The next few quarters are expected to be slow, economically speaking. As summarized in ‘The Normalization Mirage,’ inflation is abating at the expense of growth following a process anticipated months ago. The pattern is proven: first, consumer spending declines (early cycle). Then, industrial production (mid-cycle). Finally, depending upon the severity of the slowdown, capex (late cycle).
Under these circumstances, leadership teams tend to focus on short-term operational measures at the expense of long-term ones. Thus, sustainability initiatives are at risk of being deprioritized. It is human.
But it is also a miscalculation. In his book ‘Built To Last’ (1994), Jim Collins developed the concept of the ‘Genius of the And.’ He argued that ‘a truly visionary company embraces both ends of a continuum: continuity and change, conservatism and progressiveness, stability and revolution, heritage and renewal, […]’ to which I add short-term operational measures and long-term sustainability projects.
Take biodiversity. The ‘Tragedy of the Commons,’ conceptualized in 1833 by British writer William Foster, is a situation in which people with access to public, common resources act in their own interest and ultimately deplete the resource. This is factually what has happened to nature over the last few decades. Even if biodiversity loss and climate change are connected, there is no need to believe in the latter to acknowledge the existence of the former and act upon it.
The World Economic Forum estimates that more than half of global GDP is moderately or highly dependent on nature and its services and is therefore exposed to nature loss. It is intuitively plausible. They identify construction, food & beverage, and agriculture as most at risk when considering their reliance on the oceans, the atmosphere, freshwater, and land.
Expanding the considerations to these sectors' entire value chains suggests that all firms are directly or indirectly dependent upon nature and related (future) regulations. But how materially so?
The Task Force on Nature-related Financial Disclosure (TNFD) promotes the LEAP approach as an internal due diligence assessment methodology. The objective is to help companies assess their dependencies and impact on nature to evaluate related risks (ecological, liability, regulatory, reputational, market, and financial) and opportunities. Next to it, ENCORE is a quick, user-friendly tool to scan for potentially material nature-related issues given any activity.
A company recognizing biodiversity as a material sustainability driver can use the brand-new TNFD as a disclosure framework. It was inspired by the well-received Task Force on Carbon-related Financial Disclosure (TCFD) approach; the SBTN stands ready to help set and approve related targets.
Displaying maturity about sustainability, including biodiversity, contributes to signalling quality to investors. I believe this to be true subject to two conditions: a strict approach to materiality and an established link to long-term value creation.
Given the economic trends, integrating biodiversity in a dialogue with investors may bring tangible benefits in the short term since quality is expected to be a focus investment theme in 2024.
Nature and stock price resilience and risk-managed long-term value creation. Genius.