Nature-related dependencies, impacts, risks and opportunities

All businesses depend on nature to some degree, whether for raw materials like water and land, or for ecosystem services like pollination and flood protection. At the same time, businesses can also have impacts on nature, either positively or negatively, directly or indirectly. These dependencies and impacts create both risks and opportunities for organisations. Identifying and managing nature-related risks and opportunities is becoming increasingly important for business resilience and success.

A company’s dependencies on nature vary by industry and location. For example, agri-food businesses depend on water, pollination, healthy soil, and protection from flooding and erosion by neighbouring wetlands and forests. If these degrade, crop yields can fall, impacting supply chains and retail businesses. Similarly, construction and manufacturing industries depend on water and other raw materials, and on habitats for protecting infrastructure and operations from flooding and other hazards. If nature’s supply of these benefits is reduced, damages and disruption can occur.

Companies may also have impacts on nature, either through their operations or wider value chain. For example, an agri-food business may have deforestation activities in its supply chain (eg, due to land clearance for food production), while the use of chemicals in the production of fruit and vegetables may harm soil quality as well as freshwater and marine life due to run-off. Companies can also have positive impacts on nature, for example, an agri-food business can shift towards regenerative agricultural practices in its supply chains to support improved biodiversity, soil health and carbon storage.

Businesses face three main types of risks from their nature-related dependencies and impacts:

1. Physical risks

These arise from changes in nature that disrupt business operations and can be acute or chronic. Examples include:

• Flooding: Loss of forests and other habitats can increase flood risks, which can damage infrastructure and disrupt operations and supply chains.
• Pest outbreaks: Climate change means pests are becoming more prevalent, threatening agricultural output and food security.
• Raw material shortages: Habitat loss is threatening the availability of natural resources on which some sectors rely, such as cosmetics and consumer retail.
• Water shortages: Industries like agriculture and manufacturing are at risk of disruption when freshwater resources decline.
• Tourism loss: Environmental damage, such as coral reef destruction, can hurt tourism industries.

2. Transition risks

These are associated with anticipated (or unforeseen) future changes in policy and regulation, legal precedent, technology and markets. Examples include:

• Regulatory changes: Evolving (or enforcement of existing) policies and regulations may require organizations to address and be accountable for their nature-related impacts.
• Legal liabilities: Companies having negative impacts on nature may face lawsuits and fines.
• Technology: The emergence of new technologies may affect the commercial viability of an organization’s operations or business model.
• Investor pressure: Shareholders are increasingly demanding sustainability in business operations.
• Changing consumer preferences: More people are choosing environmentally responsible products, reshaping market demand.

3. Systemic risks

These arise from the breakdown at the system level, causing sudden and severe disruption to nature, society and the economy, with unforeseen and significant financial implications for individual organizations. Examples include:

• Ecosystem collapse: Abrupt and possibly irreversible shifts in ecosystems due to crossing of tipping points (eg, parts of the Amazon rainforest are at risk of transforming into drier savannah).
• Natural disasters: Extreme weather and flood events can affect entire countries, disrupting markets and industries (eg, as occurred during the 2024 Spanish floods).
• Inflationary shocks: Large scale effects on production can lead to economic instability (eg, droughts can reduce crop yields, trigger food price rises and drive inflationary pressure). 

Managing nature-related risks can also create financial opportunities:

• Access to new markets: Companies that offer sustainable products can attract nature-conscious consumers.
• Cost savings: Reducing resource use (eg, water and energy) can lower operational costs and improve efficiency.
• Better access to finance: Sustainable businesses are more attractive to investors and may get better financing terms.
• Stronger brand and reputation: Companies that prioritise nature-friendly practices can improve their public image and customer loyalty. 

Nature-related risks and opportunities vary by industry, driven by their different dependency and impact characteristics. The diagram below illustrates the most significant direct nature-related dependencies and impacts by industry-type.

Nature-related dependencies and impacts can create financial risks and opportunities that affect an organisation’s income statement, cash flow, and balance sheet, as outlined below. These financial impacts will be influenced by how the organisation responds through risk management and strategic planning. These impacts may have implications for financial and non-financial reporting, and well as assurance.

The A4S Nature Guidance Series provides further insights into these financial impacts, particularly through the Business Case for Nature guide. It’s worth noting that nature-related risks and opportunities can be valued using qualitative, quantitative and monetary approaches, depending on the organisation’s objectives.

How nature-related risks and opportunities can translate into financial impacts

Revenues

Nature-related risks and opportunities can influence product demand and service delivery, impacting revenue generation. For example:

• Supply chain disruptions: Flooding due to ecosystem degradation can halt supplier operations, causing stock shortages and revenue loss.
• Regulatory fines and reputation damage: A company failing to comply with environmental laws may face penalties and lose contracts.
• Competitive advantage: Companies that comply with environmental regulations and maintain a strong reputation may win contracts and increase revenue.

Expenditure

Businesses may face higher or lower costs due to nature-related risks and opportunities:

• Increased costs: Regulatory changes may increase material costs or require investment in alternative resources.
• Cost savings: New technologies can reduce water use or improve waste management efficiency, lowering expenses.
• Capital investment: Companies may need to invest in flood defences, pest management, or water treatment infrastructure.
• Opportunity investments: Funding sustainable practices can enhance brand reputation and create new revenue streams.

Assets and liabilities

Changes in policies, technology and markets may affect asset valuation and liabilities:

• Asset impairment: Regulatory changes or environmental shifts may devalue assets, requiring write-downs.
• Investment decisions: Companies may need to restructure activities or allocate capital differently due to nature-related risks.

Capital and financing

Nature-related risks and opportunities can impact an organisation’s debt and equity profile:

• Debt levels: Increased financing may be needed to offset revenue losses or invest in sustainability initiatives.
• Access to finance: Companies demonstrating strong environmental performance may attract better financing terms.
• Investor confidence: Transparent reporting on nature-related risks and opportunities can improve investor trust.

Global interest in integrating nature into disclosures alongside climate is growing, driven in part by international agreements like the Global Biodiversity Framework (GBF). Under GBF Target 15, the world’s governments committed to introducing measures to encourage and enable businesses to disclose their risks, dependencies and impacts on biodiversity.

As the reporting standards and frameworks continues to evolve, many organisations are aligning their reporting with voluntary and mandatory frameworks, including:

• European Sustainability Reporting Standards (ESRS)
• IFRS Sustainability Disclosure Standards
• Global Reporting Initiative (GRI) Standards
• TNFD Recommended Disclosures

Aligning with these frameworks can help to ensure compliance and enhance confidence among investors and other stakeholders. Even if you work in a jurisdiction where nature-related reporting is not yet mandatory, taking steps to align processes and reporting with these frameworks, and exploring alignment across climate and nature-related reporting, will give you a head start.

Assurance and accounting standards

As sustainability reporting becomes more regulated, assurance is gaining importance. The International Standard on Sustainability Assurance (ISSA) 5000 provides a framework for verifying sustainability reports, applicable to various reporting standards.

Preparers and assurers of financial statements should be aware of how nature-related issues should be considered in relevant accounting standards. It is important to note that, while the TNFD and other frameworks refer to nature-related ‘risks’ and ‘opportunities’, IFRS Accounting Standards use different language. Instead IFRS uses the term ‘uncertainties’ to cover both risks and opportunities (if those opportunities are within the scope of financial statements). 

Below are a few examples of where IRFS Accounting Standards may require information about nature-related issues:

• IAS 1: Requires disclosure of material information related to sustainability issues.
• IAS 2: Recognises that environmental factors can make inventory harder to sell, increasing costs, or lower selling prices, which may mean reducing inventory value.
• IAS 16: Accounts for how environmental risks may shorten asset lifespans and values.
• IAS 36: Includes nature-related risks in asset impairment calculations.
• IAS 37: Recognises provisions and contingent liabilities arising from, for example, environmental regulations.
• IAS 38: Considers that nature-related investments, like patents or licenses, may qualify as intangible assets.
• IAS 41: Covers biological assets in agriculture, integrating nature into financial reporting.

Materiality in nature-related reporting

Materiality plays a key role in nature-related disclosures:

• ISSB (IFRS S1): Defines material information as any information that could influence investor decisions, which could include sustainability (and nature-related) matters.
• GRI Standards: Focus on ‘impact materiality’ in the context of sustainability reporting, reflecting their focus on reporting to wider stakeholders on the impacts on the economy, environment and people.
• ESRS: Adopt a ‘double materiality’ perspective, requiring disclosure of sustainability matters that are material from a financial or impact perspective, or both.

Organisations should align their reporting approach with regulatory requirements while considering voluntary frameworks for a comprehensive reporting strategy.