Economics for Ecologists – Knowing your ESG from your GCN – By Morgan Taylor CEnv MCIEEM

TNFD, TCFD, ESG, risk, return, capital, value, disclosure, funds, bonds, loans, credit facilities, assets.

The endless acronyms (finance types have even more than us ecologists!) and confusing constructs can make the world of finance seem a little scary and irrelevant to what we do in the world of nature conservation.

In the near future, many ecologists will however benefit from at least a basic understanding of how sustainable finance systems work. This is thanks to an emerging regulatory standard from the Taskforce for Nature-related Financial Disclosures (TNFD).

TNFD has evolved from an existing body known as the Taskforce for Climate-related Financial Disclosures (TCFD), which has been running since 2015 under the leadership of ex Bank of England head, Mark Carney. The TCFD outlines a standard for how companies capture and disclose their financial risks in light of the climate emergency, both in terms of how they contribute to climate change, and how their operations could be affected by it. The idea is that such disclosures (which are newly mandated for large companies in the UK) encourage positive action to address risk through adaptation and mitigation via market pressure: investors, lenders, insurers, staff, clients and consumers increasingly expect evidence of climate action.

The drive from the financial sector for such disclosures is proving particularly valuable at encouraging change. If a company’s TCFD report highlights that, for example, they and their supply chain result in significant carbon outputs and that their operations are subject to physical risk from climate change (e.g. through flooding, urban heat island impacts or transition costs to meet changing regulations, to the point where they may be financially unviable) then they are not viewed as a good prospect for investors or consumers. A poor TCFD outcome can devalue a business. A good outcome can evidence reliability, and of course benefit the environment.

It’s already been possible to use TCFD related actions to encourage biodiversity focused interventions, for example, where a climate risk can be addressed by a nature-based solution (viewing a biodiversity focused action through the lens of ecosystem service benefits) this can be enacted and captured within a corporate strategy and then reflected in TCFD reporting. Nature wins, the business gains tangible benefit of physical protection from risk and the finances are rewarded.

Relying on TCFD to drive nature focused projects has however been challenging, given the frequent intangibility of biodiversity action and the associated ecosystem service co-benefits.

Which leads us to the welcome creation of the TNFD. The recently launched beta framework represents a mechanism to align financial decision making at the highest echelons of business with nature-related risk and opportunity. The idea is to effectively capture what economists call ‘externalities’; the things that a business benefits from but does not factor into classical financial accounting. Natural capital stock and the flow of associated benefits, ecosystem services, is an example of such an externality. Through following the TNFD beta framework a company will therefore capture how it financially relies on nature, disclose what impact it actively has upon nature and outline how it is planning to address these factors.

To translate this to a sector that we all understand: housing developers will soon have to capture the nature-related risks that they face and come up with strategies to reflect these risks, assuming they want to address the inevitable top down (lenders, regulators, insurers) and bottom up (consumers) pressure. In practical terms this may mean:

  • considering the risk to business that being unable to achieve BNG may introduce, triggering a culture change which prioritises exceedance of BNG standards through corporate strategy setting.
  • capture the biodiversity impact of their supply chains and the reliance of these supply chains on nature related factors. This may encourage changes in where and how timber and other materials are sourced, encouraging protection of biodiversity far from where we usually have influence.
  • Where developers also have asset management responsibility, there will be further opportunity to change the way these assets are managed and deliver retrofit gains to buildings or influence land use improvements reflecting identifiable risk of decline or ecosystem service need.

Ecologists clearly have a role to play in this new model, as all of the disclosure outcomes will usually come with a need to develop a meaningful, science led strategy to optimise performance. Ecologists are also needed to ensure that greenwashing is avoided. It is our responsibility to hold corporates accountable through our expertise.

What’s exciting is that this means we can encourage companies to achieve positive action for biodiversity entirely outside of the policy and legislative framework that we are subject to on planning projects. These are gains that would otherwise be unexplored under business-as-usual scenarios where assets continue to simply exist as they currently do or cultures which don’t view biodiversity as a crucial element in a business’s functioning are allowed to pervade.

If applied correctly, use of TNFD alongside other finance linked drivers (e.g. favourable lending rates or insurance premiums based on biodiversity-linked performance) could play a role alongside the BNG Habitat Bank model in restoring habitats and encouraging ecosystem service improvements at scale.

It’s still early days and this represents a simplified model of approach, however, I’d encourage all ecologists to swat up on these new ideas as they’re another useful tool for driving gains for nature.

Morgan Taylor CEnv MCIEEM

Morgan is a director at Greengage where he leads the Ecology team. Morgan has developed and supported delivery of biodiversity/climate resilience related corporate policy for a number of major land owners and developers which contributed to him being awarded the CIEEM Member’s Award in 2018. Morgan’s work aims to bring all stakeholders on board with innovative corporate aspirations that incorporate wider ecosystem services and nature-based solutions. His team recently challenged themselves to determine the carbon footprint of an Environmental Impact Assessment, and he hopes to challenge other ecologists in a similar way.

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