Nature Risk Profile was launched by the United Nations Environment Program (UNEP) and S&P Global on January 17. The Profile is a methodology with an aim at allowing the financial sector to measure and address nature-related risks.
The launch of the Nature Risk Profile follows the adoption of the Kunming-Montreal Global Biodiversity Framework in December 2022, which includes a target for governments to take measures to encourage and enable businesses to regularly monitor, assess, and disclose their risks, dependencies, and impacts on biodiversity.
Importance of publishing the Nature Risk Profile
1. Increasing concern about ESG issues
ESG considerations have become increasingly important in the investment community as investors look for ways to balance financial returns with a focus on sustainability. ESG factors are non-financial characteristics of a company or investment that can impact its long-term financial performance and stability. To help investors better understand and manage ESG risk, the development of ESG methodologies and frameworks has become increasingly urgent and important.
2. Recognizing the Nature-related Problems
With half of the world’s GDP highly dependent on nature, biodiversity loss is a growing concern for global business leaders. In the 2023 Global Risks Report from the World Economic Forum, the loss of biodiversity ranks as the fourth greatest global risk in the next decade, following the failure to take action on climate change, the need for adaptation to climate change, and severe weather. As a result, companies must adopt a credible and data-driven approach to assess the impact and dependence on biodiversity in their operations and investments, reduce associated risks, and promote positive outcomes for nature to increase their resilience.
3. Pushing Companies to Take Actions
The S&P Global 2021 Corporate Sustainability Assessment highlights several crucial trends regarding nature-based issues, like biodiversity. Although the number of corporate commitments to biodiversity has increased, the overall level of commitment is still low, with some sectors performing better than others. Furthermore, among companies with a commitment, 40% have not set a target year, which could weaken their commitment, regardless of its magnitude.
For a long time, businesses have utilized nature’s resources without taking into consideration the full cost. However, there is a growing recognition that the real cost of exploiting natural capital should be accurately identified and recorded. Moreover, it assesses and manages nature-related risks such as biodiversity loss, deforestation, and water scarcity which can have a significant impact on both the financial performance and reputation of a company or investment. Therefore, launching a proper methodology could drive companies to create and market products and services in a way that maintains or improves natural capital, contributing to the recovery of the natural world.
Overview of applying the Nature Risk Profile
The Nature Risk Profile aligns with the emerging approach of the Taskforce on Nature-related Financial Disclosures (TNFD) and will support the implementation of TNFD’s disclosure framework. It provides analytics on nature impacts and dependencies in a scientifically robust and actionable format. Moreover, its goal is also to enable companies and investors to identify and quantify nature-related exposure and mitigate risks to advance nature-positive outcomes and build resilience.
The Nature Risk Profile takes into account three main factors when evaluating the nature-related risks of a company or investment: exposure, sensitivity, and resilience. Exposure refers to the direct and indirect impacts that a company or investment has on the natural environment. Sensitivity refers to the degree to which a company or investment is affected by environmental changes and trends. Resilience refers to a company or investment’s ability to withstand and recover from environmental shocks and stressors. By considering these three factors, the Nature Risk Profile methodology provides a comprehensive view of a company or investment’s nature-related risks, which can help financial institutions make more informed investment decisions and engage with companies to reduce or mitigate nature-based risks.
To apply the methodology, investors must first identify the nature-related risks associated with a company or investment. This can involve reviewing the company’s operations, supply chains, and products to assess its exposure to nature-related risks. It can also involve reviewing the company’s policies, practices, and track record on environmental issues to assess its sensitivity and resilience.
Once the nature-related risks have been identified, the Nature Risk Profile provides a number of tools and techniques to help investors assess and manage these risks. For example, investors can use scenario analysis to evaluate the potential impacts of environmental changes on their portfolios. They can also use tools such as impact assessments and sustainability audits to better understand the nature-related risks associated with a company or investment.
The Nature Risk Profile methodology also provides investors with a range of best practices and guidance on engaging with companies to reduce or mitigate nature-related risks. This can involve working with companies to improve their environmental policies and practices, or engaging with companies to encourage them to adopt more sustainable business models.
The current financial market changes rapidly and is highly complex, which urges investors to have access to accurate and relevant information on nature-related risk. The Nature Risk Profile offers tools and guidance that companies and investors need to make informed decisions, manage nature-related risks, and achieve their sustainability goals.
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