Could nature degradation prove a significant threat to corporate and financial stability? As climate change accelerates, oceans acidify, deforestation and soil erosion continue and species are lost, this important question is weighing on investors and financial regulators around the world.

Read this article to understand:

  • Why addressing climate change and nature degradation need to go hand in hand
  • What stress tests have revealed about the scale of nature risk
  • What the Taskforce on Nature-Related Financial Disclosures (TNFD) hopes to achieve, and how soon

“We are facing a global crisis,” warned Sir David Attenborough in the introduction to The Economics of Biodiversity1 by Professor Partha Dasgupta. “We are totally dependent upon the natural world. It supplies us with every oxygen-laden breath we take and every mouthful of food we eat. But we are currently damaging it so profoundly that many of its natural systems are on the verge of breakdown.”

This conclusion has deep implications for citizens everywhere and has triggered questions about how companies are monitoring and reporting their environmental impacts. Who is responsible for pollution, species loss or depleting groundwater? What needs to change to ensure capital is directed away from activities that destroy nature to ones that are ‘nature positive’ – in other words, based around conservation and restoration? 

One of those leading the debate is David Craig, founder of Refinitiv, one of the world's largest providers of financial market data, and now co-chair of the Taskforce on Nature-Related Financial Disclosures (TNFD). The TNFD was established to provide a risk management and disclosure framework for organisations to report and act on evolving nature-related risks, which it hopes will support a “shift in financial flows away from nature-negative outcomes”.

With over half of the world’s economic output – $44 trillion according to the World Economic Forum – dependent on nature to some degree, there is much at stake. According to Craig, interest in nature-based risk has exploded since the COVID-19 pandemic, and the TNFD has an ambitious roadmap to have that risk reflected on the balance sheets of large, listed companies.  

How much interest is there in the work of the TNFD?  

Interest has grown phenomenally since we officially launched in June 2021. The nature community has been active on this topic for many years, but we now have interest and awareness building in the financial and business community. What we are trying to do is join the natural world and finance together, using a risk accounting and disclosure framework. We are trying to bridge the gap between environmental agencies and finance ministers.

We received endorsement from the G7 in June. That was a big step forward, thanks to support and help from various members including Canada, the UK and France. We had explicit support over the summer from the French government, not just in terms of funding and involvement, but President Macron himself called out the initiative several times. We have UN backing from, amongst others, UNDP and UNEP FI, as well as support from the World Wide Fund for Nature and Global Canopy, the non-profit concentrating on deforestation, which have all been driving the creation of the TNFD. Then we received G20 endorsement in October.

Many governments have started to realise the importance of nature and climate

Many other governments have started to realise the importance of nature and climate. Initially, people recognised the importance of climate and said: “Let’s address that first, then nature comes next.” But now people have begun to appreciate the quantum of risk. The interconnectivity of climate and nature means they must be tackled together, because most of the tools likely to be used to tackle climate change and carbon absorption are going to be natural.

Some countries are far ahead in this. French banks have made notable progress. Japan has established disclosures on nature-related risk and is very active. Australia is also moving ahead; it is one of the world’s most nature-dependent economies but also one of the most exposed because of what's happening with the state of the oceans, wildfires and droughts.

We are experiencing a vicious cycle. The degradation of nature is creating substantial risk to the global economy because there is very little we do that does not use natural resources. But climate change is also degrading nature, which is impacting the natural resources that will support and absorb carbon, affecting seagrass, ocean reefs, forests, savannas and so on.

We now have over 230 committed TNFD Forum members

Alongside the 34 taskforce members working directly on the framework, we now have over 230 committed TNFD Forum members, and the Australian government agreed to support us financially at COP26, which is fantastic. But people are still figuring out what to do. How do we think about managing nature-related and biodiversity risk? What kind of disclosures are we going to use?

I have launched many projects in financial services and other areas, but I have rarely seen the level of interest and engagement match this. 

Why has it taken the wider community so long to get on board? Ecologists have highlighted the issues for years.

You are right. People have been raising the alarm on biodiversity and nature loss for decades. For instance, Prince Charles has said he has been described as an avid environmentalist campaigner for around 50 years. He began the Sustainable Markets Initiative, yet in the early days no-one was listening to him.

The scale of financial exposure to nature has been revealed

What has changed is that the scale of financial exposure to nature has been revealed. Several central banks are now carrying out stress tests in the area; that always makes things interesting because nobody knows what's coming next. The Dutch have done it. The Brazilian government has done it, and the French government is doing it.

The French study found 40 to 50 per cent of bank loan books are exposed to nature. That is considerable, particularly if you marry it with the scale of degradation, where we are losing around a football pitch of primary rainforest every six seconds. It is an extraordinary number. If you look at this bluntly and start putting the factors together, it means switching from ‘Let's care for pandas” to a serious assessment of economic risk and reality.

It means switching from ‘Let's care for pandas” to a serious assessment of economic risk and reality

As things stand, our current systems are unsustainable. The Dasgupta review was a breakthrough in this regard. What Professor Dasgupta said loud and clear was that natural and economic systems are far more interlinked than most people appreciate, and then the penny dropped.

Look at COVID-19. Ultimately, it is a nature-born issue, which has come about because of the proximity of animals and farming to clusters of humans. And look at the financial hit companies have taken as a result. Asset managers and insurers are taking this seriously because they have regulatory, financial and fiduciary responsibilities to factor in such externalities. They are thinking: “We need to focus on this, fast.” The crisis has made people aware they have a reason to act now.

You will be amazed at the dependencies industries have when you look at the natural environment

There are some good examples to focus on. For instance, the US spends over $300 million a year on shipping bees around the country because pollinators are threatened. If pollination does not happen, you have no fruit crop. Then we saw a chip manufacturer in South Korea that had to stop production as it ran out of water. People associate nature-based risk as the home of agriculture and fishing, but you will be amazed at the dependencies industries have when you look at the natural environment and across their supply chains.

Coca-Cola has focused on water efficiency for around a decade. If you go to its website, you will see it publishes the amount of water it takes to create a litre of coke (see Figure 1).2,3 Why has it done that? Coca-Cola has production capacity and bottling plants around the world, but it cannot function without water. It has been taking it out of ground sources faster than that it can be replaced. It's a good example of where a company has started to look at this issue in detail and associate it with its financials.

Figure 1: How much water does it take to create 1 litre of Coca-Cola?
How much water does it take to create 1 litre of Coca-Cola?
Source: Aviva Investors. Data from Coca-Cola, 20214 and Coca-Cola Great Britain, 20225

With climate, the international community has coalesced around a high-level target. Is there potential to do this with biodiversity, or are the issues too complex?

It has taken us six years to boil climate down to just a few numbers, around average global temperature increases of 1.5 degrees, 1.8 degrees and so on. Carbon dioxide and methane are uniform around the world and measurable, which helps.

We will get to a set of numbers but it will never be as simple as climate

Natural systems and biodiversity are local. The factors are contextually sensitive to location and industry; it matters where you are. So, some companies will have a lot of water risk, while others will have land use and fertility risk. There is no single number to capture this complexity, although there may be a set of numbers that achieves it. Water use is measurable, as is land use, then there is STAR (species threat abatement and restoration) for biodiversity, and other metrics are surfacing as well. We will get to a set of numbers, but it will never be as simple as climate.

We need to pivot our thinking from ‘climate first’. If we were to wind back the clock six years, we would probably start thinking holistically about nature, and climate would be one element of that. The Nine Planetary Boundary6 model from Professor Johan Rockström at the Stockholm Resilience Centre includes climate as one of the boundaries. We can look at temperature increase, but will also have to look at ocean acidification, terrestrial land use, pollutants and other factors.

I would therefore answer the question in a different way. There are metrics we need to use for the whole natural system. We happen to have quite a simple approach for climate, but we must consider other planetary boundaries and appropriate metrics for those to have a more comprehensive view.

There is growing awareness of the need for a just transition when it comes to climate action. How important is it that we have a just transition on biodiversity?

The problem is the same, but perhaps larger if you think about climate as a component of nature, not nature as a component of climate.

Let's think about farming. We have industrial-scale farming in North America and other areas, but generally farms tend to be small and locally run and owned around the world. What will emerge from concentrating on natural systems is that industrial farming techniques will have to change.

How might nature-enhancing changes be subsidised?

Governments are currently subsidising ways of farming that are not necessarily good for the environment and knock-on effects are emerging from that. Former Vice-President Al Gore said there are only 50 harvests left in the US if fertilisers continue to be used at the current rate. The question is: how might nature-enhancing changes be subsidised, or how might rural or indigenous populations be supported that are farming today?

We are also enormously dependent on fishing. Twenty million people in Indonesia rely on fish for their food or livelihood, but oceans are dying. How do we stop that and ensure those reliant on fishing are supported and not forced to migrate? This is important to address in a socially just way.

What about the state of our forests? How do we incentivise less-developed countries not to cut virgin forests down? The irony now is that some incentives on carbon offsets promote cutting down and replanting. It does not make sense, because it means destroying a rich forest, which then takes another 20 years for the replanting to get to the point where it absorbs the necessary carbon.

What changes are needed to accelerate change?

It's back to measurement. Large asset managers already have a price for carbon in their models, but they do not have a price for nature. The debate is ongoing about whether it is possible to achieve this in a simple way.

We are designing how to incorporate nature as an asset into a formal framework

One of the things we are designing into a formal framework is how to incorporate nature as an asset. If you look at the balance sheet of any corporation, there are assets and liabilities; there is a revenue line and a cost line. But natural assets are not set out in that structure, although companies are heavily dependent on them.

In our risk management framework, we are looking at how to identify the revenue dependent on natural assets or assumed in the cost base. A few companies have a tiny line that accounts for, say, water used. However, if that water source disappeared, it is likely to cost a lot more to replace it. We will have to start identifying the natural assets we rely on and where risk controls should be focused. We know that integrating a price for carbon into accounts is complicated. Our work intends to add a natural asset view into the balance sheet for investors and regulators.

What timeframe are you hoping to achieve this in? What will success look like?

Our goal is to create a framework for identifying and managing nature biodiversity risk and ultimately directing capital to nature positive outcomes, starting with a risk management framework. Everyone thinks we are starting with disclosures; that's not the case.

We are starting with risk management, re-using the four pillars (governance, strategy, risk management, metrics and targets) established by the Task Force on Climate-Related Financial Disclosures, so that we can get as close as possible to a common framework. We are also working with standards bodies to ensure existing standards will be adopted into our framework; we are not looking to reinvent the wheel but build on the materials and research already out there.

We are trying to bring all this together in one market-led global framework

We aim to release a beta version in the first quarter of 2022. That will allow us to get feedback, which we will aim to incorporate and refine during the year, including any additional approaches and metrics through 2022 and into 2023. That's an aggressive timeframe, but we are not starting from a blank sheet. Years of work have already taken place around natural resources; we are trying to bring all this together in one market-led framework, globally.

We want it to be comprehensive, adopted by companies and investors, based on scientific rigour, and ultimately adopted by the market, because that is the secret of success. Having built many communities across financial services over the years using information, it's all about adoption and building the network effect.

Ultimately, you are trying to simplify things because this is such a complex area. People are confused about what to report against thanks to an alphabet spaghetti of initiatives and standards bodies. We are trying to bring this all together into one framework, setting out holistically how to think about the world as a natural system.

Related views

Important information


Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

The information contained herein is for general guidance only. It is the responsibility of any person or persons in possession of this information to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. The information contained herein does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it would be unlawful to make such offer or solicitation.

In Europe, this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK, this document is by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: 80 Fenchurch Street, London, EC3M 4AE. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 138 Market Street, #05-01 CapitaGreen, Singapore 048946.

In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business address: Level 27, 101 Collins Street, Melbourne, VIC 3000, Australia.

The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom.

Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is based within the North American region of the global organization of affiliated asset management businesses operating under the Aviva Investors name. AIC is registered with the Ontario Securities Commission as a commodity trading manager, exempt market dealer, portfolio manager and investment fund manager. AIC is also registered as an exempt market dealer and portfolio manager in each province of Canada and may also be registered as an investment fund manager in certain other applicable provinces.

Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) registered with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.