Seeing nature differently: How businesses are waking up

| Interview

Businesses are dependent on nature—not only directly through access to resources, but also systemically: all economic and social connections ultimately rely on a healthy planet. Today’s accelerating crisis of nature loss, amplified by climate change, therefore poses a major risk to the viability and resilience of economic activities.

The 2022 Living Planet report by the Worldwide Fund for Nature (WWF) reveals an average decline of 69 percent in species populations since 1970.1 The 2019 assessment report from the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) shows that, due to human pressures, 75 percent of the global land surface is significantly altered and 66 percent of the ocean area is experiencing increasing cumulative impacts.2 Recent reports by the Intergovernmental Panel on Climate Change (IPCC) suggest that more than one million species will become extinct in this century as a result of climate change impacts alone—unless the planet comes together to take rapid and ambitious action.3

Such publications are a wake-up call for businesses to re-evaluate their relationships with nature. The Taskforce on Nature-related Financial Disclosures (TNFD) was established to facilitate The TNFD provides a framework to provide clarity on a business’ exposure to nature-related risks, impacts, and opportunities, to support a shift of investments from destructive activities toward activities that restore and protect nature.

Elizabeth Maruma Mrema—who is also the deputy executive director of the United Nations Environment Programme (UNEP) as well as the United Nations’ (UN) assistant secretary general, and the former executive secretary of the Convention on Biological Diversity—chatted to McKinsey’s Jason Eis about how the TNFD aims to balance the relationship between nature and business. An edited version of their conversation follows.

McKinsey: What is the primary role of the TNFD? Who are the main stakeholders involved, and what progress has been made to date?

Elizabeth Mrema: Great progress, I can assure you. The TNFD aims to develop and deliver a framework for organizations to report and act on evolving nature-related risks and impacts, with the ultimate goal of supporting a shift in global financial flows away from activities that harm nature toward activities that have positive outcomes for nature. So, basically, it will allow organizations to provide clarity and better transparency on their exposure to nature-related risks and impacts, and then how they can make informed decisions to reduce and mitigate them.

The taskforce has 40 members, all from leading corporate, financial, and service-provider organizations, charged with developing the framework and associated guidance with the support from the TNFD secretariat. It is overseen by a stewardship council with government representatives from Australia, Germany, the Netherlands, Norway, Switzerland, and the United Kingdom, as well as representatives of public development banks, like the French Development Agency, the NGO Global Canopy, and multilateral organizations such as the UN Development Programme, the UNEP Finance Initiative, the Global Environment Facility, and the Worldwide Fund for Nature. At least two foundations, the Macdoch Foundation and the Children’s Investment Fund Foundation, also serve on the Stewardship Council.

The TNFD forum has over 1,000 members and there are about 200 organizations piloting the beta versions of the framework to help us test its application in various sectors and geographies. These pilot studies are providing critical feedback to the TNFD secretariat to inform future iterations.

In December last year, at the United Nations Biodiversity Conference (COP15), the Kunming-Montreal Global Biodiversity Framework (GBF) was adopted.5 One of its targets, namely Target 15 of the GBF, requires that transnational companies and financial institutions monitor, assess, and transparently disclose their risks, dependencies, and impacts on biodiversity. The TNFD works to build consistency among different approaches and standards, such as Science-Based Targets for Nature and International Sustainability Standards Board (ISSB). We are looking forward to the ISSB’s contribution. As announced at COP15, the ISSB’s reporting guidance to be released this year will integrate guidance on nature in relation to climate.

The latest, and fourth, iteration of the TNFD beta framework was released on March 28 for public consultation until June 1. This will enable us to finalize that framework for its final release and launch in September, 2023. After that, we expect to see a voluntary uptake of it by the market to report on nature-related risks and impacts.

McKinsey: With the adoption of the GBF and the progress being made by the TNFD, what changes do you anticipate seeing in the financial disclosures of businesses over the next five years?

Elizabeth Mrema: I would start with the GBF, which has four long-term goals and 23 action-oriented targets to be achieved by 2030. Target 15 of the GBF calls parties to the Convention on Biological Diversity (CBD) to encourage, through mandatory requirements, large and transnational companies and financial institutions to regularly monitor, assess, and transparently disclose their risks, dependencies, and impacts on biodiversity. This also includes their operations in value chains and portfolios.

As parties to the CBD work to implement the GBF in their national regulatory frameworks, disclosures under the GBF should move from being voluntary to mandatory. Some countries, like France, are already requiring mandatory disclosure, and EU regulations are already looking at not just climate, but climate-, nature-, and sustainability-related disclosures. As we have said before, the TNFD is a market-led framework for voluntary adoption. Over time, however, we may see that countries refer to the TNFD in their disclosure regulation, leading to convergence of the TNFD with the GBF as implemented at jurisdictional level.

McKinsey: What advice would you offer to business leaders in managing their companies’ relationships to nature, including risks and opportunities?

Elizabeth Mrema: My first recommendation would be to reflect on nature’s importance to the business. Second, they should take stock of their existing initiatives and assess their own value chain. Then, they should locate where their businesses or organizations interface with nature. Once they have identified this, they would have to assess the risks, impacts, and dependencies of their operations on nature, as well as opportunities. Then, they would have to develop a strategy for reducing those risks and impacts and optimize their opportunities. And lastly, which would be very important, they should engage with the different stakeholders to support collective awareness and actions.

Read more about Natural Capital and Nature

McKinsey: How do climate- and nature-related financial disclosures interrelate, and should business leaders think of them separately or in tandem?

Elizabeth Mrema: You know what I always say—and especially when I address the climate community: you can do everything under the sun as far as climate actions and solutions are concerned, but if nature is not part of the equation, global warming will continue to increase to unimaginable levels. I am delighted that a shift is occurring in this respect, with increased recognition of the importance of nature from the perspective of climate change mitigation and adaptation. It is now widely recognized that climate change and nature loss are two sides of the same coin.

If nature is not part of the equation, global warming will continue to increase to unimaginable levels.

Elizabeth Mrema

McKinsey: What is the scope for nature credits and markets in achieving a nature-positive future, and how might this help achieve the goals of the TNFD?

Elizabeth Mrema: Biodiversity or nature credits are in an early stage of development. The existing credit initiatives, particularly at country level, essentially stem from ecological offset mechanisms. Proposals for these systems are emerging, but they need time for piloting and testing before they become adopted as a mechanism for claiming positive impacts on nature or become a widely tradeable commodity.

There have been concerns around carbon credit schemes in globally significant forested regions like the Amazon and Congo basins. Issues were raised surrounding governance and effectiveness, permanence of the credit, and participation of indigenous people and local communities—further impacting the trading price of carbon credits. These issues must be taken as important lessons learned to build trust, integrity, and scalability of credit schemes—be they biodiversity-enhanced carbon credits or purely biodiversity credits.

We should pay attention to the Biodiversity Credit Alliance, which was launched recently by the UN Development Programme, as well as UNEP. They are working with a community of market actors to support the development of an integrated biodiversity credit, with the associated market regulation mechanism. We should also note the commitment from political leaders at the One Forest Summit in Libreville, Gabon, to launch a “Positive Conservation Partnership” relying, among other approaches, on biodiversity certificates—a variant of credits.

As things stand, there is no direct link between the TNFD and biodiversity credits. But the TNFD is tracking developments and may provide guidance at a later stage.

McKinsey: Beyond the TNFD, what emerging trends should business leaders be tracking in relation to nature and biodiversity?

Elizabeth Mrema: We need to strive to meet the targets adopted under the GBF. For instance, by reducing negative impacts, increasing positive impacts within organizations’ value chains and investments, and repurposing the $500 billion being spent on harmful negative subsidies by redirecting this money in favor of generating positive outcomes for biodiversity.

In addition, the GBF calls for significantly scaling up domestic and international public finance toward biodiversity, and this means scaling up private investment through blended finance and other innovative solutions, which would trigger opportunities for companies to enter into public-private investment schemes in support of activities that will contribute to the goals and the targets of the GBF.

Nature is no longer a free commodity for all to plunder. Nature has value; it is an asset.

Elizabeth Mrema

McKinsey: As a longstanding leader in this space, what has surprised you most in the last year?

Elizabeth Mrema: Seeing the rapid, growing commitment and awareness of business and financial institutions advocating for nature has been a positive surprise. For instance, last year, the Business for Nature coalition literally pushed governments toward the adoption of the finalization of Target 15 to make its disclosure mandatory. Five years ago, who would have expected this? It’s not governments pushing businesses, but businesses pushing governments to make it mandatory.

I think that recent scientific reports have helped to move the needle—both the IPBES and IPCC reports tell us that one million species might become extinct within this century, and that 75 percent of land is degraded and 97 percent of biodiversity loss is due to human actions. The scientific reports have been a wake-up call that business-as-usual, and how we look at nature, can no longer continue. Nature is no longer a free commodity for all to plunder. Nature has value; it is an asset. And this is what’s now clearly being demonstrated by the awareness of business, financial institutions, and organizations pushing governments to take action.