The Client: A leading Asia-based financial institution

The Users: The risk management team

Nature and biodiversity risk is a rapidly emerging issue of global concern. It has quickly become a key topic for financial institutions since the adoption of the Kunming-Montreal Global Biodiversity Framework (GBF) aiming to halt and reverse biodiversity loss by 2030, and the development of disclosure guidance by the Taskforce on Nature-related Financial Disclosures (TNFD).

The speed and scale of biodiversity loss and ecosystem degradation is the highest in history. Approximately 85% of the world’s largest companies have a significant dependency on nature, indicating the critical importance of greater transparency for market participants on nature-related risks and opportunities.

An Asia-based financial institution joined the Partnership for Biodiversity Accounting Financials (PBAF) to collaborate with international organizations on how best to respond to nature-related issues, and was one of the first in its home country to join the TNFD.

Members of the risk management team of the financial institution were looking to assess the institution’s nature-related impacts and dependencies, and be the first financial institution in their home country to publish a report in line with the TNFD recommendations. They wanted to identify specialists in the field who could help support this analysis.

Pain Points

The risk management team needed external support to take their actions further by:

  • Assessing the nature-related impacts and dependencies of their investment assets and assets under operations.
  • Publishing the first TNFD report following the LEAP approach (i.e., locate, evaluate, assess, and prepare) in the company’s home market.

In 2022, S&P Global Sustainable1 (“S1”) convened a Knowledge Community to inform the development of data intelligence to accelerate a shift of capital towards nature-positive outcomes through the universal lens of the TNFD. The Knowledge Community’s pilot program Framing the Future for Nature received global interest, and this financial institution became one of the partners in the initiative. To date, the Knowledge Community is comprised of over 270 global organizations, representing financial institutions, corporations, government, academia, and interest groups. Being familiar with the work of S1, the risk management team contacted the S1 product group to discuss what support was available.

The TNFD is gaining momentum as organizations around the world recognize the need to take action to address the critical state of nature and biodiversity.

The Solution

The S1 analytics solutions and product group discussed a four-step process that would draw on the S&P Global Nature & Biodiversity Risk data solution, built on the Nature Risk Profile open source methodology launched by the UN Environment Programme (UNEP) and S&P Global. This solution covers 20k+ public and private companies with over 1.6 million assets mapped to corporate owners and provides 130+ decision-grade metrics to assess a company’s impact and dependencies on nature as recommended by the GBF and in line with the TNFD LEAP approach. The process entailed a four-step approach:

  1. Evaluating the ecosystem footprint. 
  2. Determining the ecosystem significance. 
  3. Creating a dependency score. 
  4. Helping to prepare the TNFD report.

S1 collaborated with the risk management team to collect essential data that covered both the company’s own operational assets, plus the assets it was financing. S1 leveraged its Nature & Biodiversity dataset to evaluate the nature-related impacts and dependencies of these assets, and then aggregated the results to the portfolio level. The assessment covered 159 major asset and operating sites across industries within the financial institution’s home market. There were regular meetings during the engagement to help the risk management team understand the data collection process, methodology, and results. The results were then integrated into a TNFD report.

1. Create an ecosystem footprint

The Ecosystem Footprint measures a businesses direct and operational impact on nature and biodiversity. The metric combines three areas of analysis: the areas of land impacted by the company (land area), the degree to which the location-specific ecosystem integrity is reduced (ecosystem degradation), and the significance of the location-specific ecosystem impacted (ecosystem significance). The three come together to calculate the equivalent impact on the most significant areas globally in terms of biodiversity conservation and ecosystem services provision. This produces an Ecosystem Footprint expressed as the equivalent number of hectares in the most globally significant ecosystems that would be fully degraded by a company’s operations.

2. Evaluate Key Biodiversity Areas (KBDs), and Assess the Impact on Ecosystem

Key Biodiversity Areas, as defined by the International Union for Conservation of Nature, are sites contributing significantly to the global persistence of biodiversity. KBDs are identified at the national, sub-national or regional level by local stakeholders based on standardized scientific criteria and thresholds. Protected areas are geographically defined spaces managed through legal or other effective means to achieve the long-term conservation of nature with associated ecosystem services and cultural values.

3. Generate a dependency score

Dependency scores consider the level of reliance that a business’s direct operations have on 21 different ecosystem services, as well as the expected resilience risk of the ecosystem providing these services, where these businesses are operating around the world. The score is on a scale from 0 to 1, where 0 represents no dependency risk and 1 represents very high risk.

4. Publish a TNFD report

Reporting services assist with publishing the results of the TNFD analysis to identify and assess nature related dependencies, impacts, risks, and opportunities to help turn metrics into action.

Key Benefits

The analysis assisted members of the risk management team as they sought to understand, manage, and mitigate the financial institution’s exposure to nature-related risks and impacts. The S1 methodology:

  • Enables users to combine company-level information with robust nature-related data to calculate vital risk metrics.
  • Uses powerful, science-based impact, and dependency measurement tools.
  • When applied to the S&P Global 1200 index, representing approximately 70 percent of global stock market capitalization, showed that:
    • 85% of the world’s largest companies have a significant dependency on nature across their direct operations.
    • 46% of the world’s largest companies have at least one asset located in a KBA
      that could be exposed to future reputational and regulatory risks.
    • S&P 1200 companies used an estimated 22 million hectares of land for their direct operations in 2021 to generate USD 28.9 trillion revenue. Expressed as an ecosystem footprint, this is equivalent to fully degrading 2.2 million hectares of the most pristine and significant ecosystem globally, such as the most intact and biodiverse parts of the Amazon or Sumatran rainforests.

The analysis enabled members of the risk management team to meet their goal of being first to market in their home country with a TNFD report to show the financial institution’s leadership position on nature-related issues.

Click here  for more information on TNFD reporting.

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