Avoid Climate Change Tunnel Vision

By Peter Jonathan Jameson Trine Filtenborg de Nully Simon Riggelsen

Addressing climate change is just one of several nature-related risks we face today. Soon, Nordic companies will be required to step up both their nature-related reporting and action.

Is your company ready?

July 28th was this year’s ‘Earth Overshoot Day’. The day marks the time of year where humanity’s consumption of ecological resources exceeds the amount of resources our planet can generate within a year. Thus, in 2022, we exceeded the planet’s regenerative boundaries within the first 7 months, and the overshoot is on a worrying trajectory. In 2016, the overshoot day was August 6th, and in 2002, it was September 21. Additionally, the Nordic countries are amongst the countries with the highest footprint per capita. If the whole world’s population lived like the people in Denmark, Finland, Sweden, or Norway, the 2022 Overshoot Day would have arrived already in March or April, meaning that we would need the regenerative capacity of more than 3 earths to sustain humanity’s consumption.

 Consequently, profound changes are required and within the next 5 years, and companies in the Nordics and beyond will face new environmental reporting requirements and be expected to act on a much broader range of nature-related risks. These risks encompass a host of environmental and ecological impacts connected to $44 trillion in economic value generation, or nearly half of the total global GDP, according to the World Economic Forum. Nature-related emergencies—from natural disasters to the extinction of a growing number of plant and animal species—will be business emergencies, too, and companies must plan for the coming nature transition now.

 What Are Nature-Related Risks? 

Managing and mitigating nature-related risks will require a much wider lens than most companies have adopted to date. There are nine planetary boundaries that span our world—the land, sea, and atmosphere—and the life that it supports. Planetary boundaries are the thresholds that humanity must stay within to maintain a stable environment and decrease the risk of irreversible environmental change.

 Of the nine boundaries, climate change is likely the most well-known, including in the Nordics. As laid out in BCG’s 2022 ‘Nordic Net Zero’ report, the Nordic countries face a herculean task to realize their ambitions of reaching net zero greenhouse gas emissions by 2050. Whilst the countries are making progress, the change is not happening fast enough. Although approximately

70% of the top 400 Nordic companies have emissions targets in place, only 39% have reduced emissions during the past year, the report outlines. The companies are waiting for the right incentives to reduce emissions.

 However, climate change is just one of the nine planetary boundaries (see Exhibit 1), and analysis co-sponsored by the IPCC & IPPBES outlines how climate action can have adverse consequences on other planetary boundaries. As an example, expanding hydropower capacity can adversely impact marine biodiversity through loss of natural ecosystems.

 Thus, as the climate change momentum builds, Nordic countries & companies must be careful to avoid climate change tunnel vision, by monitoring and addressing environmental impacts holistically.

It is only when all nine planet boundaries are taken together, that companies can begin to evaluate their exposure to nature-related risks. To do that effectively, business leaders will need to adopt a mindset of “double materiality”—that is, they will need to think through how business activities may impact each of the boundaries and, as crucially, how each of the boundaries may impact business performance. 

Although some companies have greater exposure to environmental and ecological degradation and collapse than others, the leaders of all companies need to adopt a more comprehensive approach to nature-related risks. As with climate change, customers, employees, and governments will demand it. In addition, investors will require it, especially large investors with diverse portfolios that are particularly vulnerable to the systemic threats arising from natural disasters and ecosystem collapse. 

How Companies Impact and Depend on Nature

The nature-related impacts of industries stem in highly disproportionate degree from four value chains: food; infrastructure and mobility; energy; and fashion. Analysis done by the Boston Consulting Group (BCG) shows that these four value chains are responsible for about 90% of the biodiversity loss. Of the four, food is by far the most significant, estimated to be responsible for at least 50% of the biodiversity loss. The value chains associated with infrastructure and mobility follow at approximately 25%, and then the energy and fashion value chains at approximately 10% each. In terms of activities, farming and fishing are the largest contributors to the impacts of these value chains. (See Exhibit 2.) 

Companies don’t just have an impact on nature, many are also dependent on natural assets to operate. The World Economic Forum found that among the sectors highly dependent on nature were construction, responsible for $4 trillion gross value added; agriculture, responsible for $2.5 trillion gross value added; and food and beverages, responsible for 1.4 trillion gross value added.

Many other sectors are either directly dependent on nature or indirectly through their supply chains. Often, industries that exert the most pressure on nature are also most dependent on it. 

The Challenges of Reporting and Acting on Nature-Related Risks 

The corporate responses to climate change to date can provide a rough map that companies can follow as they consider how to report on and respond to nature-related risks, but they won’t serve as a blueprint for several reasons.

 First, as we discussed, nature-based reporting and action will need to cover a broader and more complex range of environmental concerns. These concerns should be methodically identified with a materiality analysis covering the full value chain of the company. In each sector, specific issues arise, such as deforestation, overfishing, water consumption in stressed areas, fragmentation of habitats in biodiversity hotspots, pollution, as well as dependencies on fragile ecosystems.

 Second, climate impacts tend to be globally fungible, whereas nature impacts are local and, often, not interchangeable. In terms of global impact, it doesn’t matter where greenhouse gases are released or sequestered in terms of global impact, but the location of other impacts on nature do matter. The release of toxic waste in a lake and its remediation, for instance, may have a huge impact on the local environment, but little or no global impact. Thus, nature-related reporting and action is more complex: the aggregation of impacts may not be possible; and action in one area may not reduce overall impact in a significant manner.

 Third, climate risks are focused primarily on fossil fuel combustion and scope 1 and 2 emissions, which can be calculated by multiplying operational data by established factors. The broader scope of nature-related risks however requires a more comprehensive, and thus complex, impact assessment methodology. Comprehensively understanding the environmental impact of operations requires engaging both up- and down-stream stakeholders to create end-to-end transparency. To understand how that could be done in practice, we can look to Danfoss, an international manufacturing company based in Denmark, for inspiration. As part of Danfoss’ journey towards a circular product portfolio, the company is performing life-cycle assessments (LCAs) across the organization to understand the environmental impacts of their products, from ‘cradle to grave’. The company has a structured approach for engaging both customers and suppliers to build the necessary supply chain transparency, and the LCAs will serve as inputs to environmental product declarations, that summarize the nature-related impacts of their products. Many other Nordic companies have similar LCA initiatives in place.

Standards for Disclosure and Action on the Nature Transition Are Coming

tSandards for managing nature-related risks are already forming. As with climate change, two kinds of standards are emerging: those that apply to disclosure and those that apply to preventive and remedial action.

 Disclosure. The standards developed for emissions and climate-related risk are paving the way for nature-related risk reporting. In June 2021, the Taskforce on Nature-Related Financial Disclosures (TNFD) was formed. It is extending the leading climate risk and opportunity reporting framework created by the Taskforce on Climate-Related Finance Disclosures (TCFD) to a broader range of environmental exposures.

Also in 2021, the demand for standardization across environmental reporting led to the creation of the International Sustainability Standards Board (ISSB), which plans to establish standards that extend to all nature-related exposures.

 It is likely that the impetus behind nature reporting will be driven by investors and regulators, and it will probably be aligned with the emerging ISSB and TNFD standards. Within the European Union, for example, the Corporate Sustainability Reporting Directive (CSRD) will require all large companies to regularly report on their environmental and social impact activities. If adopted later this year, it will involve disclosing “all major environmental factors, including their impacts and dependencies on climate, air, land, water and biodiversity,” starting in 2024. In the US, the Securities and Exchange Commission recently proposed to require all companies to report on their emissions and climate risk exposure, creating a precedent for the mandatory disclosure of other nature-based risks.

 Action. Driven by investors, regulators, customers, employees, and other stakeholders, the Science Based Targets Network (SBTN) will likely set the bar for corporate action on nature. Formed in 2020, the SBTN is building on the work of the Science-Based Targets Initiative (SBTi), which verifies that corporate net zero and interim emissions reductions targets are aligned with the overall goal of limiting warming to 1.5°C above preindustrial levels. The SBTN aims to extend the concept of science-based targets from climate to nature. Just as SBTi clarifies the fair share of the global carbon budget that an industry and, therefore, a company can consume, SBTN aims to clarify the fair share of other environmental capitals. While corporate participation in SBTN and SBTi is optional, the standards that they set for action are likely to serve as the basis for regulations and laws in the future.

Three Initial Tasks in the Nature Transition

Increasing investor and stakeholder expectations and emerging reporting obligations suggest that the transition from climate to the wider, more comprehensive landscape of nature is just around the corner. To get ahead of the transition, leaders can undertake three initial sets of tasks:

 Task set 1: Assess materiality, establish your baseline, and set targets.

Leaders can begin to understand what the nature transition means for their companies by conducting a materiality assessment aimed at identifying their nature-related impacts and dependencies. Whilst many of the largest Nordic companies (for example, Ørsted, Equinor, Grundfos, IKEA, Nokia, and H&M) already are performing materiality assessments, it is essential that that the nature-related impacts are considered comprehensively and analyzed thoroughly. Although most companies are analyzing their carbon footprint, few companies have a thorough understanding of their impact on nature.

 Once identified, these impacts and dependencies should be prioritized and analyzed in greater depth to identify key metrics and their current baselines. After that, management can articulate its aspirations and commitments, and embed them in achievable targets.

 Ørsted, the Danish energy player ranked as the world’s most sustainable energy company in 2022 by Corporate Knights, has a structured approach to respecting & guarding the constraints of our planet. In their 2021 sustainability report, they outline how the company engages internal and external stakeholders to identify the most material sustainability topics. Ørsted’s Board of Directors and Executive Committee ensure these priorities are embedded in the company’s overall strategy. The priority topics, which currently include both biodiversity, greenhouse gas emissions, use of natural resources, and others, are brought to life a clearly defined targets, specific action plans, and supporting governance structures. Finally, the company reports extensively on their environmental performance, such that anybody interested can understand both the company’s challenges and achievements.

Task set 2: Build action plans for mitigating both impacts on the planet and risks to the business.

The second set of tasks in the nature transition is aimed at identifying the actions needed to achieve the company’s goals. These actions can take four forms:

 Avoid and reduce by making operational improvements that reduce nature impacts and dependencies while generating cost savings. Danfoss’ efforts to make their headquarters CO2 neutral is an example. During the past years, the Danish engineering company has carried out energy efficiency optimizations across the buildings in their HQ campus in Southern Jutland, benefitting both the planet and company financials.

 Transform and innovate by redesigning existing business models, processes, and products in ways that reduce nature risks, enhance the business performance, and contribute positively to the planet.

 Restore and regenerate by offsetting the remainder of impacts to deliver nature positivity. Here, it is critical to carefully select efficient and recognized offsetting programmes to guarantee positive impact.

 Create new green products and ventures by exploring products and business opportunities that rely on nature as a source of competitive advantage.

 Grundfos, a Denmark-based manufacturer of pumps, is a business built around the distribution & use of water, and the company has taken several steps to reduce waste & promote responsible consumption. As an example, at their plant in San Luis Potosi (Mexico), Grundfos have built their own water treatment plant, where which allows the company to reuse their wastewater locally. This effort helped Grundfos save more than 850,000 liters of water during the initial 12 months.

 Task set 3: Put into place the infrastructure needed to support the nature transition.

The third set of tasks ensures that the infrastructure needed to make the nature transition are in place. This includes: the governance, organizations, and people needed to oversee and support the transition; the ecosystems and partnerships needed to provide leverage and expertise; and the internal capabilities, such as risk management, financial valuation, and monitoring tools, needed to execute the actions described above.

In pursuit of its Forest Positive Agenda for 2030, IKEA is reaching out and engaging with partners across its ecosystem. In 2021, for instance, the company extended its longstanding partnership with WWF through 2025. Together, they are protecting and improving forest management and fighting illegal logging, as well as working to reduce water and pesticide use in cotton farming. At the same time, IKEA enlisted its suppliers in the achievement of its nature goals by adding biodiversity requirements to IWAY, its supplier code of conduct.

Act Now, Refine Later 

Companies should not wait to embrace the nature transition. First and foremost, leaders must protect their companies from nonlinear nature-related risks that could disrupt their businesses overnight and take years to remedy.

 There are also first-mover advantages up for grabs. Companies that take the lead in the nature transition will be seen as pioneers, which will help them win over customers and investors and bolster their loyalty. It will make it easier to attract and retain talented employees. First movers will also be able to secure lower impact inputs to production and position themselves for future success.

 The nature transition is coming. Yesterday (Dec 19th 2022), at the COP15 to the UN Convention on Biological Diversity in Montréal, the Parties committed to the Kunming-Montreal Global Biodiversity Framework. The goals and targets set forth in the framework will drive a new wave of regulatory pressure and open new business opportunities for nature positive businesses. The scientific community has now demonstrated that climate and biodiversity cannot be addressed as silos, and nature-based solutions are indispensable to address the climate crisis. Now is the time to plan how companies will integrate climate into a comprehensive social and environmental agenda.

This is an adaptation of the BCG article titled ‘Environmental Risks Go Far beyond Climate Change’, published on November 9th, 2022 & written by James Tilbury Adrien Portafaix Rebecca Russell , and Fabien Hassan

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