Why businesses shouldn't overlook nature risks in sustainability

Corporations have devoted much attention to lowering emissions. Decarbonizing operations and supply chains remain critical to becoming more sustainable, but they are not enough to reduce risk and build resiliency.

"I call it carbon tunnel vision," says Roopa Davé, partner and national climate risk leader at KPMG in Canada. "We're underestimating risks when we're not considering climate and biodiversity in tandem."

The two are interconnected. That's why Ms. Davé says it's essential to take a holistic nature risk-mitigation approach.

Nature comprises the land, oceans, freshwater and atmosphere, and the living organisms within them. Biodiversity is the variety of life in the world, or a particular habitat or ecosystem. Natural capital describes the stock of renewable and non-renewable resources.

According to a 2024 KPMG report, 92 per cent of Canadian business leaders worry about climate-related extreme weather affecting the finances, operations and services of their companies.

Extreme weather can also threaten biodiversity and natural capital. In turn, biodiversity acts as the strongest natural defence against a warming climate, states the United Nations. Our forests, peatland and ocean habitats are carbon sinks, sequestering carbon dioxide from the atmosphere.

Moreover, nature can defend us from other climate-change impacts. Wetlands are a "green infrastructure" that combats drought, some coastal ecosystems are buffers against flooding, and the right vegetation can help to anchor soil and prevent landslides and erosion.

Degraded ecosystems can pose financially material risks to many businesses. The Insurance Bureau of Canada says 2024, at $8.5-billion, was the costliest year in Canadian history for severe weather-related losses. The figure represents almost three times the insured losses in 2023, and 12 times the annual average from 2001 to 2010. The numbers also do not reflect the extensive uninsured damages — another reason why understanding climate and biodiversity risk together is business critical.

To broaden their climate actions and mitigate risks, identifying and mapping the full extent of those material risks is the critical first step for companies. The Taskforce on Nature-related Financial Disclosures (TNFD) has developed guidance for businesses to assess, report and act on their nature-related dependencies, impacts, risks and opportunities.

Future-proofing business operations means understanding the full risk exposure connected to biodiversity, from increased costs for inputs through to disaster management.

In sectors such as mining, forestry and agriculture, poor management of biodiversity and natural capital can lead to smaller product yields or delays, reduced supplies and fluctuating prices. But any sector can be at risk. Acting sooner reduces vulnerabilities, and it helps organizations stay more resilient.

Biodiversity is increasingly a regulatory focus. Last fall, COP16 in Cali, Colombia – the United Nations Biodiversity Conference – set goals for nations to stem biodiversity loss by 2030. The Global Biodiversity Framework had been finalized at COP15 in Montreal in 2022.

The European Union and United Kingdom, among other jurisdictions, are implementing biodiversity regulations for corporations.

By aligning with current and emerging frameworks, businesses can prepare for future regulatory compliance and be in a better position to build nature resilience for improved sustainability. A proactive approach can enhance climate risk mitigation, attract investment and open new revenue streams.

In North America, however, political winds may signal reducing focus on environmental, social and governance initiatives, says Josh Hasdell, senior manager at KPMG in Canada's ESG practice.

"For many organizations, understanding biodiversity impacts is a new imperative. The ultimate goal is to enhance business planning. Companies are seeking support and evidence to incorporate biodiversity into their enterprise risk management frameworks. They're looking to understand these risks in conjunction with their climate and business risks."

Mr. Hasdell says framing the issue appropriately helps corporate leaders identify how much of their operations rely on natural capital. For example, wetlands can serve as wildfire breaks or limit the impact of drought on natural resources such as essential crops. "There's dependency on these assets that corporations need to protect like they would any other part of the supply chain."

Around half of global GDP is either moderately or highly dependent on nature. In Canada, natural resources directly and indirectly account for more than 19 per cent of our nominal GDP. Canada's vast coastal regions are resilient natural habitats, important for flood protection, carbon sequestration, habitat for wildlife, and other environmental and social resilience factors.

The Nature Conservancy of Canada increasingly partners with insurers, financial institutions and other large companies to protect wetlands, coastlines, grasslands and forests. "These [protections] don't just benefit communities, but businesses themselves," says Andrew Holland, the organization's national media relations director.

He explains that maintaining biodiversity through land preservation makes forests more resilient to wildfires, so landscapes are more resistant to landslides from heavy rains. "When roads are closed from floods and wildfires, businesses can't operate," says Mr. Holland.

As a stark and ironic reminder, severe flooding in Colombia affected event logistics at COP16. That only highlighted how businesses need to address climate and biodiversity risks before they become even more urgent threats to their operations and long-term prospects.

When collecting internal and external data to view such risks, companies should integrate them fully into their Enterprise Risk Management (ERM) plans, says Ms. Davé. That means going beyond piecemeal action to gain a complete picture of how climate, nature and biodiversity intersect and impact their operations.

"Failing to address biodiversity in business planning and risk management activities can lead to difficulties raising capital," she says. "Investors are increasingly scrutinizing climate plans through a biodiversity lens."