Addressing challenges in biodiversity reporting | Q&A with Philippe Diaz

The mismatch is mainly caused by a lack of understanding of nature. It is considered too complex. And yes, it is complex and we should all appreciate its complexity. And yes, it is different from dealing with climate change where you only have CO2 and methane molecules. Therefore, we should not argue that we ought to prioritize climate change because it is easier, then move on to nature. No, it should be the other way around. This is a conceptual error, in my view.

Simply because ESRS E4 looks at the status of nature, biodiversity and ecosystems, the E4 standard should be much longer, more detailed, and more granular. Biodiversity should be E1. The current E1 Climate Change, as well as E2 Pollution and E3 Water & Marine Resources „just“ impact the state of nature. Reordering the standards would frame it differently, with the status of nature being the starting point for the other environmental ESRS.

Nature is complex and we need to have a much more detailed understanding of it. And the current ESRS E4 sets the stage for people to take a closer look at it. Right now, unfortunately, E4 is largely considered as just another environmental standard. Most attention is on ESRS E1 “Climate Change” because it is easiest to grasp. This belittles E4 and the relevance of the state of nature.

ESRS E4 at least remained at the sector agnostic level. There was significant pressure to drop it during Q2 2022. Over the next few years, corporations and whoever supports corporations in reporting against the standard will need to upskill. This is already happening.

Ideally, corporations will have a lot more biologists in future. However, currently, people who have done financial reporting or just #sustainability in general, now also look at nature and are supposed to tell firms, okay, this is why nature is or is not material to you and this is how we should report and eventually deal with nature. This huge capacity gap is where the problem begins.

With the Kunming-Montreal Global Biodiversity Framework, the Taskforce on Nature-related Financial Disclosures (TNFD) as well as Global Reporting Initiative (GRI) updating its biodiversity standard, there is increasing momentum. Although things are moving in the right direction, they are moving very slowly.

We are witnessing changes in biodiversity that are really detrimental to the conditions that we as humanity need to be able to live and thrive on this planet. Why is that? To survive, we depend on many of these or even exclusively on these ecosystem services.

These include pollination by bees, insects, and plants that would not grow if they weren’t pollinated. There are already some areas in China where people are trying to do artificial pollination. 

A regular rainfall pattern is part of it, as is pollution control. Nature can deal with some level of pollution and absorb it, but not too much. If there’s too much pollution or too much heat in the atmosphere then this disturbs all these free services. 

As a result, we degrade natural capital that we use and abuse and thereby reduce the capital stock of nature in a way that is comparable to a portfolio of stocks. You can live off the dividends, but once you start selling stocks, you, by definition, have fewer dividends to live off. This is what we’re doing with nature. Climate change is hitting this stock of natural capital that we have at our disposal. And so are other drivers of biodiversity loss and ecosystem degradation like pollution.

Nature is complex and it is fine to appreciate just that. Since it is impossible to measure everything at once, prioritization is critical. Companies can start using free tools, such as Encore (Exploring Natural Capital Opportunities, Risks and Exposure), to assist them in identifying potentially material impacts on nature and dependencies on ecosystem services.

I know of private providers that are developing tools to simplify this process for firms and go beyond disclosures by adding recommendations for actions as well. It will not remain as difficult as it appears today to measure, although it is unlikely that a single metric will do justice to the complexity of nature.

TNFD also has a list of priority sectors. I’m not entirely sure how far they have progressed with their guidance per sector, but they will push forward with this. Hopefully, they will not just look at the risk, but also at the impact. This could be the starting point of what is material.
 

Of course, measuring nature in its entirety is highly complex and essentially impossible. Therefore, proxies are needed, e.g. via a focus on areas with high biodiversity or keystone species. One can always start with land-use change, as any additional hectare sealed does not help achieve the goal of turning nature positive.

Afterwards, you could take a look at the impact drivers that are key to you. Do you, for example, emit a lot of pollution that negatively affects the state of nature? Do you cause significant fertilizer run-off, release microplastics via tyre wear, and withdraw significant amounts of freshwater resources?

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There’s a commitment between EFRAG and TNFD to deepen their work relationship, which was rather informal up to this stage. I think this is a good step towards formalizing it.

TNFD’s LEAP approach can complement the non-climate environmental ESRS since it provides guidance on how to conduct the materiality assessment. LEAP follows four key areas: Locate your interface with nature; Evaluate dependencies and impacts; Assess material risks and opportunities; Prepare to respond and report.

The materiality assessment is not standardized under the ESRS, which in itself is a big problem. Due to the capacity gap, companies would just continue consulting their stakeholders on whether biodiversity is material to them or not. But these stakeholders know nothing about biodiversity, so no wonder they rank it low. Hence, companies think it’s not material, but based on what type of information they use, it’s a very shaky foundation.

It is therefore very helpful to have LEAP, which is referenced in ESRS E2, E3, E4 and E5. Even though TNFD focuses on risks and opportunities, LEAP also lends itself to double materiality because it starts by looking at impacts and dependencies in the Locate and Evaluate phase.

There is a three-year review cycle of the standards. So, no, not yet. Considering ESRS E4 the Mother Nature standard and an evolution in nature-related reporting may lay the foundation for an expansion of ESRS E4 in future, starting with more detailed disclosure criteria on the transition plan. For now, it is just great to have ESRS E4 amongst the sector-agnostic standards, as it was really close to being removed from the sector-agnostic layer.

On the Q&A platform, however, questions will be submitted regarding topical standards. A list of questions and the accompanying answers related to E4 or any other standards could then be used as topical guidance. Note that this is not law, but additional guidance released by EFRAG only.

The sector-specific standards will only come later. They would also expand nature-related reporting through the ESRS by providing additional data points and disclosure requirements per sector that would go deeper in terms of granularity.

Although the sector-specific standards may deepen granularity at the sector level, this does not necessarily mean that it will get more complicated. More granularity can simply mean that it is easier to report against nature. The guidance on LEAP by TNFD is more than 200 pages long, for example.

I’ll stay until the end of March. Thereafter there’s a new application round, so I’ll apply, but only for another year. I might not be taken. Let’s see.

It happened by accident. When an ex-colleague of mine from the European Policy Office at the Worldwide Fund for Nature (WWF) dropped out of EFRAG due to his workload, they were looking for someone else within the organization. I said I could take this as I had a closer connection to biodiversity competency knowledge than most others due to my WWF background. 

We don’t get paid for this work, but we thought it was worth investing in it because with non-EU firms also having to report, we’re essentially setting the global standard. However, it’s not right for the European Commission to underfund an organization that has such a critical role. Shortages exist, and free labour from civil society has to save the day.

There’s a commitment between EFRAG and TNFD to deepen their work relationship, which was rather informal up to this stage. I think this is a good step towards formalizing it.

Philippe Diaz led the development of ESRS E4 Biodiversity & Ecosystems during the public consultation and is currently a member of the Sustainability Reporting Technical Expert Group (SR TEG) at EFRAG.  He also works on other fields of EU legislation, including the EU Taxonomy, the Sustainable Finance Disclosure Regulation (SFDR) and the Corporate Sustainability Due Diligence Directive (CSDDD).

All opinions expressed are those of the author and/or quoted sources. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.