By Maxim Vergeichik, Senior Nature Economist, UNDP & Marco Arlaud, Associate Global Coordinator, UNDP Biodiversity Finance Initiative
A new UNDP-BIOFIN publication sheds light on how businesses and the finance sector in developing countries can embrace the concept of nature-related disclosures.
The world’s immense economic growth over the last several decades has come at a cost to the health of our planet. Over a million species are today threatened with extinction and the very fabric of what society relies on to fuel life and its economies is collapsing. But there are sprouts of hope with businesses beginning to understand better that the decline of wildlife and ecosystems is a significant risk to companies and investors. By working differently, businesses can shift from nature-negative business models to nature-positive ones.
Integrating nature into economic decision-making requires understanding and disclosure of risks and resulting dependencies, impacts and opportunities. Nature-related disclosures help companies and investors better understand how investments are helping or hindering the planet, and this information can help the world better preserve ecosystem services our livelihoods depends on.
UNDP supports the development of frameworks for organisations to report and act on evolving nature-related risks, such as the framework proposed by the Taskforce on Nature-related Financial Disclosures (TNFD). Measuring and disclosing nature risks and impacts is the first step to shifting global financial flows toward nature-positive outcomes. As an example, disclosure of conservation value of forests in Costa Rica, as part of a tailored metric called “economy of the forests” (which assesses in monetary terms the extractive, sustainable management as well as conservation value of natural forests) has been one of the factors which contributed to re-thinking forest management options, re-orienting revenue generation away from logging to conservation-focused activities.
Another example of nature disclosure could be in India, where the Securities and Exchange Board of India mandated the top 1000 listed entities by market capitalization to file the ‘Business Responsibility and Sustainability Report’ (BRSR) starting in 2023. The disclosures under the BRSR are segregated into essential (mandatory) and leadership (voluntary) indicators. The list of metrics is dominated by those measuring carbon emissions, water extraction and hazardous waste. Two indicators, however, deal with biodiversity: one requests companies to report on their business at or close to “ecologically sensitive areas”; another indicator is requesting information on investment in biodiversity loss prevention or remediation activities. Such non-financial disclosure is encouraged for the whole value chain.
UNDP’s Biodiversity Finance Initiative (BIOFIN), with funding from the Government of Italy, has conducted a study of five emerging economies (Indonesia, India, Costa Rica, Zambia and Mexico) to assess their readiness for nature-related disclosures. The study looked at the readiness of the policy and regulatory environment and the preparedness of institutions to embrace nature-related disclosures.
The study is based on an analysis of 10 key areas of preparedness which assess the current state of affairs and identify priorities in areas such as natural capital accounting, disclosure metrics, mandatory vs. voluntary reporting principles, the inclusion of nature criteria in investment evaluation checklists, public budget nature tagging, fiscal instruments in support of nature-neutral or nature positive businesses, institutional set-up behind disclosing, and the role of digital technologies.
The study found that while every country embarked on some form of natural capital and ecosystem services accounting, no government has fully integrated it into the system of national economic accounts. There is a diversity of metrics used by countries, without a single standard framework. Reporting is often hindered by a lack of data to enable collation, comparison and trend or scenario analysis. The need for a standardized approach in disclosing based on reliable, frequently updatable and “business-friendly” metrics was noted.
Most countries noted the need for additional capacity in building and using natural accounting systems such as the System of Environmental Economic Accounting (SEEA) or ENCORE. Every country presented a different hierarchy and structure of financial institutions involved in collecting and processing economic reports. Countries noted that for regulatory success, an international nature disclosure framework such as TNFD would need to be sufficiently flexible to allow embracement by national authorities with different institutional frameworks.
Some Governments point to being overwhelmed by the rising number of ESG reporting and disclosure instruments recently, noting they are in constant need of raising their understanding and ability to deploy them. Making disclosure mandatory in a country requires time, capacity, and willingness. It is complicated for governments to bring these three criteria every time a new type of reporting is introduced. Harmonization of international standards, for example under the aegis of International Sustainability Standards Board (ISSB), would allow for a more effective and quicker regulatory update.
The publication contains further views and results on the preparedness of developing countries for nature-related disclosures, and we hope would make for an interesting read for standard-setters and stakeholders willing to assist developing countries in their transition to nature-positive economies. UNDP is committed to continuing to support countries on this path.