The term “net zero” has become a bit of catch-all for corporate sustainability efforts. Globally, some 929 publicly listed companies currently have publicly disclosed net zero targets, a number that has more than doubled over the past two years, and countless press releases and environmental, social and governance (ESG) reports have touted corporate efforts to reduce their carbon dioxide (CO2) emissions as a symbol of their commitment to environmental action.
But there is far more to the environmental element of corporate sustainability than just reducing greenhouse gas emissions. Now that global regulators and stakeholders are starting to get serious about addressing not only emissions, but also the biogeophysical effects of business activities on natural ecosystems, businesses are scrambling to get a handle on a whole new class of environmental risks and opportunities. Very few are ready to do so.
New Standards Focused on Biodiversity and Ecosystems
At the heart of the issue are new standards that address the impacts of business activities on biodiversity loss, which is the degradation of natural ecosystems due to changes in land and sea use, direct exploitation of organisms, climate change and invasion of alien species and pollution. Put simply, regulators and standards bodies now want to know not only what companies are releasing into the air, but also what may be leeching into soil, running off into streams and oceans and affecting wildlife habitats. And, they want to be able to track it throughout the product lifecycle, from resource acquisition to manufacturing, including the entire production supply chain and through to the eventual product disposal. That means these rules will also potentially impact non-industrial, office-based companies too, few of which have experience with this type of risk management.
Among the new reporting frameworks being introduced are GRI 101: Biodiversity 2024, a new biodiversity standard introduced in January by the Global Reporting Initiative (GRI), which is one of the primary organizations promoting standardized corporate sustainability reporting. The new standard includes details on location-specific impact reporting and a host of disclosures on direct drivers of biodiversity loss, including land use, climate change and invasive species throughout the supply chain, and it will formally go into effect in January 2026.
The GRI standard follows closely on the heels of the sister framework to the Task Force for Climate Related Financial Disclosure (TCFD), the Taskforce on Nature-Related Financial Disclosures (TNFD) recommendations, which guide businesses to start reporting and acting on nature-related dependencies, impacts, risks and opportunities. Among its proposals are 14 core global disclosure metrics that cover everything from dependencies and impacts on nature to location of assets and activities in ecologically sensitive locations.
And, of course, there is the EU Corporate Sustainability Reporting Directive (CSRD), which will require companies to disclose biodiversity risks, opportunities, dependencies, and impacts starting in 2025. The European Sustainability Reporting Standards (ESRS) E4 Biodiversity and Ecosystems sets out in detail the Disclosure Requirements related to targets, metrics and impacts arising from business operations.
A New Breed of Compliance Challenges
The reason these biodiversity reporting requirements present such a big compliance challenge to businesses is that they represent a fundamentally new topic in the in the world of risk assessment. The bulk of corporate sustainability regulation to date can trace its roots to a combination of environmental, health and safety (EHS), governance and HR standards that have been in effect for decades. Take the international standards for corporate sustainability disclosure on climate-related risks introduced last year by the IFRS’ International Sustainability Standards Board (ISSB). As I noted following the introduction of the ISSB, the new standard was so successful, and so widely embraced by regulators and corporations, because it built on and consolidated many of the disparate approaches to corporate sustainability that had been presented over the past several years.
Companies have already accumulated a lot of experience tracking these types of metrics and most already had a playbook in place to comply.
That is not the case with the new crop of biodiversity loss-focused reporting requirements and frameworks. For example, in just one aspect of the product lifecycle, when it comes to getting a handle on all of the chemicals used in every aspect of raw materials and component development, environmental ripple effects caused by production processes, transportation and logistics and the long-term impacts of product and packaging disposal is brand new territory for most companies. Many don’t know where to begin.
It is also worth noting that the ISSB has already signaled that one of its next priorities is the development of an additional reporting standard focused on biodiversity.
On top of the significant operational challenges associated with even finding the information they need to comply with biodiversity and ecosystem impact reporting standards, the issue of double materiality amplifies the issue. This concept, which is a cornerstone of the CSRD and GRI biodiversity requirements, holds that these environmental risks can be material to a company from both a financial and non-financial perspective. Therefore, companies don’t only need to understand the potential impact of their operations on the environment, they must also understand the implications of those impacts on their balance sheets.
In practical terms, that means businesses assessing biodiversity loss risk will need to be able to forecast whether or not a single compound in one product was harvested in such a way that it could adversely affect wildlife or contaminate soil long after it is disposed. And that’s just the beginning. Biodiversity impact risks will encompass all aspects of business operations from construction projects to resource use to shipping and logistics all the way to disposal. Most companies do not have the visibility they need into their global supply chains to identify these risks, let alone the data needed to calculate their influence on company financials.
While most corporate environmental sustainability initiatives have been focused on greenhouse gas emissions and their reduction, the bigger picture on how global regulators will tackle impacts on biodiversity and ecosystems, is now becoming much more focused. There will be few businesses who will not be affected by these new obligations and even fewer who are fully prepared to manage the process.
For most businesses, the next few years will be a crash course in becoming proficient in this new risk management challenge. A small number may be ready, most are not.