Episode Transcript
Speaker 0 00:00:00 Welcome to the Definitive Sustainability Perspectives Podcast, where our goal is to engage and inform our audience from investors to asset managers and portfolio managers, to sustainability leaders and those involved in E S G and sustainable finance. This ISA Shrine, according to the Intergovernmental Science policy platform on biodiversity and ecosystem services, around 1 million animal and plant species, are now threatened with extinction, many within decades more than ever before in our human history. Now, what's behind this well changes in land and sea use for one, climate change and pollution among other factors. Also, biodiversity loss was ranked among the top global risks by the World Economic Forum. And while factors like climate change have already started having a material impact on asset values across the globe, few financial institutions have a deep understanding of how nature related risks can affect businesses and their portfolios. Today, we're going to discuss how and why companies should measure and report on biodiversity, and just as importantly, how can investors encourage them and help them to do so. Here with us is Joel Hue, managing director at the Biodiversity Footprint Company. Thanks for joining us, Joel.
Speaker 1 00:01:42 Thank you. Pleasure.
Speaker 0 00:01:43 So, what exactly do we mean by the term biological diversity, and why should corporations and investors care about it?
Speaker 1 00:01:51 All right. Well, BA is about all living things from species and genetic diversity and ecosystems that all of that lives in, and these things interact together and they provide lots of benefits and services to companies and people. For instance, um, bees, uh, provide pollination services to agriculture. Uh, fish is used by fisheries and different types of companies, uh, use that for different products along the supply chain. And all of these different users also, uh, generate impacts along the way, and that leads to many types of risks. From a business perspective, uh, we see more and more company, uh, facing physical constraints, typically access to biological resources being constraints, uh, and more and more companies also are facing, uh, what we call ecosystem disservices, where ecosystems fail to function properly and air and water fail to be, um, treated properly so that it generates extra cost for companies.
Speaker 1 00:02:48 But, uh, more and more importantly, I guess from a financial perspective, it's becoming a permitting issue to get product approval, to get, uh, product off the ground. Uh, there's more and more constraints from a policy relationship perspective to get, um, bio city taken into account, and sometimes in a non net loss, uh, framework, which means that you cannot degrade more than you, uh, than, um, is possible from a conservation perspective. Uh, and at the end of the day, all of that is about, I guess, stranded assets. More and more people are calling, including, uh, more than 40 leaders just a few weeks ago, for 30% of land and seas to be protected from development. And that actually could rise up to 50%. If we listen to scientists. What does this mean for business? It means that you need to think creatively about how you develop land, how you develop a sea. You cannot just expand continuously and places where people expect future development, like let's say Canada or Russia, or are probably going to become, um, places where it's a nego area in the future. So from a pure business perspective, it, it's, I guess, birthed, um, constraints right now in terms of access to resources, uh, new laws and regulation, and especially in terms of the future. How can you develop, how can you grow in a constrained world? That's a key question from my perspective.
Speaker 0 00:04:05 So, Joel, now that we're talking about stranded assets becoming an issue, air and water are not being treated properly, that becoming an issue, what are the tangible risks and potential losses that corporations and investors should be thinking about in light of this?
Speaker 1 00:04:19 Um, well, uh, there are quite a few of them. So typically in, in our, in our company, we're facing quite a number of clients, especially in the mining sector. They want to expand the operations, for instance, in the coal sector in the many dive, uh, many mining, um, commodities. And the issue becomes, uh, how can I expand and, uh, into that wetland, into that place where there's that plant growing of, at Mabel's species is living, and there's so many stakeholder pressure to actually take that into account. But in some cases, uh, approval for exp expenses are completely, uh, refused by authorities. We've invited a number of times in South Africa and throughout the world. So just in terms of going concern and business expansion, it's becoming already a key material issue. Uh, and now in terms of, of a more positive outlook, it's becoming also, uh, a new perspective for innovation. How can I design product services that take ball into account? How can I grow my business, uh, using the same land, same land area, without expanding into new ones and being more resource, uh, efficient essentially. So it's both sides of the coin. It's not just negative, and we see that in many, many sectors, including, especially in the agribusiness sector. How can I become more efficient without destroying new, uh, wild nature and use what I've got already and make use of wild nature to pollinate or provide clean water.
Speaker 0 00:05:40 So if I were to categorize those risks, would you consider these systemic risks? It sounds like they have the potential to become reputational risk. What types of categories would you put that in?
Speaker 1 00:05:51 So historically, it was more reputational, especially when a threatened, uh, species highly, uh, I well-known species was, uh, threatened by your business. You had your business reputation at stake. But more and more, um, I think it's a resource physical constraint that is occurring in many places in the world, especially on from a commodity perspective. If, for instance, you talk about renewable energy and you need metals to, to actually grow your business, where are you going to source them? Uh, it's gonna be your major issue of, of physical constraint, because you cannot expand into wild areas for in the future. That's one side. From a systemic perspective, uh, the failure of ecosystem generates so many systemic risk from, uh, failure of providing clean water throughout the watershed, uh, also, uh, through climate change, calling all the, the different, um, uh, Catholicism that we've seen from, um, natural disasters to, uh, rise in sea level, which has huge impact. I'm not going to go into. And, uh, from a policy perspective, uh, as I said, there's, there's a growing call from world leaders to protect 30% of land and surface area within the next 20 years. What does this mean for your business? How can you expand, uh, next door if you, if there is a policy and a relative con context that forces you to offset your damages, it's gonna be very, very expensive. So it
Speaker 0 00:07:11 Sounds like these risks are already considered material risk. This is not something that's in the works. It's already there in terms of materiality
Speaker 1 00:07:17 For many companies. It is already a material risk Now.
Speaker 0 00:07:21 So let's switch gears and talk about firms that are successfully reporting on biodiversity. The ones that are just getting it right, tell us about how they measure impact and what their disclosures look like.
Speaker 1 00:07:33 So unfortunately, I cannot say that they're getting it right. Let me just, um, comment on that. What I mean is more and more companies, uh, have got system t reports out there. Most of the major largest companies out there, they do report on an annual basis on a number of topic. And typically, uh, it's based on the management approach to, uh, sustainability risk and the disclosure of some quantitative metrics, for instance, what to use, uh, greenhouses gas emissions. When we talk about the baity, there's a limited number of companies, uh, that actually mentioned baity. And there's a recent report that was published just two years ago out of, uh, top 100 2016 Fortune 500 global companies. Uh, assessment that was recently published. As I said, uh, only 31 of those companies had actually ity targets that were measurable, specific and time bound. So those few companies do have targets and KPIs, key performance indicators, but however, what's missing for almost all of them is the basic starting point of how much impact do they have?
Speaker 1 00:08:37 Nobody talks about their surface area that they control on their own, and what is the state of baity on them? How much, uh, baity is left, how much has been impacted, uh, historically, uh, through the last year and over time, essentially. So we are missing the magnitude and the scale of that impact is missing from these reports still. And, uh, and I guess, uh, at the end of the day, there's been, uh, from a business perspective concerned that we didn't, didn't have the right measurement tools, the right indicators to actually, uh, put together those data sets at the company level. These things are changing. There are more and more companies providing services in terms of bio diversity, footprinting, there are more and more, uh, solutions out there. And for instance, uh, uh, encourage you to have a look at the EU Business and Diversity, uh, network. They do an annual regular, um, follow up of all the different tools out there for companies, and they provide reports on what to progress. And it's, yeah, so basically day the solutions are there, but we are still missing that quantitative data invoice reports.
Speaker 0 00:09:41 So let's dive deeper into that. I, I'm thinking, where does this biodiversity data even come from? What are the different sources? You talked about the EU business and biodiversity information. What other sources, how reliable are those sources? And what's being done to improve the quality of the data?
Speaker 1 00:09:59 So when we talk about bio, we need to understand there's a value chain of information first. There's a raw dataset, for instance, maps of vegetation, um, information about the occurrence of specific species in the landscape. This raw information, uh, has varying quality across different countries. For instance, we know quite well what's there in Europe, but we know very little about Amazonia or Central Africa or Southeast Asia. So there's disparity. And most of the da, those dataset are managed, uh, either by some global organization like unip, world Conservation Monitoring Center or National Entities, but for those countries without any resources to, to get and manage those data. Obviously it's a big challenge, but that's one side of a value chain, the raw data, then it's about measuring the impact. It's about how do you measure the change in barrier city over time? And for this, uh, number of organizations have developed different tools, and there are basically two models.
Speaker 1 00:10:55 One, uh, group of people focus on measuring the actual change through satellite team, measuring through, um, onsite surveys, uh, different experts. Uh, and that's one side of one, one approach. And V is based on modeling through clever uh, algorithm, you can, uh, generate velocity footprints using what we call, uh, impact drivers, which are typically, uh, climate change information or resource use information. So those two approaches are being used. And I guess what matters at the end of the day is how do you want to use this? If it's for a high level risk screening, typically a modeling approach can work, but if you want to get your project approval by, um, permitting, uh, um, authority, you need to have real data on site. Is that species actually present? Is that wetland really threaten? You can't rely on just model information. You need actually real data. So it's a mixed basket. And, but at the end of the day, I want to maybe to, to, to reassure your, your origins. It's the same with, uh, climate change data. You've got global data assets managed by different people, but you also need real internal data. At the end of the day, if you want to make any meaningful decision, you need to measure your own emissions. And that requires working, uh, through that process yourself.
Speaker 0 00:12:11 So in terms of the increase of this data, and I know there are different types, we have the real data versus the model info. Have you seen increases in the demand for data over the last couple of years?
Speaker 1 00:12:22 Uh, yes, indeed. Uh, more and more nations, I'm putting together, uh, what they call ecosystem accounts. There's a standard being finalized right now, uh, at the un um, cea. It's, uh, basically the body that sets accounting standards at the level of nations, and they're calling for each country to, to put together databases on bio city change. And that requires, obviously, input from business, and it also, um, supply information to different, uh, companies. But, uh, that's one side of, of things. On the other end, more and more stakeholders are asking companies about what is the scale of a BAI footprint? If you're a retailer, if you are a mining, uh, operator, if even if you're a financial institution, what is the BAI risk in your product and your services throughout your supply chain? More and more, um, clients, uh, even consumers are asking about this on product labels.
Speaker 1 00:13:14 So there's definitely a growing trend, and I'm just going to mention a couple of examples. There's more and more pressure typically at the EU level, uh, even UK level for product labeling regarding deforestation, regarding the loss of specific species. Uh, there's more and more demand for that type of information, and it's growing. Just want to, to add a couple of things that are linked to that. First of all, there's been some, um, very interesting development at the level of C D P, which collects data, um, privately from, from organization on historically on climate and water. And they're expanding into basti since last year. So that's also a new thing. So they're asking, especially the mining sector for basti impact information. And there's also, in 2021, uh, there's gonna be the adoption of a post 2020 global BAI framework, which is going to be agreed upon by all the nations that are parties to the union. And as part of this process, we're gonna have to have an international and national targets for, for Bar City mainstreaming. And it'll mean that companies somehow will have to start measuring the impact report and disclose them as well, so that they can actually contribute to, uh, national targets. Similarly to what has happened with climate change, uh, there's, um, nationally, um, determined, uh, contributions and budget that have been done for climate change. We are gonna see the same process for, for <inaudible> coming up very soon.
Speaker 0 00:14:38 Hmm. So bringing that along into the same realm as climate change, that global biodiversity framework in 2021, that sounds very interesting. Let's talk about the importance of corporate disclosures For investors specifically, what are the top three to five things that investors need to look for?
Speaker 1 00:14:56 Uh, well, from a pure risk perspective, I think there are two main approaches. First of all, you have to, to understand whether the, the asset category of a company you want to look at is actually operating at, uh, high risk region. And there's a number of data assets out there that actually map those bio city important areas. Typically, uh, the Amazon or, uh, even Southeast Asia, like, uh, Indonesia and its islands are really high risk but's, an example, but on the oven, it's also about specific commodities and product. So it's quite easy actually to, to red flag them and understand whether these are high risk, uh, assets and commodities, however, be going beyond that. Uh, any business actually relies on BioCity and impact barriers. So what they should ask for, first of all is, is there any actual company policy beyond, uh, following up what validation requires?
Speaker 1 00:15:50 Because what we see coming up more and more is that proactive business, uh, have a very specific policy policies, and this is going way beyond and just saying that we respect the law, these companies are thinking ahead and they're talking about having no net loss or net positive impact. We've seen a number of companies, if I recall a report mentioned, uh, published just last year, there's about, um, yeah, I believe it's almost 40 comp global companies with no net, uh, loss or net positive impact target regarding bio. It's quite a lot. It's a challenge, but they should actually look for, for such, um, commitment to see the, to find companies that are actually, uh, really trying to make a difference. But, um, and going beyond that, I think what the future really is all about is what companies actually embrace this challenge and find new ways to make business and find new opportunities, especially in the agri business sector, especially in the, in the finance sector. How can you, how can you finance new business models that actually, uh, protect diversity and have actually positive impact at the,
Speaker 0 00:16:57 That's amazing. The, the last question, Joel, there are loads of projects that you've already started to talk about, but I'm just wondering, what other sorts of projects can we expect to see in 2021 happening around driving change in biodiversity?
Speaker 1 00:17:11 So I think, uh, there's a number of activities, uh, happening. As I said, there are more and more service providers providing solutions to company to, to assess the biopsy footprint. There's a number of government actually asking the price sector to contribute and to, and to come up with their, with their own solutions. And we've seen a group of, uh, organization coming together, uh, on a specific project, which is called, um, the Biological Diversity Protocol. It sounds like the greenhouse's gas protocol. And it's similar in concept. It's about providing an accounting framework to help companies, uh, measure, uh, consolidate their net BioCity impact data at the group level. This was something that was missing. We had, uh, data about impacts from a specific site or a specific product or company, and, but it was always a challenge for companies to pull together that data and to, and that specific product was developed through collaboration by many organization over the past three years.
Speaker 1 00:18:06 And it's going to be released, uh, very soon, over the next few months. And the goal of that is to provide, um, to protect the public sector, a free resource, and any consultant can develop their own, uh, solution, IT solution actually using the standard based on that. And at the end of the day, it's, it's basically about providing an accounting framework to, to assess the bio footprint of companies, of any sector, any supply chain, any, any kind of business. And that was really missing. And I want to highlight a couple of things, uh, in it. First of all, it's focusing on changes in ecosystem, changes in species. It's about actually, uh, helping companies quantify that specific impact. We're not talking about impact drivers like resource use or water use or climate change, uh, emissions, no, we're talking about changes in ecosystem condition and extent. We're talking about changes in population of species.
Speaker 1 00:18:59 It's possible to quantify it, to measure it, and to put it together. And that specific accounting framework is actually an adaptation of double entry bookkeeping, which originates from, uh, financial accounting. So we are putting together, um, statement of baity position, statement of baity performance, uh, but it's not in financial, uh, monetary values, it's in baity metrics, but at the end of the day, it helps company actually keep track of what's happening within their, uh, operations. And as part of that process, uh, I just want also to highlight why this project has actually been been put together, is that from, uh, one of my, uh, partner organization, which is what I've trust based in Johannesburg South Africa, we've been actually assessing, uh, uh, johannesburg's location listed company for the past three years. We've been looking at the quality of a disclosure on BioCity, and we've been making that, that information public.
Speaker 1 00:19:51 And what we found is that there is no quantified, um, consolidated impact data at the level of a company. And that specific tool aims to address that gap, providing a framework which is free available, uh, and makes it easy to compile bio impact data for all report users, from investors to broader stakeholders. Uh, and at the end of the day, it's free about asking companies to assess and talk about the barrier footprint. In a nutshell, it's about what the, the ecosystem they control, they're on the ownership or result, and how much of it is in good condition or in bad condition. <unk>.
Speaker 0 00:20:32 So, such great information here. So starting off, talking about really what risks look like. Historically, there was a lot of reputational risks involved in terms of threatening species, et cetera, but now we're seeing more systemic risk in the area of biodiversity failure in providing clean water. Um, the climate change that accompanies that and risks are already material for many companies. One issue is that there's a limited number of companies that are even mentioning biodiversity and having a measurable, specific time-bound biodiversity target. So something that's emerging, but many firms don't have this in hand yet. Um, and what's missing from many of those targets and from many of those measurements is magnitude and scale of impact in terms of data. There is real data as well as model info, and we really need to understand how the data is to be used to make the best decision about which data approach to take, whether using real data on our model data.
Speaker 0 00:21:33 And also worth noting here, definitely more nations are putting together ecosystem accounts, so creating accounting standards, putting together databases on biodiversity change. And that's definitely hitting an uptick as we see more and more of that. Also, more stakeholders are asking about the scale of their biodiversity footprint as well as biodiversity risk throughout their supply chains. What should investors look for? You mentioned Joel, understanding the asset category that they're operating in and understanding what the risk of the region is. So whether they're operating at a, in a high risk region or a lower risk region, and also the specific commodities and products, are those commodities considered high risk? If so, we need to be mindful of that. Finally, one of the most important questions that an investor should ask, what is the company policy? Is the company thinking ahead, being forward thinking in terms of financing new business models that are protecting and improving biodiversity footprint, the projects that we expect to see in the near term. Lots of those just gonna name a couple global biodiversity framework in 2021. And with that one, international targets are in play as well as the biological diversity protocol and accounting framework to measure net biodiversity footprint. Joel, Jude, thank you so much for joining such a great and interesting conversation.
Speaker 2 00:22:58 Thank you, Kiza. It's a pleasure.
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