Part II: Genetic Diversity Loss and Financial Risk

Ragini gupta CLB Student Fellow (Environmental Law and Policy) ’23

In Part I, I gave an overview of some legal issues that arise from the loss of genetic biodiversity and biodiversity. In this post, we will look at the securities law issues in more detail.

A new regulatory framework for biodiversity-related disclosures is on its way

In recent years, climate related disclosures have received considerable attention. The disclosure of biodiversity has received less attention, but this could change once the Task Force for Nature-related Disclosures (TNFD) releases its final recommendations this year. The adoption of Kunming-Montreal Global Biodiversity Framework (KMGBF) is another important development. The KMGBF’s Target 15 calls on countries to take legal, administrative, and policy measures that will encourage and enable businesses, in particular large and transnational financial institutions and companies. Note: The USA is not a member of the Convention on Biological Diversity. Although the KMGBF does not have legal force, future disclosures related to biodiversity may require more information.

What about the existing regulations?

Existing regulations do require disclosure in some circumstances of risks related to biodiversity? Regulation S-K sets forth disclosure requirements for different SEC filings made by listed entities. In certain circumstances, some of the items in Regulation S-K could be relevant to risks arising from biodiversity loss.

Item 101 (Description of Business)

Item 101 demands disclosure of the “material effects” that complying with government regulations can have on “capital expenses, earnings, and competitive position”, including “estimated expenditure for environmental control facility.” Biodiversity net gain (BNG), laws that will be implemented in U.K. as of November 2023, are an example. In the U.K., developers are required to prevent habitat loss on development sites. If this is not feasible, they must create habitat on-site or elsewhere, or, as a final resort, purchase statutory credits. Such regulations may have an impact on capital expenditures or earnings. One example of laws that affect earnings is the gradual phase-out and elimination of incentives and subsidies harmful to biodiversity, as envisaged in Target 18 of KMGBF. The KMGBF does not have any binding effect, but countries must still show progress in implementing the KMGBF through their national biodiversity action plans. [1] Item 101 is a reference to the existing regulations, and will only apply when they are adopted.

Item 105 (“Risk factors”)

The disclosure of generic risk factors is discouraged. However, if they are disclosed, it will be at the end of each risk factor section, under the heading ‘General risk factors [3].

The regulations do not allow the disclosure of generic risk factors. This would mean that the risks to the economy resulting from the loss of biodiversity must be disclosed, but only those that are specific to the business. The legal, political, and scientific developments relating to biodiversity may create different risks that, if they are material, will need to be disclosed. These risks include:

• Consumers pledge to boycott restaurants that serve Bluefin Tuna (an overfished species).
• Reputational risk, if an enterprise causes or is associated with contributing to biodiversity loss (e.g. in some cases the reputation of institutions may be damaged if they are linked to funding palm oil companies
• Products are banned (e.g. the EU parliament has approved a law to ban the importation of coffee, soybeans, and other commodities into the EU if they were linked with the destruction of forests).

Item 303 (“Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations”)

Item 303 asks that registrants discuss whether legislation related to biodiversity will have a material impact on their financial situation. If material, registrants may have to disclose and consider the impact international biodiversity agreements will have on their business. )[9]

The only trend that is relevant or uncertain here are the new or pending laws. Coral reefs have USD 3 billion per year in the U.S., including fisheries and tourism. Losses of biodiversity could have direct consequences for businesses who depend on them. 60% wild species of Coffee could be at risk of extinction. This poses a threat to businesses. The decline in productivity of coffee plantations has had an economic impact in the past. For example, in 2011-12, in Latin America and Central America, the coffee leaf-rust epidemic caused more than USD 3.2 Billion in damages.

If a trend or event (such as the passage of new legislation relating to biodiversity) is unknown, the management must perform a two step analysis [10]. The management must make a determination if it cannot. If it can’t, they have to evaluate the effects of the trend, event, or uncertainty if it happens. Disclosure is required unless management determines a material impact on the registrant’s financial situation is not reasonable likely.

It is a complex and time-consuming process to determine whether a biodiversity risk will have an impact on the financial health of a company. There are tools and methods for this purpose. World Wildlife Fund launched Biodiversity risk filter earlier this year as an online tool to help financial institutions and businesses assess biodiversity-related risks. UNEP and S&P Global have also announced the launch of Nature risk Profile. This is a methodology to identify and quantify nature-related exposure.

There are many ways that disclosures about biodiversity risks can be required by law.

References

1. TNFD Releases fourth and final beta framework global (28 March 2023), https://tnfd.global/news/tnfd-releases-fourth-final-beta-framework-v0-4/
2. Kunming-Montreal Global biodiversity framework (18 December 2022), https://www.cbd.int/doc/c/e6d3/cd1d/daf663719a03902a9b116c34/cop-15-l-25-en.pdf
3. Department for Environment, Food & Rural Affairs, Biodiversity net gain, Gov.UK (21 February 2023), https://www.gov.uk/government/collections/biodiversity-net-gain
4. Jeremy Hance, Thousands pledge to boycott restaurants serving bluefin tuna, Mongabay (1 December 2010), https://news.mongabay.com/2010/12/thousands-pledge-to-boycott-restaurants-serving-bluefin-tuna/
5. Biodiversity Degradation: 3 Risks for Finance, OAFD (29 October 2021), https://www.afd.fr/en/actualites/biodiversity-degradation-3-risks-finance
6. Kate Abnett, EU lawmakers back ban on goods linked to deforestation, Reuters ( 19 April 2023), https://www.reuters.com/markets/europe/eu-parliament-approves-law-banning-imports-deforestation-linked-goods-2023-04-19/
7. James Ashworth, Over half of coral reef cover across the world has been lost since 1950, National History Museum ( 26 September 2021), https://www.nhm.ac.uk/discover/news/2021/september/over-half-of-coral-reef-cover-lost-since-1950.html#:~:text=Coral%20reefs%20have%20declined%20by,the%20half%20century%20from%201957.
8. Luke Brander & Pieter van Beukering, The Total Economic Value of U.S. Coral Reefs: A Review of the Literature (NOAA, February 2013), https://www.ncei.noaa.gov/data/oceans/coris/library/NOAA/CRCP/other/other_crcp_publications/TEV_US_Coral_Reefs_Literature_Review_2013.pdf
9. Adam Moolna, Coffee: 60% of wild species are at risk of extinction due to climate change, The Conversation ( 17 January 2019), https://theconversation.com/coffee-60-of-wild-species-are-at-risk-of-extinction-due-to-climate-change-109982
10. Brian Wallheimer, COVID’s next casualty could be your cup of coffee, edu – Agriculture News (28 June 2021), https://www.purdue.edu/newsroom/releases/2021/Q2/covids-next-casualty-could-be-your-cup-of-coffee.html
11. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Interpretive Rule) (1989), https://www.sec.gov/rules/interp/33-6835.htm
12. WWF’s new Biodiversity Risk filter helps companies tackle nature-related risks, WWF (16 January 2023), https://wwf.panda.org/wwf_news/?7438966/WWFs-new-Biodiversity-Risk-Filter-helps-companies-tackle-nature-related-risks
13. UNEP and S&P Global Sustainable1 launch new nature risk profile methodology, UNEP.org (17 January 2023), https://www.unep.org/news-and-stories/press-release/unep-and-sp-global-sustainable1-launch-new-nature-risk-profile

SeeSection I, Responsibility and Transparency. Kunmig Montreal Global Biodiversity Framework

[2] 18 CFR 229.105 (a)

[3] Id.

[4] 229.303 (b)(1) (i) of 17 CFR

[5] 17 CFR 229.303(b)(1)(ii)(B)

[6] 229.303(b), (2) (ii)

[7] Instructions for Item 303

[8] See Commission Guidance on Disclosure Related to Climate Change (2010), https://www.sec.gov/rules/interp/2010/33-9106.pdf. ; Management’s Discussion and Analysis of Financial Condition and Results of Operations (Interpretive Rule) (1989), https://www.sec.gov/rules/interp/33-6835.htm Here, this logic has been extended to biodiversity

[9] See Commission Guidance on Disclosure Related to Climate Change (2010), https://www.sec.gov/rules/interp/2010/33-9106.pdf

[10] Management’s Discussion and Analysis of Financial Condition and Results of Operations (Interpretive Rule) (1989), https://www.sec.gov/rules/interp/33-6835.htm