Alex Gray explains how trade banks can help their global customers protect biodiversity in supply chains by beginning to price in the true cost of ‘ecosystem services’Pull quote“To make sure that markets actually ‘price in’ the value of nature – and the demands that specific products make of uncosted ‘ecosystem services’ like waste decomposition – firms have to change the way they manage their supply chains”
The Taskforce on Nature-Related Financial Disclosures released its final recommendations in September 2023 and spelled out what financial markets have – at least until recently – tended to ignore: “Our society, economies and financial systems are embedded in nature, not external to it.”
To make sure that markets actually ‘price in’ the value of nature – and the demands that specific products make of uncosted ‘ecosystem services’ like waste decomposition – firms have to change the way they manage their supply chains.
Many large firms are already working on this. For instance, Nestlé, the world’s largest food and beverage company, has set a target of sourcing 20% of its key ingredients through “regenerative” methods by 2025 and aims to get to 50% by 2030. Regeneration will include protecting water resources, boosting biodiversity and improving soil health.
Perhaps more importantly, regulators are also on the case. The EU’s Proposed Directive on Corporate Sustainability Due Diligence, will, according to Didier Reynders, the EU Commissioner for Justice be a: “real game-changer in the way companies operate their business activities throughout their global supply chain.”
But really changing the way that supply chains impact nature means firms must collect detailed data on that impact. The right data, though, will not be easy to collect, nor will it be easy to draw good conclusions from it.
“We create petabytes of new data along the agricultural value chain every day,” says Tedd George, the founder and Chief Narrative Officer of Kleos Advisory, who has delivered trade ESG workshops at The London Institute of Banking & Finance in conjunction with GTR.
“But unless you collect targeted data for specific reasons, you end up with noise and data overload,” says George. “And even with careful data collection you still need the full power of machine-learning and AI to get real value out of it.”
There may also be a more fundamental problem with market pricing of ‘ecosystem services’: much of what is important is not just absent from economic models, it’s a black box to scientists.
For example, vultures in South-Asia provide a vital ‘ecosystem service’ by removing rotten carcasses. When they were driven to the edge of extinction in the late 1990s by the use of diclofenac, an anti-inflammatory, in herds of cattle, human mortality in affected regions rose by 4%. (Wider ecosystems were also affected.) There were several reasons for the mortality spike including water contamination and an increase in the population of feral dogs carrying rabies. But what should arguably concentrate the minds of firms that want to protect nature is that it took scientists nearly ten years to work out what was happening to the vultures, which is not unusual in the study of complex dynamics.
And, at the same time as research is necessarily slow, ecosystems can quickly reach a tipping point. A recent paper from the Banque de France points out that “the global rate of species extinction is now tens to hundreds of times higher than the average rate over the past 10 million years. This could affect terrestrial biogeochemical processes in a non-linear and irreversible manner”.
So, how can trade banks help?
Banks decide where the money goes. Should they provide credit to a firm that is involved in deforestation of the Amazon? That ought to be an easy ‘no’ for most. What about a large producer that sources ingredients from many different parts of the world? That starts to get much more complex, and the first challenge will be getting a good dataset on the true impact of that business on nature. What is priced in, and what not?
The producer itself is unlikely to have all the data needed to form a rounded picture of what is going on at each supplier. But the bank can help – through the provision of supply chain finance predicated on the supplier sharing data.
“That is one of the stand-out benefits of Naturetech,” says Tedd George. “We can now get data on the violation of habitats, such as deforestation or planting in protected areas. That allows us to hold companies and people to account. By the same token, it allows us to reward best practice and encourage further data collection and more detailed analysis.”
There are stumbling blocks, of course – not least the lack of data standardisation. Different banks look at different metrics and different regions are moving forward at different rates. Many countries with young populations and a relatively small carbon footprint have more immediate fiscal and monetary concerns than protecting biodiversity – though supply chain finance should be an opportunity to help them monetise the natural assets from which we all benefit.
The bottom line is that we need to step up now to protect nature and we increasingly have tools to do so. “The outlook may be bleak for biodiversity,” says Tedd George, “But Naturetech is tried and tested, and it helps us monitor supply chains. We should make use of that.”
The bottom line? Dangling the carrot of supply chain finance may turn out to be one of the most powerful ESG tools we have.
Alex Gray is Head of Trade and Transaction Banking at The London Institute of Banking & Finance
