Nature-Related Risk is a CFO Problem, Not Just a CSO Concern
Credit: Midjourney
In recent years, the conversation around nature-related risks has taken on new urgency. Traditionally, the mantle of addressing environmental issues within a corporation fell to the Chief Sustainability Officer (CSO). However, as we delve deeper into the complexities of nature risk and its far-reaching implications, it’s becoming increasingly clear that this is not just a sustainability issue—it’s a financial one. This shift in perspective places nature risk squarely in the realm of the Chief Financial Officer (CFO).
Nature Action Lags Behind Climate
Last week I moderated a nature tech panel at #GreenBiz24, the largest sustainability conference in the US. I asked the audience: 'How many companies in the room have a nature/ biodiversity strategy?' Out of over three hundred sustainability professionals in the room, five people raised their hands..
Mismanaging nature risk has burned billion-dollar holes in many corporate balance sheets yet action on nature lags far behind climate:
95% of financial institutions say that climate has influenced their strategy, but only 30% said nature influenced their strategy (Source: CDP)
Less than 1% of companies know how much their operations depend on nature
This is likely to conceal significant risks and opportunities
Three Types of Nature-Related Risks
Nature-related risks can be categorized primarily into three types:
1. Physical Risks: These arise from the direct physical impacts of environmental degradation, biodiversity loss, and climate change on assets and investments. Examples include the damage to property from extreme weather events like floods, hurricanes, and wildfires, or the loss of agricultural productivity due to soil degradation and water scarcity. Physical risks can also stem from the decline in ecosystem services that support economic activities, such as pollination, water purification, and flood protection.
2. Transition Risks: These are associated with the economic and financial impacts of transitioning to a more sustainable and nature-positive economy. Transition risks may include policy and legal risks, such as new regulations on pollution, waste, and biodiversity protection that could affect the profitability of certain industries. There's also the risk of technological changes, where innovations in sustainable practices or products could make existing processes or products obsolete. Market preferences shifting towards more sustainable options and the reputational impacts of not adapting to these changes also fall under transition risks.
3. Systemic Risks: These are broader, more diffuse risks that can affect the entire financial system. They result from the interconnectedness of ecosystems, economies, and social systems. The systemic decline in biodiversity and ecosystem services can lead to widespread economic disruptions, affecting various sectors and geographies simultaneously. Systemic risks also include the potential for 'feedback loops,' where environmental degradation leads to economic impacts that further exacerbate environmental problems.
The Financial Implications of Nature Risk
Nature risk encompasses the threats that businesses face from the degradation of natural resources and ecosystems. These risks are not merely environmental; they are deeply financial. From disrupted supply chains to new regulatory landscapes and shifting consumer preferences, the financial stakes of ignoring nature risk are higher than ever.
Eleven industries have moderate or high nature dependence for at least 35% of the economic value from their direct operations and supply chains
Source: EXIOBASE, ENCORE database, PwC analysis
The integration of nature risk into corporate financial strategy requires a shift in perspective and approach. CFOs are uniquely equipped to lead this charge, given their comprehensive oversight of corporate financial health and risk management.
Supply Chain Vulnerability - for many corporations, supply chains are intricately linked with natural resources. Disruptions due to climate change, deforestation, water scarcity, and biodiversity loss can lead to significant operational and financial setbacks. CFOs, with their focus on financial health and risk management, are ideally positioned to assess and mitigate these risks.
Regulatory Changes and Compliance Costs - the regulatory environment is rapidly evolving to address environmental challenges. This evolution can lead to increased compliance costs and operational changes. CFOs must navigate these changes, ensuring that their companies not only comply with current regulations but are also prepared for future legislative shifts.
Market and Credit Risk - investors and lenders are increasingly factoring nature risk into their decisions. Companies that fail to address these risks may face higher borrowing costs or reduced access to capital. For a CFO, understanding and mitigating these risks is crucial to securing favorable financing terms and protecting shareholder value.
Reputation and Brand Value - consumer preferences are shifting toward sustainability, making environmental responsibility a competitive edge—or a liability. The impact of nature risk on brand value and reputation directly correlates with financial performance, making it a critical concern for CFOs.
Investing in sustainability is no longer just an ethical choice; it’s a strategic financial decision. CFOs can lead the way in allocating resources toward sustainable practices that not only mitigate nature-related risk but also open up new markets. CFOs can leverage financial modeling to understand the potential impacts of nature-related risk under various scenarios. This analysis can inform more resilient business strategies and investment decisions.
CFO & CSO Unite!
While the CFO plays a pivotal role, addressing nature risk is a cross-departmental endeavor. Collaborating with CSOs, CFOs can ensure that sustainability initiatives are not only environmentally effective but also financially sound.
Nature-related risk is a complex challenge that requires the expertise and insight of the CFO. By recognizing the financial dimensions of environmental sustainability, CFOs can lead their companies toward resilience, innovation, and long-term profitability. The transition to a more sustainable future is not just an environmental necessity but a strategic financial imperative. In this evolving landscape, the CFO’s role is not just supportive but central to navigating the challenges and opportunities that nature-related risk presents.
Are you a CFO of a company in a nature-exposed sector? How do you mitigate nature-related risks?
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