There are some crucial, imminent developments that are set to increase the materiality of biodiversity risk faced by corporates. Understanding and being ready for the increased regulation and compliance burden that comes with these developments will be key.
European Union Corporate Due Diligence law
The proposed European Union Corporate Due Diligence Directive is the most significant and far-reaching development in this area, and, once in force, is expected to cover 13,000 EU companies and 4,000 non-EU companies. Businesses will be required to prevent, cease or minimise actual and potential adverse human rights and environmental impacts, including threats to biodiversity. These obligations apply to the company, their subsidiaries and, in some cases, their value chains too. To give effect to this, where a potential adverse impact is identified, businesses must implement action plans, with timelines, and must also seek contractual assurances from business partners.
In severe cases, where an adverse impact is ongoing and cannot be corrected, companies may need to terminate business relations. Meanwhile, failures to comply are set to be governed by national civil liability regimes. Once adopted, the Directive should be implemented into EU member states’ national laws within two years.
Nature-related financial disclosures and “mainstreaming” of biodiversity risk assessment
As its mission, the Taskforce on Nature-related Financial Disclosures (TNFD) seeks to support a shift of financial flows away from nature-negative outcomes and towards nature-positive outcomes, in support of the goal of no net loss by 2030 and net gain by 2050 under the Convention on Biological Diversity.
To that end, the TNFD aims to provide a framework for organisations to report and act on nature-related risks, aggregating the best tools to promote international consistency for nature-related reporting. It recommends organisation use four pillars to consider nature-related impacts, dependencies, risks and opportunities:
- Risk management
- Metrics and targets
The TNFD’s framework is still in development, led by the market’s response to its beta versions. It plans to publish its final recommendations in September 2023.
At the heart of its June 2022 proposals, The TNFD puts forward an internal risk and opportunity assessment approach, called LEAP, for the use of both corporates and financial institutions:
- Locate – where does our business interface with nature?
- Evaluate – what are our nature-related dependencies and impacts?
- Assess – what are the material risks and opportunities?
- Prepare – how will we allocate resources and measure performance?
An idiosyncratic approach to materiality is proposed. In line with the gradual convergence in the perspective on materiality in the market, the TNFD framework recognises that consideration of both nature-related dependencies and impacts is required for a comprehensive assessment of risks and opportunities.
There are two points within the LEAP process where the concept of materiality is used. Firstly, at the Locate phase, for identifying priority locations where an organisation may interface with nature, and, secondly, at the Assess stage, where an organisation would consider material risks.
There are criticisms of the TNFD’s approach to materiality as currently proposed. Interested parties have called for greater clarity, streamlining and consistency in definitions of key terms, including ‘materiality’.
Technological advances in remote sensing and traceability
Climate change reporting means that there is an increased effort to monitor and track the provenance of products, the supply chain and companies’ GHG emissions. As the regulatory environment becomes more onerous, companies are expected to be increasingly transparent about their value chains.
Rapid advances in technology are making it easier to trace the provenance of raw materials used in the manufacturing process. Blockchain technology is increasingly being used by adept companies for this purpose, while geospatial data from satellites has plunged in cost and can be used to scrutinise corporations’ environmental impacts. NASA satellites have tracked the degradation of the Amazon rainforest since 2001 and the same technology is now used to monitor oil spills, wildfires and heat profiles of factories.
This article is part of Clyde & Co’s 3-month blog series ‘Biodiversity and Business Risk’. In this 3-month blog series, Clyde & Co explores the relationship between biodiversity and business risks. In the run up to the delayed UN Biodiversity Conference (COP15) in December 2022, these weekly blog posts dig deeper into themes highlighted in Clyde & Co’s Biodiversity liability and value chain risk report, published in March 2022. The importance of biodiversity on corporate liability and risk planning cannot be understated.
If you have any questions about the content of this article or any articles in the series, please contact Sarah Hill-Smith, Catriona Campbell, Vincent Fraser, or the authors of this post.