The Business Case for Nature

The Business Case for Nature

From Environmental Issue to Material Financial Risk

For most of the 20th century, biodiversity loss was framed as an environmental concern, important to conservationists and policymakers but peripheral to mainstream finance and corporate strategy. That framing has fundamentally shifted over the past decade, driven by growing evidence that nature loss creates material financial risks across every sector of the economy.

The TNFD Recommendations (2023) define nature-related financial risks as risks to organisations arising from their dependencies on and impacts on nature. These risks operate through three primary channels: physical risks from the degradation of ecosystems and ecosystem services; transition risks from policy, regulatory, technology, and market shifts in response to nature loss; and systemic risks from the potential for nature-related risks to cascade through financial systems and the broader economy.

Physical Risks: When Ecosystems Fail

Physical risks arise when ecosystem degradation directly impairs the services that businesses rely on. These risks are not hypothetical futures; they are already being realised across industries.

• Water scarcity: Degraded watersheds reduce reliable freshwater supply. The World Resources Institute found that 17 countries, home to a quarter of the world's population, face "extremely high" baseline water stress. Sectors including beverages, semiconductors, agriculture, and energy face acute physical risk as aquifer depletion and watershed degradation accelerate.
• Fisheries collapse: The collapse of the Grand Banks cod fishery in 1992 erased an industry that had operated for 500 years, eliminating 40,000 jobs in Newfoundland and costing the Canadian economy billions of dollars. The ecological driver was direct exploitation beyond sustainable yield, compounded by habitat degradation.
• Pollinator decline: A 2021 study in Environmental Health Perspectives estimated that current pollinator declines already cost agriculture between $3 and $5.7 billion per year in the United States alone through reduced crop yields.
• Soil degradation: The FAO estimates that globally, soil degradation costs approximately $40 billion per year in agricultural productivity losses and will reduce food production capacity by up to 10% by 2050.

Transition Risks: The Regulatory Acceleration

Transition risks arise from society's response to nature loss: new regulations, changing market expectations, evolving technology, and shifting stakeholder demands. These risks are accelerating rapidly as governments translate the Kunming-Montreal Global Biodiversity Framework's ambitions into law.

• EU Deforestation Regulation (EUDR): Effective from 2025, the EUDR prohibits placing on the EU market products associated with deforestation or forest degradation after 31 December 2020. Affected commodities include cattle, cocoa, coffee, palm oil, soya, wood, rubber, and derived products. Non-compliance risks exclusion from EU markets.
• EU Nature Restoration Law: Adopted in 2024, this legislation requires member states to restore 20% of EU land and sea areas by 2030 and all degraded ecosystems by 2050. It creates both compliance costs and land-use transition risks for agriculture, forestry, and infrastructure sectors.
• Biodiversity Net Gain (UK): Mandatory Biodiversity Net Gain for new developments came into force in England in 2024, requiring developers to provide a 10% measurable improvement in biodiversity compared to the pre-development baseline.
• Mandatory nature reporting: Jurisdictions including France, the EU (CSRD/ESRS), and California are introducing mandatory nature-related disclosure requirements aligned with or drawing on TNFD.

Systemic Risks: The Financial Stability Dimension

Beyond individual company exposures, nature-related risks pose systemic risks to financial systems. Central banks and financial regulators are increasingly concerned about nature as a source of macroprudential risk.

• The Dutch National Bank (DNB) conducted the first systematic assessment of Dutch financial sector exposure to nature-related risks in 2020, finding that Dutch financial institutions had financed more than 510 billion euros in businesses highly dependent on ecosystem services.
• The Banque de France estimated that more than 42% of securities held by French financial institutions come from companies "strongly or very strongly dependent" on at least one ecosystem service.
• The Network for Greening the Financial System (NGFS) has called for integration of nature-related risks into central bank mandates and supervisory frameworks.

The Opportunity Side: Nature as a Source of Value

Nature-related risks have a mirror image: nature-related opportunities. The World Economic Forum estimates that nature-positive business models could generate $10.1 trillion in annual business opportunities and create 395 million jobs by 2030. These opportunities cluster in three major systems:

• Food, land, and ocean use: Transitioning to sustainable food systems (regenerative agriculture, sustainable aquaculture, reducing food waste) could generate $2.3 trillion in annual business value and create 191 million jobs by 2030 (WEF New Nature Economy Report).
• Infrastructure and the built environment: Green infrastructure approaches (natural flood management, urban greening, nature-based water treatment) offer lower lifecycle costs than grey alternatives in many applications.
• Energy and extractives: Developing operations with smaller ecosystem footprints reduces long-term rehabilitation liability and social licence risk. Companies achieving this earn preferential access to capital from ESG-screened investors.
• Financial services: Biodiversity-linked bonds, natural capital funds, ecosystem service payment markets, and nature-based solutions investment vehicles represent a rapidly growing asset class.

Investor Perspective: Growing Engagement

The investment community is accelerating its engagement on nature. As of 2024, the Finance for Biodiversity Pledge has been signed by over 170 financial institutions with combined assets under management exceeding $23 trillion. Signatories commit to assessing their biodiversity impact, setting targets, and reporting on them by 2025.

Institutional investors are increasingly asking portfolio companies for TNFD-aligned disclosures, using them as inputs to portfolio risk assessment, engagement strategies, and investment exclusion decisions. Companies that cannot articulate their nature-related risks and responses will face growing pressure on access to, and cost of, capital.