of biodiverse resources are located in the global south. A company based in Europe taking action to comply with that region’s standards on biodiversity must consider all of its supply chain and its impact on biodiversity, not just the first link in that chain. Aziz says this will be particularly important for the larger multinational companies. ‘There will be some actors who have a bigger role to play compared to others,’ she says.

Frameworks emerge

To help their organisation begin to address its role in biodiversity loss, general counsel can investigate the reporting frameworks currently being developed. It’s possible that post-COP 15, companies will be expected to disclose their biodiversity risks using these frameworks and that some could become mandatory.

The Taskforce on Nature-related Financial Disclosures (TNFD) is developing a reporting and risk management framework that aims to support a shift towards global financial flows being directed at nature-positive outcomes. It’s working with market participants and leading science and data bodies to create a framework that’ll be scientifically rigorous and easy for organisations to adopt. TNFD released the second version of its beta framework in June and plans to release two further beta versions in November 2022 and February 2023, with the first full version of the framework expected in September 2023.

From the beginning of 2023, companies will be able to set their own science-based targets for nature. The Science Based Targets Network says doing so will help businesses to ‘measure their contribution to a nature-positive economy’. The Network is currently encouraging organisations to start following its guidance, which offers a framework and tools to help them understand where and how to focus their efforts towards being more nature friendly.

The World Benchmarking Alliance (WBA) has developed a nature benchmark methodology that ‘will rank keystone companies on their efforts to protect our environment and its biodiversity’. The WBA’s assessments will measure how companies are reducing their impact on biodiversity as well as their efforts to regenerate ecosystems. WBA analysed in-scope companies in the summer and will launch its first benchmark in December.

Bastos sees disclosure as motivating action. ‘When your company knows what’s going on and your audience, your clients, see what you are doing and you’re obliged to say so,’ she says, ‘that’s when you start to worry, what will I do about this?’ She argues that disclosure also demonstrates how biodiversity can be ‘not only a crisis but also an opportunity,’ by allowing organisations to get ahead of their competitors.

Board action

Aziz says that investors’ expectations on biodiversity are directed to companies’ management and the board. She believes that currently biodiversity isn’t on the agenda at board level and argues that ‘boards need to take these [issues] into account’. General counsel should be stressing this to their boards, underlining the urgency of biodiversity loss and its links to the climate crisis.

Walker highlights litigation risk and says some current cases in this sphere are being labelled as ‘biodiversity litigation’. He says general counsel should be watching how this and related climate litigation develops. Walker also suggests that general counsel could look at their board’s composition and ask, ‘do they have a skillset that’s commensurate with the risks that are emerging, not just in biodiversity but also on climate change?’

General counsel could consider how to recruit board members with expertise in biodiversity and the climate crisis as well as any succession planning that might be needed. They could think about what third-party expertise the board should access to have the right knowledge base to anticipate and mitigate these risks.

A turning point

We are experiencing a moment where biodiversity loss is gaining more recognition and will continue to grow in importance. There’s a drive to consolidate efforts to address the issue from a range of actors who are calling for a more systematic, global approach. COP 15 will give those groups an opportunity to articulate their desires and is likely to kickstart wider momentum towards addressing biodiversity loss.

As such, Bastos believes ‘next year is going to be a very important year for biodiversity’. Now is the time for general counsel to understand their company’s biodiversity risks and begin to address them so that the business and the board are prepared to engage meaningfully with investors. As Chaturvedi observes, ‘there’s no panacea to this, there’s only better alternatives. The only thing we can do is do slightly better than we did yesterday’.