INSIGHT by Zaneta Sedilekova and Zili Duniya Bungwon
Biodiversity loss poses a risk to companies and directors through its inherent links to business via, among other things, supply chains. The corporate activities depend on and impact biodiversity in various ways. These dependencies and impacts often translate into corporate biodiversity risks.
Biodiversity risks are generally categorised into physical, transition, and liability risks. Physical risks arise from the damage to ecosystem equilibria caused by biodiversity loss. Transition risks arise from changes in law, policy, technologies, or market conditions necessitated by the transition to a nature-positive economy. Liability risks arise from the mismanagement of physical and transition biodiversity risks and may materialise in litigation, fines, insurance costs, or reputational damage. Foreseeing and responsibly addressing these risks provide an avenue for companies to translate them into business opportunities. For example, through mapping corporate value chains, companies may build value chain resilience to acute shocks such as pandemics, with shareholder value increased or protected in crisis.
This article discusses the relationship between businesses and biodiversity, provides examples of impacts and dependencies of business activities on biodiversity, and explains the risks and opportunities for companies and directors. The authors of the article write on behalf of The Commonwealth Climate and Law Initiative, a global think tank, which recently released a report on the legal implications of biodiversity risk for companies and their directors that discusses all these points in more detail.
| Relationship between biodiversity and business
Biodiversity is the diversity of life on the Earth – including within and between species and ecosystems. Biodiversity is the living element of nature, the term which also encompasses non-living elements, such as minerals, rocks and soil.
Complex series of naturally occurring interactions between the living and non-living elements of nature in healthy ecosystems result in ecosystem services on which both people and businesses depend. These ecosystem services include carbon sequestration, water purification, soil quality regulation and many others. All economic actors across corporate value chains depend on ecosystem services for their output and financial stability. By way of an example, between 2010 and 2019, nature-dependent exports made up about 40% of the total annual world trade, while an estimated $44 trillion of economic value generation, more than half of global GDP, is moderately or highly dependent on nature and ecosystem services. The evidence of the dependence of the global economy on ecosystem services is unmistakable.
In the economy of the 21st century, global value chains act as risk transmission channels – national nature-related dependencies in one country translate to global risk for other countries, economies and companies. This disproportionately affects countries in the Global South that experience devastating impacts on their ecosystems in a bid to supply raw materials to countries in the Global North. Industry-specific nature-related risks combined with country-specific nature-related risks, both transmitted through globalised value chains mean that no country or industry is immune to nature-related risks.
| Impacts and dependencies – a case study of the construction industry
>>click to zoom in | Source: CCLI Report ‘Biodiversity Risk:Legal Implications for Companies and their Directors
The value chain of the construction industry is complex – it depends on supply of materials from many other industries such as manufacturing, mining and forestry. At the same time, many industries are dependent on the construction sector itself, including real estate and infrastructure. In other words, the construction industry is positioned at the centre of a value chain, with inputs (raw materials and shipping), outputs (buildings and infrastructure), and their eventual demolition and waste.
The construction industry has many direct and indirect dependencies on nature. It is highly dependent on ecosystem services such as climate regulation, flood mitigation, and soil and sediment retention. Healthy and biodiverse ecosystems provide diverse and interconnected vegetation that absorbs water, while healthy and functional coastal barriers serve to lessen storm surge. Both act as flood-prevention mechanisms thereby providing protection against flood water to constructed assets – residential and industrial buildings, hotels and their surrounding infrastructure, for example.
On the impact side, the construction industry’s impacts on biodiversity are far-reaching. Biodiversity loss and species extinction at building sites are results of factors introduced by the industry such as light pollution, wastewater, energy use during the operational stage of the lifecycle of the constructed asset, and waste at the demolition stage. The extraction of major construction minerals (sand, gravel and limestone) impacts numerous species including over 1,000 species in the IUCN’s Red List of Threatened Species, with a majority threatened with extinction. The impacts of the industry arising from natural resource extraction are unequally distributed worldwide, with demand from richer parts of the world resulting in land use impacts and high biodiversity and species loss in less developed regions, which often supply these resources. Sulphur and nitrogen emitted in the process of shipping of construction materials around the globe also contribute to negative biodiversity impacts.
Though rare, some companies in the construction industry indirectly acknowledge their biodiversity dependencies and impacts by identifying natural resources as essential for their business. Further some also identify risks of lost opportunity or reputational damage, and acknowledge that biodiversity issues link to social licence to operate. For example, multinational Bouygues Construction considers environmental issues as strategic, acknowledges resource scarcity, and ranks biodiversity as a key concern. It also recognises that failure to address environmental responsibility could result in reputational damage and lost opportunities. Mexican multinational Cemex acknowledges that failure to gain approval from consumers and communities concerning biodiversity could impact its operations. It also recognises increased resource constraints in the cement industry as a result of biodiversity loss. This tacit recognition of biodiversity dependencies, impacts and potential risks points towards an increasing recognition of the materiality of biodiversity loss by directors of these companies.
| Risks and opportunities for companies and directors
As mentioned above, biodiversity physical, transition, and liability risks pose a real risk to business continuity and the financial performance of companies in the current economy. Liability risks have already materialised against some companies, with several courts around the world already considering corporate lawsuits with biodiversity loss as an element. For instance, in 2021, a suit was brought against the French supermarket chain Casino. One of the claims is the failure of Casino’s yearly due diligence plans to detail environmental and human rights harms caused by the supply of cattle from deforested areas to Casino’s Brazilian subsidiary. This illustrates liability risk arising from the corporate value chain activities. Liability risks are not limited to companies but can also materialise against directors, with liability in such cases often being personal. In March 2023, ClientEarth filed a case against Shell’s Board of Directors before English courts claiming mismanagement of material and foreseeable climate risk and breach of their duties. Similar reasoning could be applied in suits concerning foreseeable and material biodiversity risks.
Liability risks are not limited to companies but can also materialise against directors, with liability in such cases often being personal. In March 2023, ClientEarth filed a case against Shell’s Board of Directors before English courts claiming mismanagement of material and foreseeable climate risk and breach of their duties. Similar reasoning could be applied in suits concerning foreseeable and material biodiversity risks.
For the sake of business continuity, transformation and success, many companies must recognise and address their biodiversity risks in the next 30 years and beyond. Identifying and addressing them early on can also translate into vast business opportunities. The inherent link between biodiversity risk and value chains may enable companies to build value-chain resilience by identifying supply chain bottlenecks and mitigating their impacts on business continuity in times of crisis, such as was the case during the COVID-19 pandemic. Identifying other value chain issues – human rights abuses, modern slavery, climate change impacts – will also enable businesses to foresee and address them.
For the sake of business continuity, transformation and success, many companies must recognise and address their biodiversity risks in the next 30 years and beyond. Identifying and addressing them early on can also translate into vast business opportunities.
Finally, there is a steady shift in customer and employee preferences to environmentally responsible businesses. Companies that take steps to address their biodiversity risks now are therefore likely to experience an increase in market share and attract new talent. All of these opportunities are linked to the increased value chain transparency that arises from tracing of biodiversity impacts and dependencies across corporate value chains.
| about
Zaneta Sedilekova is a Director of climate and biodiversity risk consultancy firm Climate Law Lab. She has also been appointed as a Biodiversity Risk Advisor for a global think tank Commonwealth Climate and Law Initiative, where she carries out research and provides strategic advice on how biodiversity loss can pose a material risk to financial institutions and corporations across multiple sectors. She is also a practising lawyer with a strong focus on climate and biodiversity liability risk in corporate sector. Zaneta has co-authored several reports on biodiversity risks, including Addressing biodiversity loss – revolution or evolution of English law? and Biodiversity Risk: Legal Implications for Companies and their Directors. She regularly speaks about climate and biodiversity risk and litigation at conferences, webinars and other events.
Zili Duniya Bungwon is a Project Officer for the Commonwealth Climate and Law Initiative where she provides support for the biodiversity workstream, with a particular focus on corporate and financial law. She holds a Bachelor of Law from Baze University, Nigeria and a Master’s in Energy and Environmental Law with distinction from the University of Aberdeen, United Kingdom. Zili is licensed to practice law in Nigeria and has experience working in the climate, energy and legal sectors. She hopes to continue to use her knowledge and experience to contribute to mitigating climate change and biodiversity loss in Sub-Saharan Africa.
| All opinions expressed are those of the author and/or quoted sources. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.
