The rewards of a rethink on nature

Changing the way the agriculture sector thinks about nature is not just about preventing biodiversity loss, according to Deniz Harut, Executive Director at Pollination. It’s about unlocking the inherent value in nature that savvy businesses could already be using to their advantage.

Speaking on an ANZ customer call, Harut said habitat destruction was a major driver of biodiversity reduction, and agriculture’s impact in that area was profound.

“Reforming agriculture to prevent deforestation is one of the most impactful ways to curb biodiversity [loss],” Harut said. “And on the flipside, it's an enabler to unlock investments and value for businesses.”

In March, ANZ Research report  Financial innovation to close the biodiversity funding gap suggested “significant funding” is required to slow the loss of biodiversity around the world - a figure close to $US850 billion. That will need to come alongside support from both the public and private sector in the food, beverage and agriculture (FB&A) space.

Innovative financial solutions will be needed to fund the shift, the report concluded, to ensure a nature-climate transition that creates “both risks and opportunities for FB&A companies”.

Speaking on the call, Harut said the global push against climate change was helping many businesses recognise the more-specific issue around biodiversity loss, particularly in FB&A.

“Recognising the value of nature in monetary terms, and further clarifying revenue streams from its protection, restoration and regeneration is needed to help address the global financing gap for nature,” she said.

“The food and beverage sector will play a very important role as intermediaries in directing that capital and investments in their particular supply chain.”

Harut made the comments in conversation with ANZ Sustainable Finance Director Mara Chiorean and Senior Economist Betty Wang. The conversation was moderated by ANZ’s Head of FBA, International Sherrie Banks.

Risk

According to Wang, there is a growing awareness among businesses of the need to revisit the relationship between nature and economic growth.

“As the largest user of land, [the FB&A] sector is where nature climate nexus is critically apparent,” she said. “The sector is responsible for 34 per cent of global greenhouse gas emissions, while at the same time particularly at risk from the impacts.”

A United Nations-backed report from September published by the Race to Zero suggested currently unpriced nature risk could slash billions of dollars from agriculture companies around the world.

There's “no denying” that’s creating a real risk for investment in the FB&A sector, Harut told the call. Savvy players are now applying what they have learned from climate-related risks to the nature-related risks, she said.

“To get ahead of that and start building resilience as a business is very smart positioning,” Harut said.

In 2021 a World Bank report warned the impact of a collapse in “natural services” to sectors such as fishery and timber could cut global gross domestic product by as much as $US2.7 trillion by 2030.

Wang told the call any impact would begin to weigh on stakeholders in time, with pressure from “consumers, governments, policymakers and investors” combining to encourage greater consideration of biodiversity.

The Race to Zero report said key companies in the FB&A sector could lose up to 26 per cent of their value by 2030. In such a scenario the average loss would be more than 7 per cent – a $US150 billion hit to investors.

For Chiorean, this is all evidence of a “perfect storm… building around biodiversity and nature”.

“As investors become more aware of this - and they are increasingly doing so - they are beginning to understand the financial implications and starting to put pressure on their portfolios,” she said.

Additional pressure is coming from regulators and policymakers, Chiorean said, as well as the formation of bodies like the Science Based Target Network and Taskforce on Nature-related Financial Disclosures.

“The global biodiversity framework, adopted during the fifteenth meeting of the Conference of the Parties in December 2022, will have ripple effects and translate into national policy that will have far-reaching impacts for FB&A companies,” she said. “Countries are starting to put those goals into regulation.”

Generator

Wang insists the biodiversity story is not just about risks, and that reward is there if the FB&A sector can come together on a solution.

“The transition to “nature positive” is expected to generate trillions of dollars of new opportunities,” she said.

A Project Drawdown study has estimated a commitment to regenerative-agriculture systems by 2050 would require investment of $US57 billion - but the return over time would be $US1.9 trillion.

“I think the business case is there for a lot of this intervention,” Chiorean told the call. “It’s just around bringing it up to scale.”

Addressing the biodiversity challenge will help with other goals, too, she said – including broader net-zero carbon goals.

“Acknowledging and recognising that link is very important,” Chiorean said.

Harut said companies can act right away by taking steps to create risk-management frameworks to identify gaps in their nature and biodiversity risk profiles.

“We believe companies that prepare now will have the first-mover advantage in the market,” she said. “And be best placed to mitigate key risks, as well as take advantage of the new opportunities that this nature-investing concept is presenting.”

Transparency along an entire supply chain is critical in achieving this advantage Harut said. Questions that need to be asked include “what type of monitoring and data collection will be needed on top of what you already have, and where should it be strengthened?”, she said.

Companies “need to start building internal capacity around these topics,” Harut said – “including at the board level”, where ambitions and targets can be laid out.

Missing

For Wang, the missing link in this transition is ultimately how it will be funded. According to the UN, the total financing for nature-based solutions reached $US133 billion annually in 2021. Of that figure, private finance made up only 14 per cent.

“We can't just purely rely on the public sector to provide funding,” Wang said. “Innovative financial products [from the private sector] will help direct capital towards nature-based solutions, and assist governments and companies to protect biodiversity, particularly sustainable-finance solutions.”

Chiorean said any effective mechanisms would need to ensure confidence around transactions and market integrity.

The good news is there is interest from both the “public sector and private sector side to establish functioning mechanisms,” she said.

“But it still is a nascent market, and it will require a lot of effort to mainstream,” she said. “As corporates, the actions you take in supply chain and how you transform your supply chain will define the future of how capital is going to flow.”

Chiorean said sustainable-finance investment could be a solution for many companies looking to take their first steps into what can be a complex space.

“There is so much opportunity for the FB&A sector to advance biodiversity objectives,” she said. “It sometimes can be overwhelming. How do you prioritise, what are some of the priority interventions?

“Investing in high quality, nature-based solutions could be one of those priorities.”

Outcomes

For Chiorean, green finance structured so the proceeds go towards financing biodiversity outcomes is a fast-emerging option for businesses to consider.

Chiorean told the call that among the vast amounts of sustainability-linked finance, the focus is largely on environmental metrics such as greenhouse gas emissions, waste and renewable energy - but little else.

“Here is where biodiversity comes in,” she said. “Considering the importance of biodiversity to the sector, FB&A companies have a distinct opportunity to link nature outcomes to their cost of capital.”

“Companies in this sector that already have articulated a robust biodiversity strategy — that have clear, medium- and long-term targets — are particularly well-placed to take advantage of this.”

In some cases, biodiversity has been included in eligible-use-of-proceeds frameworks.

“An emerging area in this is sustainable trade finance,” she said. “The majority of [nature] impacts of FB&A companies are coming from the supply chain. Finding mechanisms that link action in the supply chain to the financing strategy are very important.”

As the sector develops, Banks said ANZ was standing by to assist its customers take advantage of its opportunities.

“This is an important priority for the sector, and indeed for ANZ as a bank,” she said. "We recognise the importance of innovating with our customers to find the right financial solutions.”

Chiorean said the FB&A sector would continue to face risks as long as the majority of the impact on biodiversity comes from the supply chains of companies “sourcing, producing, distributing agricultural commodities”.

“FB&A companies really have an opportunity to lead a systemic improvement, through collaboration and demanding higher standards from their suppliers and partners,” she said.

You can read more about the impact and opportunities of biodiversity in ANZ Research’s ‘Financial innovation to close the biodiversity funding gap’.