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Episode 12: Intersecting biodiversity and economic development

 

Biodiversity is the natural variety of species and ecosystem services that we – and our economies – all depend on. But leading international researchers are concluding that biodiversity is being lost at a rate that is unprecedented in human history. Our first guest is Professor Kai Chan, from the Institute for Resources, Environment and Sustainability at the University of British Columbia. Kai is one of the coordinating lead authors of the IPBES Global Assessment Report and shares some of its key conclusions, and what the implications are for businesses – both in terms of their impacts on biodiversity, and their dependence on it.

Later, we’ll hear from Katie Leach from the UN Environment World Conservation Monitoring Center and Chris Hart, from Global Canopy. Katie and Chris discuss their collaboration on ENCORE, a tool which helps businesses and financial institutions understand their own dependencies on nature and how to look at natural capital risks.

In this episode:

  • What the biodiversity crisis means for businesses

  • The good and bad of biodiversity offsets

  • Natural capital accounting and risk

  • How to use ENCORE and give feedback

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Visit bmo.com/sustainabilityleaders-podcast for more information about the podcast


TRANSCRIPT:

Kai Chan: Most businesses, "They're thinking about, how do we keep the legislation from undermining our businesses?" And that means keeping it weak in many people's minds but not in the minds of the industry leaders. Actually, we've increasingly seen that corporations have come forward and actually spoken for stronger legislation in part because they realize the writing is on the wall, right? There is going to be some kind of legislative protection. Better to have it soon so that the industry can proactively adapt to it.

Michael Torrance: Welcome to "Sustainability Leaders." I'm Michael Torrance, Chief Sustainability Officer with BMO Financial Group. On this show, we will talk with leading sustainability practitioners from the corporate, investor, academic and NGO communities to explore how this rapidly evolving field of sustainability is impacting global investment business practices and our world.

Disclaimer: The views expressed here are those of the participants and not those of Bank of Montreal, its affiliates or subsidiaries.

David Sneyd: Hi. I'm David Sneyd, vice president for responsible investment at BMO Global Asset Management, and I'll be hosting today's episode. Biodiversity is the variety of species and ecosystem services that we and our economies all depend on, but leading international researchers are concluding that biodiversity is being lost at a rate that is unprecedented in human history. Our first guest today is Professor Kai Chan from the Institute for Resources, Environment and Sustainability at the University of British Columbia. Kai is trained in ecology, policy and ethics and is one of the coordinating lead authors of the IPBES Global Assessment report. He sat down with Rebekah Church, senior advisor for sustainability and climate change at BMO. They discussed some of the key conclusions of the Global Assessment report and what the implications are for business both in terms of their impacts on biodiversity and their dependence on it.

Rebekah Church: Maybe you can just take a stab at describing what biodiversity means to you and what we're talking about here.

Kai Chan: Yeah. We're talking about the diversity of life in all its forms and at all stages so including genetic diversity and the diversity of species as well as also multiple ecosystems and all of the habitats that support those species.

Rebekah Church: Okay, so the way we connected is that you're one of the authors of the IPBES Global Assessment. Can you tell me a little bit about the organization including its mandate?

Kai Chan: Yeah, so many on this podcast might have heard of the IPCC, the Intergovernmental Panel on Climate Change, which has been doing some great work on climate change for decades, and IPBES is modeled somewhat after that. It's a parallel organization in the UN family but a much newer one, and so this is the first assessment of its kind. There was a Millennium Ecosystem Assessment which was also about biodiversity and ecosystems, but that didn't have the kind of institutional infrastructure of a UN organization, and so it didn't get as much notice in certain policy circles, and so there was an effort to institutionalize it and then to do the same thing, to take stock of nature, how it's doing, how we are affecting nature and how that is affecting what we derive from nature, all those benefits and contributions, so, yeah, it was a huge effort over the course of 3 years.

Rebekah Church: Yeah, and, I mean, the Global Assessment is an incredible piece of work. It has some very worrying conclusions. Can you tell me about some of the most important conclusions and recommendations that came out of the assessment?

Kai Chan: Yeah, absolutely. The most newsworthy piece apparently given what the headlines were the day after was around the 1,000,000 species at risk of extinction due to human activities. That's a staggering number. That's even a relatively conservative number, half a million to a million at risk. That's the first point. The second point is that these changes in ecosystems are having really significant effects in terms of undermining nature's ability to provide what we derive from it, right, the clean water, the clean air, the stable soils, the contributions to producing food, the mitigation of floods, right? That's one of the reasons why we're experiencing so many more floods these days in Canadian cities in particular. It's not just about climate change. In fact, it's not even primarily about climate change in many contexts. It's also about what we've done to our ecosystems that provide that role of helping to sop up those floodwaters.

Rebekah Church: And, I mean, I assume it's also a pretty big threat here in Canada to many of our natural resource industries that depend on that biodiversity for their continued profitability as well, so what are you viewing as the biggest threats to biodiversity then?

Kai Chan: The Global Assessment set out five biggest threats, and there are really bundles of threats in a sense. It includes habitat destruction and overexploitation in the sense of overfishing and poaching, illegal harvest of wildlife, et cetera, climate change number three and then pollution and invasive species.

Rebekah Church: Can you talk a little bit more about the linkages between climate change and the biodiversity crisis?

Kai Chan: Absolutely, fundamentally intertwined, the loss of biodiversity and of ecosystem quality is causing the release of greenhouse gases and preventing forests and wetlands and the oceans from soaking up some of that carbon, so they're contributing to each other. For sure, biodiversity, as I already said, is suffering as a result of climate change, so it really doesn't make sense to pull the two apart and study them entirely separately which is why both IPCC and IPBES study climate and biodiversity in varying degrees.

Rebekah Church: Okay, so what is it going to mean for people and for ecosystems if we don't make any headway on tackling this crisis?

Kai Chan: It's going to mean that we will continue to experience more negative effects, more floods, more extreme events, higher food prices and more spikes in food prices, that farmers are going to have a harder time growing good crops without substantial inputs which then, you know, in terms of fertilizers and pesticides which then get into the water supplies and make people sick. The people that are going to notice this most of all are the people who are least prepared to deal with these kinds of impacts, right, the folks who are relying upon groundwater including untreated groundwater, for example First Nations communities in Canada who don't have that kind of infrastructure that they ought to have in order to ensure clean water and then those folks especially in less evolved nations, but obviously we have seen it here in Canada who are living in floodplains without realizing it, right? Classically, we have planned for 100-year floodplains. We don't actually even police those properly, so there are certainly people who are building in those 100-year floodplains. Some of them don't have insurance. They don't even realize it, right, and then when we get three 100-year floods in a decade which has happened in several cities in Canada meaning three floods that were so big that it was expected that we would only have one that big per century, had three of them in a decade. Then obviously things are changing, right? People are losing their homes and their possessions, and they're having to figure out where to go.

David Sneyd: There are a number of implications for policy makers in Kai's worst-case scenario. There are also implications for businesses, too, companies who have many opportunities to offset their negative impacts but will also face unforeseen challenges especially when legislation is involved. Rebekah asked Kai what risks businesses face as a result of the biodiversity crisis.

Kai Chan: It's a new landscape out there in the sense that some of the strongest legislative tools like under SARA, the Species at Risk Act in Canada, are only just beginning to be used, so emergency orders for species that are right at the brink, right, those are just beginning to be used. We have context now where we've got some species that are so fundamental in their ecosystems that they are affected by a great many different kinds of human activities, so think about salmon for example, right? It's not even just one ecosystem. They're in the watersheds when they're born and when they're laying their eggs. Then they swim out through the rivers and are exposed to all of the things that affect the fresh water and then go out through the estuaries into the ocean and then come around back again. When you have emergency protections for salmon, that can conceivably affect all different kinds of industries in the way that they are causing stress to those salmon populations. There are also all those indirect risks where as we were talking about with flooding, for example, the way that we rely upon ecosystems to just maintain livable conditions, that that becomes undermined when biodiversity losses accrue, right, and in ways that nobody would have predicted 20 years ago the kind of flooding that we're seeing yearly these days.

Rebekah Church: Conversely, I think that businesses can also play a pretty big role in helping to conserve biodiversity or, you know, at least minimize their impact on it. I'd be curious to know where you see the biggest opportunities for business to do that.

Kai Chan: Businesses are absolutely crucial in the sustainability challenge. There are two really different classes of things that business can do. The first is innovate and take meaningful action and represent that action to clients, customers, et cetera, and we can do that both with respect to climate change and with respect to biodiversity, become carbon-neutral and then pioneering ways to be Earth-positive in the sense of having net-positive impacts on biodiversity. That's something that's already aspired, kind of required under the IFC when the International Finance Corporation provides loans to businesses. Then they actually expect them to be able to show that they have net-positive impacts on biodiversity. Now the standards for that are not as strong as we might like, but it's certainly a step in the right direction, and it's a norm that I really hope picks up because we're past the point where we should be satisfied to be less bad, right? We have to start thinking about being net-positive, and we have to start being that way, so that's the first major way that businesses can help with this challenge for biodiversity. The second is to lobby governments for stronger environmental protections. Now that might sound crazy, right? Most businesses aren't used to thinking that way, right? They're thinking about, how do we keep the legislation from undermining our businesses? And that means keeping it weak in many people's minds, but not ... In the minds of the industry leaders, actually, we've increasingly seen that corporations have come forward and actually spoken for stronger legislation in part because they realize the writing is on the wall, right? There is going to be some kind of legislative protection. Better to have it soon so that the industry can proactively adapt to it and also sooner so that we suffer less of those indirect surprise impacts through degradation of ecosystems and, you know, major climate change.

Rebekah Church: I think we've seen that in the climate change space for sure. There are many businesses that are out there advocating for carbon pricing because, you know, it creates clarity, and it creates predictability, and so maybe we will start seeing that approach expand to the biodiversity space as well.

Kai Chan: Yeah, I hope so, and I think with the emergency stop orders, I think that'll be a pretty good wake-up call because it'll be such a surprise when it comes. It'll affect a whole bunch of companies that weren't expecting it, and then hopefully people will realize, "Look, this is something we have to collectively be more proactive about."

Rebekah Church: So one of the key parts that the report highlights is improving supply-chain models. Have you seen any good examples of how companies are managing to reduce their impact on biodiversity through supply-chain management?

Kai Chan: So this is a tricky question. When I say, "Good," I mean there's a good process in place and a clear trajectory by which there are improvements. Some of the best examples of that, so good processes in place, actually come from supply chains that have been the hardest hit in terms of their reputations, so you're going to cringe when I say actually, palm oil is a pretty good example of a good process in place to ensure a move towards sustainable palm oil. Now the reason that it's a good example is in part because there has been such negative attention, right? There has been so much news about the negative effects of palm oil that it has really motivated some of the industry players. You know, for example, Unilever has been at the forefront of these efforts to make certified sustainable palm oil. It doesn't yet qualify for what I would consider to be truly sustainable in the sense of being net-positive, but it's certainly a heck of a lot better than uncertified palm oil, and it's really starting to change the sector. Now 20 percent of palm oil is certified sustainable palm oil, doesn't necessarily get sold as that which is a major problem. It means that the price premium that producers expect when they sign onto certify their palm oil isn't reaching those producers, right, because it's getting sold as just regular palm oil, and that's a problem on the side of retailers and consumers where it's not the whole system that's involved up to now. It's just been really more on the producers and distributors side, less so retailers and consumers.

Rebekah Church: So transparency is a big piece of it as well and accountability for these companies.

Kai Chan: Transparency is absolutely fundamental and not only within businesses but also in government policy where one of the biggest kind of mechanisms by which the kind of legislation that would protect biodiversity gets undermined is through a lack of transparency in government, so we saw this just recently with the BC efforts towards having endangered species legislation where they went through a consultation process. They promised to bring legislation on board, and according to staffers, we just kept on getting told that it was on the books. It was ready to be presented in the legislature, and then they just pulled back, and they pulled back, apparently according to inside sources, because of the threat from industry that they would represent the NDP green government as being a job-killing government if they went ahead with that legislation. Now this is really problematic because the government didn't say anything about their reasons, and that reason doesn't stand up to scrutiny. There's not evidence that that is actually true, but because it was done through backdoor channels and lobbying, it was never exposed to public scrutiny.

Rebekah Church: So where do you see the synergies between conserving biodiversity and economic development?

Kai Chan: Well, there are multiple levels of synergies. The first is that companies that tend to have lower biodiversity footprints tend to do better because it requires good governance structures, so at that level, there's a synergy. There's also the synergy in terms of if we take care of nature, then nature better takes care of us, and so that's what we were getting at earlier in terms of if we protect ecosystems, then we'll continue to enjoy reduced flood exposure, for example, and stable slopes and less landslides and better soils to produce our crops and so greater stability all around which is good for the economy, so, yeah, those are two big ways, I guess.

Rebekah Church: There's a couple emerging areas in this realm, so one is natural capital accounting. Can you tell me what that means and if you think there are any promising trends in that area?

Kai Chan: Natural capital accounting means including in balance sheets ecosystem assets and potentially also ecosystem contributions, so this is a really important move. Some of the most impressive developments are happening at the municipal scale where, for example, Gibsons on the Sunshine Coast in BC has started to include their aquifers as capital infrastructure, capital asset, and it's so important to do that because if we're going to be planning for the depreciation of other infrastructure, of other capital assets, if we don't also include in that accounting those natural assets like aquifers, then we don't have the same kind of awareness of the problems that we're causing to those aquifers that undermine their ability to provide what we need from them. We absolutely need the clean water that comes from aquifers, right, so we should absolutely be accounting for that in our planning processes, and so cities are starting to do that. It's a really important innovation, and I hope it picks up in all kinds of contexts.

Rebekah Church: So another mechanism that's trending right now but is a little bit more controversial is biodiversity offsets, so, you know, biodiversity offset is where a company, like a developer or natural resource industry, tries to compensate or even achieve, you know, net-positive impact on biodiversity to offset the impacts that their businesses have, so what do you see as some of the benefits and the pitfalls of that approach?

Kai Chan: I definitely think it's an important move for sure. It's really clear from the degradation of biodiversity that we've seen over the last few decades that as I said earlier begin less bad is not good enough. We have to be net-positive, and we have to start getting there now, and so in that context, biodiversity offsets are an important tool because it provides a mechanism for corporations and other kinds of businesses to be net-positive flexibly, right? Before we can actually figure out how to mine in a way that doesn't have negative impacts, if we can at least mitigate those impacts close by, then we can start to realize the costs of doing business badly, right, because if you commit to making your impacts on biodiversity net-positive, then the more negative your impacts are, the more it's going to cost to clean up your mess and the greater an incentive you have to have less damaging productive processes in the first place, right, and so it's that price signal that is absolutely crucial, and that's why I'm a big champion of biodiversity offsets in theory. Now in practice if they're not done right, if we allow for mitigating impacts to biodiversity in one place through mitigation activities that affect other species or other regions, then we're just letting problems go elsewhere, right? We're not actually solving the problems in the places where they're occurring, and so we have to make sure that we are actually mitigating the effects on the populations that are being affected and ecosystems that are being affected. The other thing that's crucial is to also account not just for biodiversity in the sense of, you know, nature as scientists understand it but also all of the things that local people want from their ecosystems, right, which it would include clean water and security from floods and stable slopes and the rest of it but to be determined by those people where they live.

Rebekah Church: So it sounds like there's a lot of caveats and some cautions around doing that properly. Do you know of anybody who's kind of leading the way in terms of creating some best practices for offsetting?

Kai Chan: Yeah. There's a group called BBOP that is helping to advance these processes. It's a learning process, right? We have not sorted this all out. Let's not pretend that we've got it right yet, but let's not let that stand in the way of figuring it out.

David Sneyd: Most countries in the world are already signatories to the Convention on Biological Diversity and the Aichi Biodiversity Targets. Recently, however, we've heard calls for a Paris-style agreement on biodiversity with more effective commitments. Shifting to a broader global perspective, Rebekah asked Kai if he had a view on what the post-2020 international biodiversity agenda could look like as well as the movement towards a more sustainable global economy and how this fits in with biodiversity conservation.

Kai Chan: I have a bunch of ideas, but I don't want to speculate too much. I think that we're going to see some stronger targets. I hope that there isn't a move away from those targets where we haven't been succeeding. I've been part of some of these conversations, and some folks have been lobbying to do away with the targets where we haven't made any progress, for example, reforming subsidies and incentives. The logic is, "Well, if we didn't make any progress last time around, why should we think that we're going to be able to succeed this time around? So let's even just take it off the books," right? Now I think that's absolutely wrongheaded. The reality as to why we didn't make any progress is because we didn't even really try. To be honest, Canada interpreted only two of the Aichi targets in their target one in terms of area production goals for both the land and the waters, including oceans and Great Lakes, and that's really all that we were serious about. There was no other kind of Aichi target process other than just having a plan, you know, so we haven't even got started on that. That is absolutely fundamental. The way that we are subsidizing the continued escalation of production including the tax benefits to oil and gas companies for continued research and development for new drilling, right, like, those kinds of incentives are directly undermining biodiversity, and we need to address them if we're going to turn this economy around so that it can be productive without degrading the natural capital base that it stands upon. The story of biodiversity on the planet really is a global one in ways that most people don't really realize, so most people realize that a part of the way that business works in the current context is that they derive profits from extracting raw materials and producing them, et cetera, and that there are some environmental externalities in the process, so we all know that, and in more developed nations like in Canada, we have worked to try to minimize how those environmental externalities are affecting people. Now we're getting better at it, right? We're not that good, but we're getting better, but what most people haven't really processed completely is that the way that we have kept our economy going and growing while we are doing that is partly by importing a lot of environmentally damaging products from elsewhere. Now this is one of the reasons that mining companies ... For example, there are lots of Canadian mining companies, and many of them are doing their business elsewhere, and they benefit in part from cheap labor and from lower environmental standards in those companies. The problem is that when we do that, we are letting our solutions leak away, right? It's a leakage problem. It means that we are making our own internal economies more sustainable, but globally, we're not improving. We're not actually getting to that point where we've got a global sustainable economy, and we need to get there because at the moment, those less developed nations are effectively competing for cheap and damaging extractive activities, right, because if one country doesn't accept it because it raises its labor or environmental standards, then there's another country that will likely accept it, and we also have to think about this at the scale not only of the countries but of the kind of power plays within those countries to recognize that in many of these states when environmentally damaging activities happen, the populous bears the brunt of that, and usually a few rich people often with ties to the government get most of the profits which is not only unjust but also means that the country itself does not realize the benefits of that influx of cash, those revenues, right? They're not going towards building capacity in those countries so that they can escape that cycle where their poverty means that they have low wages which means that they have to accept those kind of, you know, most damaging kind of extractive practices, so we really need to try to lift the whole tide, right, float all of the boats and ensure that when we are working for environmental protection, we're doing it across borders.

David Sneyd: For the second part of our show, we'll be hearing from Katie Leach and Chris Hart. Katie is the Senior program officer on the business and biodiversity team at the UN Environmental World Conservation Monitoring Centre. Chris is the senior sustainable finance associate at Global Canopy, a nonprofit that aims to accelerate the transition to a deforestation-free economy. Both came on the show to discuss their work defining natural capital risk. Today is not their first time meeting. They've collaborated through their respective organizations on ENCORE, a tool which helps businesses and financial institutions understand their own dependencies on nature and how to look at natural capital risks. Katie, Chris, thank you for joining me today. We've been hearing about biodiversity in the first half of this episode. Perhaps you can tell us a bit more about this idea of natural capital. What do you actually mean by that?

Katie Leach: Yeah, so natural capital is a way of thinking about nature as a stock that provides a flow of benefits to people and the economy, consists of natural capital assets like water and forests and clean air that provides humans with the means for healthy lives and also enables economic activity, and biodiversity is the living component of natural capital, so thinking about the goods and services that natural capital provides, it provides things like foods and fiber and water but also risk protection so like flood protection from mangroves, and these services that it provides are called ecosystem services. These ecosystem services underpin all economic activity, but any change in natural capital through either human interactions with nature like deforestation or pollution or if there's indirect impacts such as climate change, these lead to a change in natural capital and a depletion of that natural capital maybe at an accelerating rate, and that then means that the businesses that depend on natural capital are having to either change their different sourcing areas, or they're having to just adapt the way that they operate to deal with those dependencies, and that's where the natural capital risk comes in through that dependence on natural capital that may change. So one example to illustrate this is if an asset manager is investing in a coffee farm, and that coffee farm is unable to sustain production or is facing increased costs because of water shortages or because maybe that crop is failing regularly due to changing climate conditions, so that might mean that the farmer may go out of business in the long-term, and that then leads to a risk for the financial institution that's investing in that coffee farm.

Chris Hart: So I think this is a really important point that Katie just mentioned there about natural capital dependencies, so typically and historically across much of the financial sector, if they have considered issues around natural capital beyond climate, typically that analysis has been focused on the impact level, so what impact are the businesses that we finance having on the environment, and how can we assess those risks? But in focusing on impacts, I think the dangers of what they may be missing are those unrealized risks which are based around dependencies. Essentially, the critical piece for the financial sector is that they are if we carry on as business as usual, as the founder of Global Canopy likes to say, we will finance ourselves into extinction, so in order to avoid that course of action, we have to be able to reveal and be much more transparent about where these risks lie, and I think that's the sort of critical aspect I think that the financial sector need to begin to adapt their thinking to.

David Sneyd: Ecosystems can be complicated to understand and navigate, but thankfully you guys have created a tool to help with that, the ENCORE tool. Firstly, what does that stand for, and how does the tool work, and what is it that it's looking to do?

Katie Leach: Yeah, sure, so ENCORE stands for Exploring Natural Capital Opportunities, Risks and Exposure, and it's a web-based tool which enables users across the financial sector but also across businesses to visualize how the economy depends on nature but also how environmental change can create risks for business, so starting from either a business sector or an ecosystem service, ENCORE can be used to start exploring the different risks that are associated with natural capital dependency, and they can be explored further to understand at a specific location, what are the risks to your financial institution investing or lending in that area? From the home page, you can input different sectors that you want to look at in more detail, so you could go by industry. You can go by production process, and you can get to a fine level of detail. You just input what you want to look at, and then on the next screen, it allows you to explore those natural capital dependencies, so you can look at the ecosystem services that those sectors depend on and how material they are, so there's a red, amber, green rating which allows you to look at the different production processes that you've selected, and you can see how material is that ecosystem service for the sector, so for example for our coffee farm, how material is pollination as a service for that coffee farm? And so it gives you that red, amber, green rating. From there, you can explore more about that system, so for pollination, you need the species to be able to provide that ecosystem service and also the habitats where that species lives in, so it describes how that system comes about and the different drivers that might change or disrupt that natural capital asset like habitat degradation, and then from there, you might want to say, "Well, for my specific location I'm interested in, what are the risks there?" and so from here, you can go to the mapping function of the tool which displays different spatial data sets about the natural capital asset itself or about the different drivers, so you can look at where different species are found, how intact the habitats are in different areas, but you can also look at the risk of flooding and habitat loss in different areas as well.

David Sneyd: Can you tell us a little bit about how you are finding the tool is being used by corporates and financial institutions?

Chris Hart: So I think the first point to highlight is that at the stage of development that ENCORE is currently at, it's essentially a knowledge base, so the idea is that it's designed to help build knowledge and understanding, awareness and capacity around understanding where natural-capital-related risks might be and then to inform that initial process and thinking about how to begin to mitigate those risks, and when I say, "mitigate those risks," I'm kind of thinking primarily from an engagement perspective, so how, as a financial institution, would you take the information from ENCORE and begin to engage with your investing companies or companies that you're making loans or finance available to? In terms of how financial institutions might be able to use ENCORE beyond that kind of knowledge base and that knowledge-building piece, the way that ENCORE structures production processes is that it uses a classification system which is familiar to the financial industry which is the Global Industry Classification system, so GICS, and what I think is interesting is that while this is not a company-level analysis or tool for company-level analysis, what financial sector users can do is apply their portfolio using the GICS classifications to the production processes that we include within ENCORE, and that will help to reveal at the portfolio level maybe where some risks are aggregating up into meaningful potential exposures, and that then serves the basis for them to take further steps for exploration into what those risks might mean and how they would go about mitigating those risks. As part of the development of ENCORE, we did go to our three priority countries so South Africa, Colombia and Peru, and we did work closely with banks in those economies and help identify really how they wanted to use ENCORE, and I think it's that portfolio-level analysis, and it's that identifying risks that are dependency-related rather than the impact piece which they were doing to date which has been the real use cases that have come out of that close engagement work that we did in those priority countries.

David Sneyd: And going forward, where do you think it will go from these three countries?

Chris Hart: Yeah, so I think, you know, ENCORE has been developed with the financial sector very much in mind, so this is a tool for the whole financial sector, and by that, we mean banks, asset owners, investment managers and the insurance sector, so, you know, I think there's a challenge for us that we have to engage the financial sector fully on issues around natural capital, so there are a number of potential barriers, if you like, that are preventing financial institutions from looking at these issues in more detail, and one of those key barriers is, how do we make the business case for natural capital more effectively? So I think the business case has been well articulated around climate and greenhouse gas emissions, and that stimulated action around climate-related risks. We need to effectively build the business case now and the materiality case for why this matters to the financial sector, and, you know, there have been a number of important works that have tried to address this issue, so there was an initiative called the Economics of Ecosystems and Biodiversity set up by Pavan Sukhdev. TEEB was the four-letter acronym, and that piece of work set out in a reasonable amount of detail the value of ecosystem services to the economy and the costs that we are incurring but not recognizing in our financial segments of the overuse of those ecosystem services, so, I mean, there are other studies. We have some tangible quantitative data that sets out, you know, what is quite frankly a very significant and very material cost or at least value of services provided by ecosystem services, but I think there is still a challenge about how we articulate that business case more fully and more comprehensively to the financial sector. I think once we've done that, then there are other challenges, so for example, if you look across financial institutions, they are enormously capacity constrained because a lot of their human resources are being tied up trying to figure out how to address the requirements around climate-related risk management and climate-related disclosures, and so what we're faced with is a situation where, you know, climate may end up crowding out activities and solutions around natural capital, so we have to try to avoid that because in many ways, these issues around natural capital are equally important in terms of the materiality and in terms of systemic risk that they pose to the financial system and on a similar time line to the climate issue. So we've got that challenge as well, and then we have additional challenges such as the complexity around issues such as biodiversity which I guess Katie can talk to in more detail, but it is much more complex than greenhouse gas emissions which are relatively simple to address, so we've got that complexity issue as well, so there are a number of barriers to the financial sector really engaging with this issue, and we need to pick those off one by one, but I think it's doable. It just takes a will to act.

David Sneyd: Maybe I'll throw that over to you, Katie, on that complexity discussion.

Katie Leach: So the loss of biodiversity is huge, and it's one of the biggest threats to humans and to the economy. Most of the business sectors that are here today, they depend on biodiversity in some way, shape or form, so it's really important to understand what's currently driving the loss of biodiversity and what we can do to mitigate that, so biodiversity has often been known as really, really difficult to measure, so carbon has been quite good. We know exactly what we're measuring. We know what targets we can work to, but biodiversity has always been slightly difficult to measure, and so there's a lot of ongoing work to look at what targets we can set for biodiversity, what different indicators we can use to track progress on biodiversity, and a lot of that work is being done, so the sustainable development goals have some elements of biodiversity included within, but those targets are not focused on kind of the loss of habitats and species. They're more focused around protected areas, and that might not be the best indicator of biodiversity loss, so there's sustainable development goals. There's also an initiative called science-based targets which have started for climate and are really driving corporate action on climate, but those are also being further developed to focus on biodiversity and oceans and fresh water as well, and that's an important component to drive systems thinking so not just to look at climate but to bring in biodiversity and kind of the whole system when we're setting targets as a business or financial institution, and there's also next year, so moving into 2020 is a big year for biodiversity when we see the climate <Indistinct> basically of biodiversity where we're looking to develop the Post-2020 Global Biodiversity Framework. This is a framework that's coming about as a result of the 80 targets which were in progress between 2011 and 2020, and they haven't been sufficient at minimizing the loss of biodiversity, so we need to set new targets post-2020 that we can work with business, governments and financial institutions to prevent loss of biodiversity.

David Sneyd: One thing that we saw from the Kyoto Protocol moving to Paris several years later was the aspirations were different. The style of target setting was different, too, but it also brought more people to the table including financial institutions and investors, such as ourselves, asking what role we can really play, so do you think that's going to be the same for the Post-2020 Global Biodiversity Framework?

Katie Leach: Yeah. I really hope so, so the IPBES Global Assessment has been great at really increasing knowledge broadly even in the public about what biodiversity loss means, and I think that's been a great rapport driving into this year in 2020 where we'll see a number of different people working towards this, and there's been movements like the Extinction Rebellion which are really making people think about the loss of biodiversity and what that means, and so I hope into next year, there will be more focus on that across all sectors. So while the Post-2020 Global Biodiversity Framework will be set at the country level, what we really hope is that financial leaders in this space can go above and beyond and those targets so similar to the Paris Agreement where kind of there's the 1.5 degrees, but the 2 degrees is really pushing that to make sure that we reduce emissions to a certain level. We hope that financial institutions and businesses can go above and beyond what's in the Post-2020 Global Biodiversity Framework, setting much more ambitious targets to prevent the loss of biodiversity through their portfolios.

Chris Hart: You know, I think one of the less appreciated aspects of the TCFD which was a Task Force for Climate-Related Financial Disclosures to essentially put together a reporting framework which came out of effectively the Paris climate agreement, is to highlight different groups of sectors for which the reporting framework is relevant, and the group of sectors which is maybe least focused on is maybe agricultural products, food and beverages, and so, you know, I think for me, this piece is the link to the natural capital debate, and so we shouldn't necessarily see these things as too separate because I think it's a logical extension really. If you're already thinking about TCFD and its application to agricultural production, for example, then that's a very nice stepping-off point into the natural capital and biodiversity-related discussions, and it is the case, and actually if you can adopt and implement more sustainable agricultural practices, you'll cut down less forest or no forest which inherently has a benefit to preserving biodiversity. But also if we look to the actual soils management around agricultural practices, if you can improve the health of soils, improve the biodiversity within soils, they're not only more productive which means the farmers make more money, but they actually lock up much more carbon, so these things are interrelated, and we should not separate out the climate debate and think that it is somehow separate from the biodiversity debate or more broader aspects of natural capital. So I think it's something to bear in mind, and I think when we talk about natural capital, the danger is that it becomes overwhelming because the financial communities and the business communities are only just really getting their heads around climate, and they really don't want as it's commonly referred to as sort of reporting fatigue. You know, what we don't want is a segregation of natural capital as something in addition to do to. I think they're very much related, and actually, the steps required to, at least the initial steps to start developing and thinking and risk management aren't that much more significant with natural capital to what you're already doing with regards to your approach to the climate agenda.

David Sneyd: I'm thinking about these frameworks which can take several years to develop and implement. What are your hopes for where we may be in several years in the future, and what do you think the new standard is going to look like for the discussion around natural capital?

Chris Hart: So I suppose for me there's two aspects. One is we really an improvement in disclosure, and companies sit at the heart of that, and the disclosures they make ultimately empower the financial sector therefore to make better decisions about how they allocate capital to more sustainable activities, so we need the implementation of a reporting framework for natural capital more broadly, and as I say getting back to my previous point, that kind of sits alongside the TCFD recommendations, and so that is actually a piece of work at the NCFA that we are currently working on which is trying to catalyze government level and financial sector regulatory level commitment to implement a reporting framework for natural-capital-related financial disclosures and by association that has to mean that the nonfinancial corporate sector needs to kind of sign up to a standardized reporting framework which the financial sector and other stakeholders can use so that they can better understand the nature of these risks and the nature of the opportunities. So that's one piece is the disclosure piece which I think is critical, and then I think once you have that commitment to a reporting framework, then what happens very quickly behind that is that there's this kind of data and solutions ecosystem services just flourishes, and so we've seen that very much happening within the climate space. I've no doubt that it will happen within the natural capital space, and ENCORE is essentially a leading tool which we hope will be one of the leading solutions providers as that ecosystem develops and emerges, so for me, it's two pieces that I hope over the course of the next few years, we'll see that disclosure piece and the standardization of disclosures so that they're useful and then the data and solutions that will kick in behind that.

Katie Leach: Yeah, and I think internally financial institutions and businesses being able to as part of their usual process when you have a new investment that you're kind of screening just to be able to take the time to look across all of the impacts and dependence on nature and take that into account in any risk management processes from the very start and start to integrate into a new type of modeling that happens within the finance sector, and to do that, as Chris says, the data needs to develop, and while the data is available at the moment on most aspects of natural capital, that needs to develop in line with the finance sector, so we need to keep developing better data sets, more quality data sets, data sets that cover different time periods so that financial institutions and businesses have the data that they need to be able to track progress on natural capital dependencies.

Chris Hart: If I may take this opportunity just to sort of shamelessly put a kind of advert, if you like, out there or a request out there to the financial sector, but, you know, it's absolutely vital as Katie was saying that our work has to be informed by the ultimate users, and that's the financial sector, so, you know, I'd really urge your listeners to be part of that dialogue because these tools are being created to help financial institutions to do this work more efficiently, and we're there to sort of pick up a lot of the heavy lifting. You know, ultimately, we're a group of people who may be not always that immersed in the requirements and the user needs of the financial sector, so we need to understand those much more fully, and we can only do that through dialogue and engagement with the financial sector, so I would encourage your listeners to get in touch and to have that discussion. Visit the Natural Capital Finance Alliance website and the ENCORE website. I would encourage listeners to also get in touch with other members of the partnership and the collaboration so Katie for one and Katie's colleagues,.

Katie Leach: So you can access the tool at encore.naturalcapital.finance, and through the tool itself, there's a feedback function, so all of that feedback comes through to the team at UNEP-WCMC, and you can tell us what you think about the tool, but you can also say, "Well, this particular sector, I feel like it's missing information on there," so that really helps us to develop the tool further and helps us to work on a number of things and also just to say at this point, so ENCORE is kind of in its first phase of development, but we're now moving into the second phase of development where we are allowing financial institutions to align portfolios with biodiversity targets so these new targets that will be developed as part of the Post-2020 Global Biodiversity Framework and also those that will become part of the other initiatives that I mentioned like science-based targets. We'll be further developing the tools so that a financial institution can go on, enter in the different sectors that are part of their portfolio and understand their performance on biodiversity through that tool. That will be coming in the next year or so.

Chris Hart: In the longer term, what we would really like to get to is a point where we can begin to identify company assets and have a complete picture at the company level of the assets or at least the main contributors to profitability and cash flows and be able to place those assets within landscapes and then because there's a burgeoning world of environmental monitoring data, so we can then begin to understand what is happening in near real time to the environment across a number of different metrics where those assets are situated which will then give us a much greater, more granular view about dependency risks and impact risks to companies at the asset level. We are a long way from achieving that, and this does link back to the disclosure piece. If we have greater disclosure from companies, and the financial sector has a role there to play in putting pressure on a common set of asks of their companies that they're financing to make those disclosures. Once we have that greater disclosure, then we can actually begin, as I say, to get ... The data can quickly feed in behind that, and the solutions will come through, and we'll end up with a tool which I think would be ... You know, I think it's possible to do, but it's some years off, and we have to be conscious that maybe we don't have a huge amount of time to start moving capital more quickly towards a more sustainable outcome.

David Sneyd: You can access ENCORE online at encore.naturalcapital.finance. This link can also be found on the show notes on our website. If you want to contact Chris and Katie directly with feedback, their team can be reached through the feedback function on the tool's website. Thanks very much to Kai, Katie and Chris for taking the time to speak with us today.

Michael Torrance: Thanks for listening to "Sustainability Leaders." This podcast is presented by BMO Financial Group. To access all the resources we discussed in today's episode and to see our other podcasts, visit us at bmo.com/sustainabilityleaders. You can listen and subscribe free to our show on Apple Podcasts or your favorite podcast provider, and we'll greatly appreciate a rating and review and any feedback that you might have. Our show and resources are produced with support from BMO's marketing team and Public Creative. Until next time, I'm Michael Torrance. Have a great week.

Disclaimer:The views expressed here are those of the participants and not those of Bank of
Montreal, its affiliates or subsidiaries. This is not intended to serve as a complete analysis of every material fact regarding any company, industry, strategy or security. This presentation may contain forward-looking statements. Investors are cautioned not to place undue reliance on such statements as actual results could vary. This presentation is for general information purposes only and does not constitute investment, legal or tax advice and is not intended as an endorsement of any specific investment product or service. Individual investors should consult with an investment, tax and/or legal professional about their personal situation. Past performance is not indicative of future results.

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David Sneyd Vice President, Analyst, Responsible Investment

David joined BMO Global Asset Management in 2017. Prior to joining BMO, David held senior research positions at the governance research agencies PIRC and ISS, aft...

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Rebekah Church Senior Counsel, Sustainability and Climate Change

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