Companies Urged to Take Stock of Their Impact on Nature and Related Risks

Companies should consider the natural world as core to their business and report their effect on it in much more detail, according to a U.N.-funded group that promotes sustainable business practices. But assessing environmental impact remains tricky.

The latest draft framework published by the Taskforce on Nature-Related Financial Disclosures aims to help big businesses and financial institutions report and act on nature-related risks, covering issues including deforestation, pollution, water stress and overfarming. It follows previous drafts, with a final version slated to be published in September.

Depletion of resources and damage to rivers and forests should be seen as integral to firms’ operations, and not merely a matter of corporate responsibility, said Tony Goldner, the TNFD’s executive director. “We used to think of nature as an endless supplier of resources into our business practices,” he said. “We’re trying to shift the conversation around the nature of the relationship between nature and business.”

The final framework should give priority to the end result in natural areas, said Kat Bruce, founder and director of environmental-DNA startup NatureMetrics.

“Creating a baseline on the state of nature in…priority areas and then ongoing monitoring to track progress over time is key,” she said, noting that new technology allowed for collection of much more solid biodiversity data.

“We also need to focus on how effective company actions are to mitigate risks,” Ms. Bruce said. The current guidance is a “solid step,” she said. “But we must not stop there.”

The TNFD is a market-led initiative but funded by the United Nations. It brings together 40 corporate executives, including Deputy Environment Director Alexandre Capelli of French luxury-goods group LVMH Moët Hennessy Louis Vuitton SE; GSK PLC head of corporate responsibility Sarah Dyson; Renata Pollini, head of nature at Swiss cement maker Holcim Ltd.; and Koushik Chatterjee, chief financial officer at India’s Tata Steel Ltd.

Some $44 trillion of global economic value is moderately or highly dependent on nature, according to the World Economic Forum. The collapse of natural systems could wipe $2.7 trillion a year from the global economy by 2030, according to the World Bank.

Companies and shareholders should pay more attention to the material risk of natural degradation, Mr. Goldner said. “Dependency is the pathway to risk,” he said. “If you’re investing in a fast-growing agricultural company in an area where there is water stress, that should trigger questions,” he said.

“What does that tell the investor about the ability to keep growing at that same rate?”

The draft framework covers three areas that should be assessed by large companies and financial institutions: the use of land, freshwater and oceans; pollution and pollution removal; and resource use and replenishment. The framework highlights the potential use of bidirectional metrics, that is to say, positive effects as well as negative, Mr. Goldner said.

A fourth indicator, on climate change, is covered by a separate framework set out by the Taskforce on Climate-Related Financial Disclosures, or TCFD.

Companies’ effect on climate change is relatively simple to measure. Emissions can be calculated in metric tons, and companies use shared rules that enable comparisons between one business and another, even if reporting remains patchy and partly based on estimates.

But reaching “nature positive”—as the TNFD aims to achieve—is a more nebulous concept, Mr. Goldner acknowledged. “There’s some work to do reaching a consensus on what nature positive looks like,” he said. It would likely encompass a basket of metrics, rather than a single indicator, he added.

The TNFD’s draft comes after nations agreed on a new international framework that will oblige large corporations to show they are reducing their impact on the world’s natural life.

Public subsidies seen as harmful for biodiversity will be cut by $500 billion a year under the Global Biodiversity Framework, or GBF, reached at the United Nations’ COP15 conference on biodiversity in Montreal in December.

Under the GBF, governments between now and 2030 will introduce laws and policy measures requiring large companies to disclose and reduce the damage done to ecosystems from their operations, supply chains and portfolios. They will also be required to provide information to the public needed for more sustainable consumption.

A previous draft requirement for businesses to reduce their negative impact on the environment by at least half wasn’t included in the final agreement, which doesn’t specify the extent of the required actions. Nearly 200 countries signed on to the final agreement. The U.S. wasn’t an official participant.

The TNFD’s framework aims to help businesses align their reporting and actions to global policy goals, such as the GBF, the task force said. The draft framework includes sector-specific guidance for areas including agriculture, mining, energy and financial services.

Guidance for other industries, including textiles, will be released on a rolling basis over the coming months, the TNFD said.