Nature risk is the next big topic in responsible investing. But what is it?

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Queensland cattle breeder Melinee Leather has seen permanent streams drying up, temperatures reaching new highs and flooding in areas that are usually not flooded.

As the weather becomes more and more unpredictable and extreme, Leather has trained to stop being surprised.

“We started to think that there was nothing that could not happen,” she says. “This thought process of ‘it wouldn’t happen here’ is probably not true.”

Queensland cattle ranchers Robert and Melinee Leather.

Over the past two decades, Leather has grown into a leader in sustainable agriculture. The diesel generators on the property have been replaced with solar powered pumps. Cattle rotate in pens to graze and Leather has stepped up planting of Leucaena, a fast growing crop that attacks soil health, water retention, livestock emissions and biodiversity in one. cut.

The changes are driven in part by changing consumer demand that favors ethical farming, in part because Leather believes it is the right thing to do, and in part because banks and investors have started to demand it.

“To have a successful business, you have to protect your environment,” she says. “Without it, you are exposing yourself to financial risk. “

Farmers are at the forefront of an emerging type of financial risk that investors are starting to factor into decisions about whether and at what price to provide finance.

“Natural risk” is related to climate risk, but goes beyond carbon emissions to measure a company’s impact on a wider range of natural assets, including biodiversity, water, soils and others. the landscapes.

Cattle that feed on Leucaena (photo) emit between 2 and 14% less methane emissions.

Cattle that feed on Leucaena (photo) emit between 2 and 14% less methane emissions. Credit:Melina leather

The World Economic Forum Global Risks Report this year, two nature-related risks – biodiversity loss and ecosystem collapse – are among the top five economic risks of this decade. In the same way that financiers have withdrawn from industries such as thermal coal to reduce climate risks, farmers may soon find it more difficult to obtain a loan if they fail to cope with the risks associated with the climate. nature.

A study by global asset manager First Sentier Investors found that $ 44 trillion, or more than half of the world’s gross domestic product, is moderately or heavily dependent on nature, with agriculture among the three most exposed sectors. to the loss of nature.

“With so much of GDP dependent on nature, this poses incredible financial risks,” said Kate Turner, responsible investment specialist at First Sentier. “It’s very much linked to climate change…. but it is really a risk in itself.

Much like climate risk, Turner explains that there are three main types of nature-related risks: physical risks due to the degradation of natural assets on which a business relies for its profits, transition risks, including penalties. severe to damage natural assets or new regulations, or systemic risks.

The current health crisis is a key example of a risk of a systemic nature. Without commenting on the origins of COVID-19, Turner says there has been an “extraordinary increase” in the number of zoonotic diseases, where germs are spread between animals and humans.

“What the research suggests is that, as there is more and more loss of nature and habitat for wildlife, wildlife is coming into closer contact with humans, and we’re seeing a lot more case. high disease transfer from animals to humans. “

At the heart of the problem, says Turner, is that nature has been underestimated.

“We do not properly value nature in an economic sense. Nature has provided us with all these goods and services for free, so it is open to exploitation, and we have been exploiting it for many years now and we have found ourselves in this situation where demand exceeds supply.

“So we need to start valuing nature more appropriately. “

The National Australia Bank is the country’s largest agricultural industry lender and the only major bank to sign the Natural Capital Declaration in 2011, a commitment by CEOs around the world to integrate natural risk into decision-making.

Rosemary Bissett, head of sustainability and risk governance at NAB, says biodiversity is the “canary in the coal mine of natural capital.” For example, the extinction of species among animals that pollinate plants is a major risk to the profitability of farmers.

The National Australia Bank is the country's largest agricultural industry lender.

The National Australia Bank is the country’s largest agricultural industry lender.Credit:

“Much of our food system depends on pollination,” she says. “Two-thirds of the world’s pollinators are at risk. These are material issues, they are noted and are now gaining in importance. “

NAB now works with its agricultural clients to ensure they are protecting themselves against loss of biodiversity, as well as other risks associated with natural capital, such as soil health and water availability.

“If you think about it, 60% of Australia’s land and natural capital is in the hands of our farmers. And 70 percent of our water resources are used by farmers. They are essential stewards of Australia’s natural capital and truly important customers to us, ”said Bissett.

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If recognizing risk is the first step in minimizing it, measuring risk is next. In September, Australian executives from Macquarie Group, Deloitte and KPMG joined a global group working to develop natural hazard disclosure standards.

Like the Climate-Related Financial Disclosures Task Force, which is now used by more than 1,000 financial institutions in 89 countries, responsible for $ 194 trillion in assets, the Climate-Related Financial Disclosures Task Force nature will be released over the next two years. .

While Europe has already made corporate disclosure of biodiversity mandatory, Turner says there is still a long way to go. “In Australia and around the world, we are still at the very beginning of our journey in this area,” she says. “As disclosure improves, it will pave the way for better risk management. “

This year, COP15, the United Nations Convention on Biological Diversity, was considered the most important biodiversity conference in a decade. At a side meeting at COP26, countries signed a post-2020 global biodiversity framework – a set of goals and targets for the next 10 years that countries, including Australia, will seek to achieve together. .

“There is always a regulatory risk if we do nothing. As an industry, we need to be proactive. We have to be transparent.

Melinee Leather, Cattle breeder

As governments prioritize protecting biodiversity, Turner says this increases the overall risk to nature for investors. She gives the example of washing machine manufacturers who have been hit by stricter regulations to protect the oceans.

Turner says First Sentier Investors has engaged with these manufacturers to encourage the use of filters that prevent microplastics from being released into the oceans. “First, it will reduce a major source of pollution, but also because we see that countries have introduced or are starting to introduce regulations to force them to do so. This is obviously a big business risk for the washing machine manufacturers in which we invest.

Large investors are also taking note. The Australian Council of Superannuation Investors (ACSI) released a report in November calling on its members, who manage more than $ 1,000 billion, to start prioritizing biodiversity loss in board conversations.

“Investors’ response to the risks and opportunities associated with climate change contains several lessons for dealing with biodiversity. The two risks are closely related and are of similar magnitude and urgency, ”the report said.

Leather takes note of international developments and says the agricultural industry should be at the forefront. “There is always a risk of regulation if we do nothing. As an industry, we need to be proactive. We have to be transparent.

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