On the Frontlines: Natural Capital and Biodiversity

Organizations that consider natural capital and biodiversity as an integral part of their ESG strategy — particularly linked to environmental targets — can help increase business resilience, improve their reputation, open new investor markets, reduce risks, and be well prepared for emerging regulations and ESG rating agencies’ questionnaires. And biodiversity action can serve as a catalyst for profitable growth. The World Economic Forum (WEF) estimates that investments in nature-positive outcomes could create $10 trillion in new business opportunities annually and create 395 million jobs by 2030.

Conversely, ignoring natural capital has consequences: Biodiversity loss can reduce operational productivity, create supply chain disruptions, and eventually limit access to land and natural resources due to increasing environmental protections. Further, a business’s negative impacts on biodiversity can result in customer loss, regulatory or legal action, and reputational damage. Therefore, there is an increased need to address emerging regulatory requirements and consumer and investor feedback on biodiversity. It is fundamental that organizations start to value natural capital and biodiversity, implement nature-positive strategies, and integrate them into their business plans to create sustainable outcomes.

Pressure on organizations to pay attention to biodiversity is increasing. Investors want to ensure their holdings are addressing nature risks, and banks have already started to develop biodiversity lending and investment products for their clients. Indeed, investors are increasingly addressing biodiversity in their ESG assessments and re-directing capital toward companies that report on their biodiversity strategy and performance. Moreover, much regulatory attention and new reporting requirements have focused on reversing losses in nature and biodiversity.

In January, the Global Reporting Initiative (GRI) published GRI 101: Biodiversity 2024, a major update to its biodiversity standard. The new standard prioritizes transparency and guides organizations to disclose their most significant impacts on biodiversity throughout their operations and value chain. It will help organizations better understand which decisions and business practices lead to biodiversity loss, impacts that occur in the value chain, and how they can be effectively managed.

The GRI standard builds on previous biodiversity initiatives, such as the Kunming-Montreal Global Biodiversity Framework (GBF) and The Taskforce on Nature-related Financial Disclosures (TNFD). Adopted in Montreal in December 2022, the GBF commits 196 countries to tackling nature loss, including protecting 30% of land and sea areas by 2030. The TNFD, published in September 2023, provides disclosure recommendations and guidance that help organizations integrate nature into their strategy, supporting a shift in global finances toward outcomes that protect the natural world.

Another regulatory action to be aware of is the Regulation on Deforestation-free Products, adopted by the European Union (EU) in May 2023. This new rule promotes the consumption of deforestation-free products and means to reduce the EU’s impact on global deforestation and forest degradation. The commodities required to be deforestation-free are cattle, cocoa, soy, palm oil, coffee, and rubber, as well as derived products such as leather, chocolate, tires, or furniture. The new rules aim to reduce biodiversity loss and to reduce carbon emissions caused by EU consumption and production by at least 32 million metric tons a year.  

Arguably, internal auditors are faced with the task of determining how to integrate biodiversity and internal auditing processes to ensure a company's compliance with existing regulations. Internal auditors should start by advising ESG leaders and finance and risk management teams to view the impacts on natural capital and biodiversity from a financial and risk management perspective. Indeed, organizations should be working to identify where their business and finance activities are interfacing with nature.

Additionally, internal auditors can raise awareness about the necessary steps leaders should consider such as:

• Conducting biodiversity risk assessments.
• Setting ambitious but realistic biodiversity targets and preparing a biodiversity roadmap.
• Becoming familiar with new reporting technologies, emerging tools, and data sets that can support baselining, measurement, and management of biodiversity.
• Managing natural capital and biodiversity accounting processes as well as the creation of strategies to support the preservation of biodiversity.
• Articulating through ESG disclosures to investors and regulators on the issue of biodiversity by showing confidence and the capacity to tackle nature-related challenges.
• Evaluating future opportunities arising from investment in nature-based solutions and as part of a climate change and decarbonization strategy.

In their unique role, internal auditors can advise board members and C-suite leaders that organizations should put sustainability and ESG at the heart of decision-making and focus on new sustainable business models to meet environmental needs.