Factoring Mother Nature Into Your SME’s Risk Strategy

To get an idea of global trends towards sustainability, the European Commission, in February 2022 adopted corporate sustainability due diligence rules. They come into effect in this financial year for companies based in the EU or doing business there that have at least 250 staff.

The directive means European corporate governance chiefs must consider these factors in their decision-making and practices, and disclose information about them:

• Environmental matters
• Social justice and treatment of employees
• Respect for human rights
• Anti-corruption and bribery
• Company board diversity (spanning age, gender, educational, and professional background.

European organisations are building those into management remuneration policies, as professional services firm, EY, explains. But what if an executive does well on one KPI but abysmally on another? How confident is your firm that it can access reliable environmental and operational data on which to base remuneration?

Experts from the University of NSW have urged businesses to prioritise integrating financial and non-financial data in their reporting to ensure transparency and environmental responsibility. This information will show how your company creates social and environmental value over time.

Check out the draft Australian Sustainability Reporting Standards – Disclosure of Climate-related Financial Information. It’s open for comment until March. While these will apply primarily to big business, changes may flow through to SMEs. For example, large companies may only want to deal with companies that meet stringent ESR standards.

And the Australian Securities and Investments Commission and the Australian Competition and Consumer Commission are increasingly cracking down on companies’ ‘greenwashing’ claims. It’s also calling out greenhushing (under-reporting or hiding ESG information), and bluewashing (citing humanitarian aid campaigns to divert attention from harmful practices).

The move towards recognising nature-related risks

To recognise and understand nature-related risks, a top-level global multi-organisation taskforce has developed a draft framework, with McKinsey support.

First published in March 2022, it’s a global framework for business reporting and acting on nature-related risks and opportunities. These include:

• Physical risks from planetary changes due to nature losses, such as the one million plant and animal species now at risk of extinction
• Transition risks and opportunities, spanning costs or regulations that try to minimise nature loss.

McKinsey explains what the framework asks companies to do:

• Assess and report on operations’ impact and dependence on nature, as well as financial risks and opportunities
• Collect and deal with a wider range of data
• Fully integrate approaches to climate and nature.

The terms climate change and nature risk aren’t the same because when natural assets are damaged, that might not be linked to climate change. The distribution of nature loss will be unequal, and countries will respond in different ways. While climate change measures hinge on CO₂ emissions, there’s no single goal or unit of comparison for nature risk, says McKinsey.

Here’s how nature-related dependencies and impacts differ.

Dependencies are where your company relies on aspects of ‘ecosystem services’ to function, so typically extract fresh water, food, fibre, timber, etc directly from nature. Or, your business might need fresh water, and the right soil conditions for plant growth or pollination to do your work. Conversely, you might draw on nature for your tourism business, think the Great Barrier Reef or Uluru – that would be intangible and experiential benefits.

Meanwhile, nature-related impacts are where your business impacts upon nature, so could affect its capability to ‘provide’ ecosystem services. These impacts can be direct (land clearing) or indirect (contributes greenhouse gases which worsen climate change) or cumulative (many businesses’ impact).

How directors can assess and manage nature-related risks

A good start is to learn more about how you can harness the abovementioned framework from the task force’s portal. As well, lawyers from Clayton Utz have unpacked the implications of the HDB opinion to spell out the directors’ next move.

This is also a good checklist:

• Identify how your company depends on nature
• Factor in direct and indirect, plus cumulative impacts, which include other organisations’ impacts
• Consider these dependencies and impacts’ risks and opportunities for your company – think resource availability, supply chain disruption, reputational damage, and regulatory compliance
• Balance the risks of harm, such as reputational, to your companies’ nature-related dependencies and impacts on possible benefits
• Work out which actions you’ll take to manage those risks and how
• Disclose nature-related risks appropriately, such as in your operating and financial review in directors’ reports, continuous disclosures to the ASX, and if needed, by the EU-regulated market.

Those moves will put your business in good stead for the expected tougher regulations and consumer backlash against companies that don’t factor nature into their risk management strategy. We’re helping businesses like yours navigate their way. Call us for a comprehensive review of your company’s insurance coverage.