An expedition into Natural Capital: Why the 'E' in 'ESG' is about more than just climate change - Financial Services Blog | Deloitte Australia has been saved
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The threat of climate change has become a headline issue at the forefront of Australia’s public debate. Whilst climate change is undoubtedly a critical issue worthy of global attention and urgent action, there is more to the 'E' in Environmental, Social and Governance (ESG) than reducing carbon emissions. Focussing on climate without discussing the broader issue of nature loss is losing sight of the forest for the trees.
Nature is a fundamental – and fundamentally underappreciated – part of the economy and human wellbeing. We think of clean water and air as priceless – a commodity without a dollar figure.
And yet it is inherent to both our wellbeing and the economy.
At every stage of economic development, countries are reliant on resources and ecosystems provided and sustained by the environment. The World Economic Forum estimates that US$44 trillion – more than half the world’s economic output – is moderately or highly dependent on nature.[i] But right now, natural resources are being extracted faster than they can be restored and are being used to provide goods and services which result in harmful waste products, such as carbon emissions and plastic packaging.
This is occurring across the globe as well as closer to home. Australia has vast reserves of ecological wealth, including endemic species, iconic ecosystems, and productive land. Our backyard is filled with some of the most significant ecological systems on the planet. A recent report from Deloitte Access Economics found that the economic, social and iconic value of the Great Barrier Reef is worth $56 billion alone.
And yet, Australia is one of the countries most vulnerable to nature loss. The 2019-2020 Black Summer bushfires burnt more than 24 million hectares and killed or displaced an estimated 3 billion native animals. It also took an economic toll – the disaster cost Australian agriculture $4-5 billion, equating to 6-8% of agricultural GDP.[ii]
It is unsurprising to learn that Australia is anticipated to experience the fifth-worst economic damage as a result of nature loss in the world. WWF has estimated this to equate to US$20 billion GDP lost annually by 2050, primarily due to the loss of coastal infrastructure and agricultural land through flooding and erosion.[iii]
What if we valued nature differently?
Natural capital seeks to change this. By presenting nature as ‘capital’ it becomes easier to see it as a valuable asset, comprised of finite stocks which may be invested in to generate value or degraded to deplete value. For this reason, natural capital is an attempt to better convey the true value of nature and create an untapped market opportunity rooted in truly sustainable returns.
With this basis, we can build a new vision for the global economy, which is transparent, inclusive and ecologically sustainable. The growing ecological deficit can be addressed by mobilising investment into the conservation, sustainable management, and restoration of natural capital assets.
Already, there is strong momentum to make this a reality. Following closely in the footsteps of the climate change agenda, the transition to nature-positive has already begun, driven by regulatory, stakeholder and market pressures. Multinational investment managers are already integrating natural capital KPIs into engagement priorities, and the upcoming second half of the UN Convention on Biological Diversity’s Conference of the Parties (COP15) in late 2022 is anticipated to agree to a ‘Net Zero-esque’ target for nature.
There is also market opportunity – from sustainable finance and impact investments to certified sustainable commodities and voluntary carbon markets. Business opportunities associated with a transition to nature-positive are expected to be worth at least $10 trillion annually by 2030.[iv]
The finance sector is the engine of this transition to nature-positive. Banks are exposed to a multitude of natural capital risks through their financing activities. Understanding where clients, transactions and assets impact or depend upon natural capital lays the foundation to mitigate risks and unveil opportunities. The finance sector is also well positioned to accelerate the move to nature-positive by integrating natural capital into decision making processes, products and services, to encourage nature-positive behaviours and investment at scale.
There is a clear opportunity for Australia to be a leader in this space and to drive the market response to natural capital right here at home. To date, most natural capital initiatives and platforms have been designed and led out of Europe. This includes the Natural Capital Protocol, The Taskforce on Nature-Related Financial Disclosures, and the EU Taxonomy for Sustainable Activities. Whilst any progress in this space is welcome, this trend does not reflect the true global spread, risk and supply of natural capital. It is imperative we are part of this change.
But, for Australia to take this market opportunity it requires action – at a policy and an individual business level. If we want to truly address the climate challenge, the time has come to bank on natural capital.
Find out more in our latest report, Banking on Natural Capital, launching in mid-June 2022.
[i] World Economic Forum, Nature Risk Rising: Why the Crisis Engulfing Nature Matters for Business and the Economy, 2020, p. 8, http://www3.weforum.org/docs/WEF_New_Nature_Economy_Report_2020.pdf.
[ii] Joshua Bishop, Tina Bell, Chuan Huang and Michelle Ward, Fire on the farm: assessing the impacts of the 2019-2020 bushfires on food and agriculture in Australia, December 13, 2021, p. 5, https://www.wwf.org.au/ArticleDocuments/353/WWF%20Report-Fire%20on%20the%20Farm_converted.pdf.aspx.
[iii] WWF Australia, “WWF: future nature loss a huge blow to Australia’s economy”, WWF Newsroom, February 12, 2020, https://www.wwf.org.au/news/news/2020/wwf-future-nature-loss-a-huge-blow-to-australia-s-economy.
[iv] World Economic Forum, New Nature Economy Report II: The Future of Nature and Business, 2020, p. 4, https://www3.weforum.org/docs/WEF_The_Future_Of_Nature_And_Business_2020.pdf.
Guy is Deloitte’s Asia Pacific and Global Nature Lead, with a focus on elevating biodiversity with businesses as a means to manage risk and capitalise on new environmental markets. Guy also serves as Deloitte’s representative on the Taskforce on Nature-related Financial Disclosures and is an industry thought leader in biodiversity and natural capital, providing science-based solutions to solve new and emerging global challenges. Guy’s work is built on his training and career as a professional ecologist with 20 years in consulting, having developed monitoring, reporting and verification frameworks for multiple clients, working closely with the finance, built, infrastructure, energy, and food and agriculture industries. Guy also has a deep and ongoing interest in community-led forest conservation, and the use of digital media to support effective primate strategies.
Chloe is a senior analyst with several years' experience delivering ESG assurance and advisory services for clients across a range of industries, including government, financial services, built environment, consumer goods, NGO and energy & resources. With a unique skill set stemming from degrees in both Law and Creative Intelligence and Innovation, Chloe thrives on the cutting edge of change and aspires to ensure that this change is positive for people and for the planet. Key areas of interest include natural capital and biodiversity, carbon sequestration and capture, sustainable and blended finance, impact investment, Indigenous rights, and humanitarian and development aid.
Will is Deloitte’s Asia-Pacific Climate & Sustainability Leader and has over 20 years’ international experience supporting organisations to respond to climate change. He has worked extensively across all infrastructure classes, led national-level climate risk assessments, delivered innovative adaptation strategies, developed urban resilience strategies for cities across Asia and advised government agencies on how to align regulatory arrangements to drive more effective climate risk management. Will has also led sustainability and carbon management services for infrastructure projects with an aggregate capital value of over $15 billion, is an experienced facilitator and trainer and co-developed the Great Barrier Reef Foundation’s ‘Resilience Reefs’ initiative. For Will, the need for organisations to rapidly accelerate action to decarbonise their business models and actively address climate risks is clear. The opportunities associated with this transformation agenda are enormous, but to capture value organisations need to move quickly, consider all aspects of their business, build new partnerships across their value chains and transparently engage with their stakeholders. Leading a group of climate and sustainability practitioners across the region, Will’s role is to bring the best of Deloitte to help our clients solve their complex problems, manage uncertainty and respond to rapid change.