Biodiversity Loss is an Interconnected and Existential Business Risk

Biodiversity is an indicator of a healthy ecosystem, and healthy ecosystems offer value and resilience through the goods and services they provide that underpin society and businesses. Declining biodiversity could impede wealth creation: according to a 2020 report from the World Economic Forum (WEF), more than half of the global GDP, or about $44 trillion, relies to some extent on nature and biodiversity.[1]

The loss of biodiversity is both a distinct risk and intertwined with other business risks such as climate change, water scarcity, and human rights. Biodiversity loss is among the top global risks to society;[2] in 2022, WEF forecast it to be among the top-three most severe risks over the next decade.[3] The UN reported in 2022 that up to 40% of the world’s land and 66% of the marine environment has been degraded or altered by human damage.[4] This damage threatens almost 1 million species[5] in what is becoming widely reported as the sixth mass extinction.[6] Moreover, according to the World Wildlife Fund, the world’s wildlife population recorded an average population decline of 69% between 1970 and 2022.[7] The destruction, degradation, overexploitation, and overdevelopment of the natural world have driven these losses to the extent that the UN has defined the loss of biodiversity as an existential threat.[8]

In our report on biodiversity and business published in 2021,[9] we highlighted not only the importance of biodiversity to humans but also how biodiversity loss can affect companies across sectors—by leading to resource scarcity, increased operational costs, liability risk, or reduced access to critical materials. Based on public disclosures, a relatively small percentage of companies understand or proactively manage their impact on biodiversity. The business case for biodiversity action has never been clearer, however, with biodiversity-related risks the new frontier of environmental, social & governance (ESG) strategies.

Biodiversity Policy Disclosures Are Low but Rapidly Increasing

The impact of biodiversity loss on a value chain is not always immediately felt, and, as such, biodiversity loss remains a blind spot for many companies around the world.[10] Establishing and disclosing a biodiversity policy is the first step in addressing the topic, after which companies can begin to measure impact and implement specific mitigation or regeneration strategies.

Around one-third (34%) of companies in the S&P 500 disclosed a biodiversity policy in 2022, while only 13% of Russell 3000 companies made such disclosures. The rate of disclosure nearly doubled from 2021 to 2022 in the S&P 500 and Russell 3000, indicating increased corporate attention to this topic alongside growing investor interest.

The highest disclosure rate of a biodiversity policy was in the utilities, energy, materials, and real estate sectors. This supports the findings of the 2022 S&P Global Corporate Sustainability Assessment that found utilities led on biodiversity commitments from a review of 3,753 companies.

Biodiversity impact on direct operations and via value and supply chains remains a nascent topic and voluntarily addressed in the US. Very few companies (12 out of 2,969; 0.4%), disclosed their impact on species and the number of species affected. Scarce reporting means that the numbers may not accurately reflect each sector’s impact; however, they serve as an indicator of the scale of business impact on species. It is important to note that not all species are equal in their biological value, nor in their risk to or resilience from impact, change, or extinction. Therefore, the number of species provides a small insight into biodiversity impact. Understanding which species are affected, and how, is necessary to develop appropriate mitigation and remediation action.

The most significant impact on biodiversity for most industries occurs in supply chains. This is why some organizations may choose to address biodiversity-related issues in other corporate policies, such as those governing their environmental supply chains. According to ESGAUGE data, in 2023 as much as 91.7% of S&P 500 companies and 75% of Russell 3000 companies adopted an environmental supply chain policy. The charts below illustrate the sector breakdown of biodiversity and supply chain disclosure.

The disclosure of biodiversity targets is also expected to increase. In 2010, 190 countries, under the UN Convention of Biological Diversity (CBD), established the Aichi Biodiversity Targets,[11] 20 goals to be achieved by 2020. However, no single target was met at a global level, and only six were partially achieved by the end of that time frame, a failure attributed in part to the lack of specific metrics and targets. Unlike climate-change commitments,[12] no target data were available for biodiversity. However, the lack of data availability does not mean US companies were not setting biodiversity targets. The 2022 S&P Global Corporate Sustainability Assessment reported just over 6% of S&P 500 companies set a biodiversity target.[13] However, there was a rapid rise in biodiversity disclosures and targets, indicating opportunities for companies to disclose more information on biodiversity including their policies, targets, and number and species of organisms affected.

Carbon Credit Use Is Increasing but Biodiversity Benefit May Be Limited

Carbon credits and offsets are mechanisms that support emission reductions while system changes take place or innovative new practices are developed that allow organizations to decarbonize. This is typically achieved through afforestation projects that may support other sustainable objectives, such as biodiversity restoration or poverty reduction.

Disclosure of carbon credit use increased in 2022 and was greatest in S&P 500 companies. The use of carbon credits was relatively uniform across sectors in 2022, with no single industry exceeding 25% of companies disclosing carbon credit use. Internal carbon pricing remains a rarely used tool, with 39 companies out of the 2,969 analyzed by ESGUAGE reporting its use.

Biodiversity credits follow a similar approach as carbon credits, but with the goal of compensating for harm to natural habitats and species by funding or implementing conservation actions elsewhere. However, biodiversity is difficult to substitute and may require a significant time investment and location-specific approaches, making it more complex than emissions offsetting afforestation projects. Therefore, the specific types of biodiversity credits available can vary based on regional regulations, policies, and the nature of the development.[18]

Because carbon and biodiversity credits have different objectives, carbon projects may not benefit biodiversity unless diversity is built into the project. For example, monospecific afforestation projects (i.e., planting a single species of tree) have limited biodiversity benefits due to their inherent lack of diversity. Biodiversity credits are slowly emerging[19] but are unlikely to gain the scale of carbon credits due to their complexity. Combined with the current skepticism about a credit-based approach and the difficulties of verifying scope and scale,[20] companies should prioritize avoiding and reducing biodiversity loss.

Utilities Companies Use and Recycle More Water Than All Sectors Combined

Water and biodiversity as closely interrelated. To thrive, the environment needs clean and reliable sources of water, while water pollution is directly linked to biodiversity loss and the endangering of species.[21] According to the WEF’s Global Risks Report 2022, water scarcity is one of three global systemic risks of highest concern.[22] Increased withdrawal combined with more variability in rainfall means groundwater withdrawal exceeds replenishment rates in over half of the world’s aquifers.[23] For example, in 2022 Lake Mead, the largest reservoir in the US, recorded its lowest level since it was filled in 1937.[24] To help address this, in January 2021 President Biden issued an executive order on addressing climate change both at home and abroad, and specifically to conserve, connect, and restore 30% of the country’s lands and water by 2030.[25]

Companies that withdrew the most water in 2022 were in the utilities, materials, consumer staples, and consumer services sectors, according to the ESGAUGE survey. Indeed, the median volume of water withdrawn by companies in the utilities sector was more than 11 times that of all other sectors combined. Companies in the financial, consumer discretionary, and materials sectors withdrew the highest percentage from water-stressed areas. (Water stress areas are defined as those where the demand for water exceeds the available water supply, either because of natural scarcity or human factors such as population growth, economic development, and climate change. This includes areas with high or extremely high-water stress.) However, in absolute terms, utilities still withdrew more water from stressed areas than all other sectors from total water sources combined.

While the utilities sector did not have the highest percentage of recycled water use, in absolute terms it recycled four and a half times more water than all water withdrawn by the other sectors combined. While there is likely some cause and effect on water stress, location appears a key consideration, with relatively low water withdrawals but a high percentage withdrawn from stressed areas by companies in the financial, information technology, industrials, health care, and consumer discretionary sectors.

Water continues to be underpriced and undervalued.[26] Access to water will become an increasingly critical factor for businesses, and as water becomes scarcer, its true value will be realized, increasing costs, and driving water conservation and recycling efforts.[27] Companies should understand not just how much water they use, but where it comes from, and what recycling options are available to mitigate present and future costs. Water scarcity represents a significant cost to business, but environmental nonprofit CDP estimated the cost of inaction to be six and a half times greater—at $92 billion—than that of water scarcity ($14 billion).[28] The SBTN included freshwater quantity and/or quality for direct operations and upstream scope in each basin in its gold-standard methodologies.

The annual survey of C-Suite executives from The Conference Board suggests widespread awareness of the need for businesses to prioritize water as an environmental issue: in 2023, survey participants ranked it fourth among pressing environmental concerns.[29] Research shows that incentivization may be underutilized: the CDP reported 38% of C-Suites are incentivized on water management issues, with 8% of C-Suite incentives related to water management in the supply chain, and 3% of chief procurement officers incentivized on water-related issues.[30] Opportunity therefore exists to implement incentivization programs similar to ESG performance remuneration[31] to drive engagement and effect change throughout a company’s value chain.

A Circular Economy Will Reduce Biodiversity Loss

Over 2 billion tons of waste are produced globally each year, a figure that is forecast to grow by 70% by 2050.[32] Electronic waste is the fastest-growing type, and less than 20% of waste is recycled.[33] Generally in 2022, the percentage of waste recycled across sectors increased with the amount of waste produced, except for the information technology and materials sectors, which had proportionally lower recycling rates. The highest recycling rates were by companies in utilities, industrials, and real estate, and the lowest in communication services and consumer staples.

The type of waste produced is as important as the amount, with communication services and materials producing the most hazardous forms of waste. Materials-use disclosures and amounts were generally low, so no trends were seen. This does, however, highlight the need for greater disclosure of materials used to better understand their impact on the environment and biodiversity.

The UN’s International Resource Panel estimated in 2019 that the extraction and processing of natural resources, especially agriculture, accounted for 90% of biodiversity loss. Recycling reduces the need to extract and process more raw materials by keeping materials in use for longer, reducing the demand for primary resources, preventing pollution, and promoting regenerative practices[34] that benefit biodiversity. For example, the practice of recycling metals like copper, steel, and aluminum reduces the need for logging and mining, which have devastating effects on the biodiversity of natural environments. Recycling paper, plastic, and glass has significant energy-saving benefits if one considers how resource intensive the production and disposal of these materials is, and the fact that a reduction in energy consumption translates to lower greenhouse gas emissions and climate change impacts on biodiversity.[35] Ultimately, companies should embrace the circular economy as necessary to reduce biodiversity loss.

Conclusion: What Can Businesses Do Now?

Companies across the economy face risks from the loss of biodiversity but may not be fully aware of this fact. While new regulations will prompt multinational firms to increase attention to this area, there is a powerful incentive for companies to view biodiversity as a key business issue on par with climate change.

• Companies should appreciate the strong business case for biodiversity (which can be at least as strong as the one for addressing climate change). A decrease in biodiversity can expose them to direct risks, including resource scarcity, supply chain disruptions, rising operational costs, liability issues, and the irreversible loss of vital resources or services. Industries from agriculture to travel and tourism depend directly on preserving species, and even more sectors rely on it for their supply chains. Boards and executives should address biodiversity not as an isolated topic, but as part of a suite of related environmental issues.
• Disclosures on biodiversity are growing rapidly, and companies should track what their peers are saying in this area. Some 34% of S&P 500 firms disclosed a biodiversity policy in 2023, up from 18% in 2022. With new EU reporting requirements, companies should prepare to disclose not just their biodiversity policies, but also risks to the company, and the impact of the company and its supply chain on biodiversity.
• Leveraging biodiversity might be an effective way to get boards of directors to focus on climate, especially if they are dependent on naturally produced goods in their supply chain. If the board is overlooking climate issues, highlighting the connection between climate impact and their upstream supply chain via biodiversity may help capture their attention.
• Biodiversity credits are emerging as a strategy to reduce a company’s impact but face even greater challenges than carbon credits. It can be difficult to substitute the loss of a species in one location with growth in another. Companies would be well advised to primarily focus on avoiding the loss of species, rather than finding other ways to compensate for such losses.
• Companies should be prepared to respond to growing pressure from investors and nongovernmental organizations for a comprehensive approach toward environmental impact. In this regard, companies should examine their value chains to identify critical intersections with biodiversity, focusing on areas crucial for their operations.
• Companies should invest in a circular economy business model, which will reduce biodiversity loss. Utilities and real estate, two sectors that face significant risks from biodiversity, are leaders in recycling. More industries should increase recycling to keep materials in use longer, reduce pollution and waste, and promote regenerative practices that benefit biodiversity.
• Companies should seek to use collaboration with stakeholders, including from the upstream and downstream supply chain, as a way of tying their biodiversity objectives to broader societal goals. Companies should begin to set their biodiversity goals as part of their own strategic planning process and reach out to peers and those in their upstream and downstream value chains to see what can be done collectively.
• Companies should prepare for increased water scarcity. Water usage may differ greatly across business sectors. Companies using the most water were in the utilities sector—with the median water withdrawn over 11 times that of all other sectors combined. Companies can begin by understanding how much water they and their value chain use, as well as the sources of that water. This will enable them to implement programs to preserve water and aquatic diversity throughout their value chains.

Endnotes

1World Economic Forum, Nature Risk Taking: Why the Crisis Engulfing Nature Matters for Business and the Economy, January 19, 2020.(go back)