Nature encompasses all, and the global economy is starting to realise its dependency on it. Two approaches are emerging – businesses develop biodiversity-oriented standards and principles, and regulators work on the legislative front. This article depicts the state of play in the EU and calls for coherent and ambitious action by markets and EU regulation in restoring and protecting nature.
The economy waking up to its dependency on nature
As a thriving nature benefits the economy and society, financial market participants have been increasingly concerned by the economic consequences stemming from biodiversity loss and ecosystems degradation.
The World Economic Forum has calculated that over half the world’s total GDP – roughly $44 trillion of economic value generation – is dependent on nature. While the European Central Bank (ECB) has recently published a report on the financial exposure of the euro area to ecosystem services, estimating that about two-thirds of companies are highly dependent on at least one ecosystem service.
In reaction to the dependency on nature being revealed, businesses and policymakers started estimating the financial risks connected with biodiversity loss and ecosystem degradation. The two camps have been developing different instruments with the same goal – providing guidance to ensure business operations are respectful of planetary boundaries and aligned with a nature positive economy.
Two sides of nature in corporate regulation
Market-led standards and regulatory requirements are working alongside each other to account for nature-related impacts and dependencies in corporate disclosures. However, both sides are challenged by the complexity of metrics that are still in a preliminary state and nature is more locally specific than climate.
On the market-led side, two global initiatives are gathering momentum:
- The Taskforce on Nature-related Financial Disclosure (TNFD) framework currently scheduled to be piloted in September. Through the framework, companies will be able to calculate and report their impacts and dependencies on biodiversity and ecosystem services.
- The Science-Based Targets Network (SBTN) initial technical guidance for corporate targets for nature published in May. The guidance assists businesses in setting targets in transition to a nature positive model.
Both frameworks are being developed in coordination with the TNFD framework to achieve a coherent architecture for corporate governance of nature. Yet, there are still unaddressed gaps in the approaches, such as too much discretion in double materiality assessment, as underlined by the Finance for Biodiversity Foundation.
On the regulatory front, the EU has focused on a set of policies derived from global commitments on nature. The Convention for Biological Diversity received concrete targets in December 2022 with the approval of the Global Framework for Biodiversity. This is reflected in the EU framework through the EU’s Biodiversity Strategy for 2030 and culminated in the development of the Nature Restoration Law. The law represents an essential piece of regulation, as it contains legally binding targets to rehabilitate degraded habitats and lost species. However, the legislation is currently at risk, as it has been recently voted down by three different committees in the European Parliament.
On the side of disclosures, the European Sustainability Reporting Standards (ESRS) would require corporates to disclose an array of nature-related information. However, recent amendments by the Commission made several biodiversity data points completely voluntary to report.
Although the EU is trying to set forth ambitious legislation, political interests are undermining the enforcement of a nature regulatory framework.
The need for coherence between the EU regulation and market initiatives
Political challenges aside, a linkage must be made between market-led initiatives and corporate regulation. The two camps must coordinate, such as via the EU Business & Biodiversity Platform, to produce a compatible and ambitious set of policies and standards that will guide the real economy into a nature positive future. Establishing this linkage is key to ensuring the EU economy acts in harmony with nature. This will not only mitigate financial risks but will also make the European market more attractive for global investments in nature.
Additionally, EU institutions need to step up and credibly play their part. Recent developments in the ESRS and the Nature Restoration Law fall short of the level of ambition necessary to set the ground for a nature-positive framework in the EU. Now, policymakers and politicians must recognise the key importance of nature for the EU economy and act upon it.