
Nature risk profile: A methodology for profiling nature related dependencies and impacts
The technical guideline outlines a methodology for how companies and investors can profile nature-related risks arising from dependencies and impacts of economic activities by combining nature data with data on the locations of companies’ activities.
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OVERVIEW
Introduction
The global economy heavily depends on nature, yet its activities drive significant nature loss. Over half of the global economic output, valued at USD $44 trillion, depends on nature. Despite this reliance, natural capital has declined by over 30% between 1992 and 2014. This deterioration increases risks for businesses and financial institutions. Addressing these risks is crucial for sustainable economic activity.
Risks relating to dependencies and impacts on nature
Dependencies refer to ecosystem services businesses rely on, such as water flow and carbon sequestration. If ecosystems fail, operations may halt. Mining, for instance, depends heavily on water, making it vulnerable to scarcity. Impacts represent changes in ecosystem states caused by business activities. These include direct effects, such as habitat destruction, or indirect effects, like pollution from supply chains.
Physical and transition risks arise from these dependencies and impacts. Physical risks include reduced availability of ecosystem services due to climate events, while transition risks involve regulatory and societal changes aimed at mitigating ecosystem degradation.
Methodology/Approach
The methodology offers a tiered approach:
- Tier 1: Broad estimates based on sectoral averages.
- Tier 2: Detailed, location-specific assessments using geolocated data.
This system enables businesses to quantify dependencies and impacts, offering actionable insights into risks.
Dependencies methodology guidelines
Dependencies are scored using three components:
- Materiality: Reflects the importance of a service to a business. For example, water dependency is critical for agriculture.
- Relevance: Adjusted based on location. Ecosystem services like flood protection are more relevant in high-risk areas.
- Resilience: Evaluates ecosystems’ ability to continue providing services despite pressures.
The Ecosystem Integrity Index (EII) assesses resilience by combining metrics for structure, composition, and function. Degraded ecosystems often have lower capacities, and the methodology recommends using condition measures to anticipate future risks.
Impacts methodology guidelines
Impacts are assessed through the condition-adjusted area footprint, which quantifies ecosystem degradation caused by business activities. This footprint is weighted for the significance of impacted areas. High biodiversity regions or critical natural assets amplify the risk profile.
Location significance integrates factors like threatened species and ecosystem services. For instance:
- The Species Threat Abatement and Restoration (STAR) metric highlights areas where reducing threats yields significant biodiversity benefits.
- Critical Natural Assets denote regions essential for ecosystem services like carbon sequestration.
Recommendations and future developments
The methodology suggests:
- Expanding the focus to include impacts on vulnerable groups, such as Indigenous Peoples and women, often disproportionately affected by nature loss.
- Integrating value chain assessments to capture upstream and downstream dependencies and impacts.
- Enhancing risk mitigation measures by incorporating actions taken by companies to address identified risks.
- Extending the scope to freshwater and marine ecosystems, which require additional data and techniques for comprehensive assessment.
Conclusion
The methodology aligns with the TNFD’s framework, supporting businesses in identifying and managing nature-related risks. It facilitates strategic decision-making to address dependencies and impacts while advancing sustainable practices. Future iterations aim to refine and expand the methodology, ensuring its relevance and utility in a rapidly changing environmental context.