How global businesses can gain first mover advantage with natural capital

Logistics is the backbone of global trade, looking at the seamless flow of goods, services and information. Logistics is not just about the end-to-end journey but also about the intricate details that make up each step of the supply chain. One such detail that is gaining prominence is "natural capital" – a term that is becoming a buzzword across various sectors, including logistics.

Understanding natural capital

Encompassing our stock of natural assets, natural capital is an umbrella term used to refer to ecosystem services like food, water, plant materials for fuel. It is a subject that deserves the increased spotlight it now receives, being a key part of "E" within the ESG-sphere and given that more than half the world's economic output is moderately-highly dependent on nature.

Natural capital sits at the beginning of the logistics flow and is interwoven with countless obligations of which businesses should be aware. With a fundamental impact on the outputs, businesses should keep an eye on natural capital when considering their supply chains and logistics.

Taskforce on Nature-related Financial Disclosures

One of the voluntary regimes within the world of natural capital is the disclosure framework provided by the Taskforce on Nature-related Financial Disclosures (TNFD). The overarching aim of the TNFD's work is to provide a framework and guidance to companies to enable them to consider, report on and take action to mitigate the impact of their operations on nature, specifically with a focus on ecosystems and biodiversity.

While currently a voluntary compliance framework, the TNFD aims to:

• Provide decision-makers with better quality information through corporate reporting on nature.
• Gather robust information on nature-related issues to incorporate into strategic planning and risk management.
• Provide better information to investors to shift the flow of global capital towards more sustainable practices.

The TNFD's disclosure framework consists of four pillars: governance, strategy, risk and impact management, metrics and targets. It sets general requirements for reporting and a set of metrics—both core global metrics and sector-specific ones—to be disclosed on a comply or explain basis, along with additional, optional disclosure and assessment metrics. It serves as a comprehensive starting point to assess the organisation's impact on nature.

Impact on logistics

In the intricate tapestry of environmental responsibility, certain industries with a direct environmental footprint, such as those affected by biodiversity net gain (BNG), have a clear picture of where at least some of their nature-related dependencies lie. Yet for many other businesses the picture is not clear, because of nature-related impacts being localised (which is fundamentally different to the global nature of climate impacts in the context of net zero).

However, analogously with the strategic approach to net-zero planning, businesses should broaden their perspective to consider their logistics in terms of nature, which encompasses the entire supply chain.

Undertaking TNFD reporting is a significant step but is complimented by various legal drivers, both current and forthcoming. Examples include:

• Corporate Sustainability Reporting Directive (CSRD);
• EU Deforestation Regulation (EUDR);
• Corporate Sustainability Due Diligence Directive (CSDDD); and
• Sustainability Battery Regulations (SBR).

These laws require businesses to identify and report on nature-related impacts within their supply chains, in many instances with data points that overlap with the requirements of the TNFD framework. For example, the CSDDD, SBR and EUDR mandate a due diligence system to monitor for adverse environmental impacts related to a business' specific nature-related commodities; and the CSRD obligates reporting on biodiversity risks under one of its standards (ESRS No 4).

Therefore, by complying with these new laws, businesses will accumulate a wealth of information around nature-related risks and the measures taken to mitigate them. This data will be invaluable for a compliance approach that can be leveraged as part of TNFD reporting and align with the four pillars of the disclosure framework.

Given this alignment, it makes strategic sense for businesses to pursue voluntary reporting under TNFD now, positioning themselves ahead of the curve and ensuring a smoother transition as these frameworks and directives evolve from voluntary to mandatory.

Natural capital markets

As requirements to account for impacts on nature multiply, such as the introduction of BNG, so marketplaces for the selling and buying on nature credits are established. While many of these incentivise or require the delivery of nature-related improvements locally, organisations are also looking at setting up international marketplaces for nature credits.

Such marketplaces come with various benefits, including that there is usually a credit bank, should a project under deliver, which can make up any shortfall. The market operator will typically undertake verification and monitoring and will also generally have set up the market with the buy in of the relevant authority, be it a local planning authority or a regulator. This should ensure credits generated are acceptable in satisfying any legal requirements.

The Voluntary Carbon Market

The Voluntary Carbon Market (VCM) is a voluntary market where organisations participate to meet net-zero targets and demonstrate their environmental commitments to customers, investors and employees. Each credit represents one metric tonne of CO2 and can be purchased by a company to offset a comparative size emission. Once used, the credit is retired and no longer tradeable.

Credits can be acquired through direct investment, contracts for delivery, one-off transactions, brokers, retailers, or exchanges.

The carbon trading market, while a useful tool for gaining first mover advantage in the natural capital sphere, comes with several pitfalls. Carbon credits are a finite resource, and over-reliance on them for emissions targets could lead to scarcity and soaring costs.

They are also intended as a solution for "residual" emissions that remain after exhaustive decarbonisation efforts, not as the primary method for reducing emissions. Moreover, the Green Claims Directive, which is progressing through the EU Parliament, will continue to prohibit green claims that are solely based on carbon offsetting, imposing significant financial penalties for non-compliance.

Osborne Clarke comment

Natural capital is still in its infancy but is a key consideration for logistics affecting all businesses. Staying abreast of developments will help gain organisations first mover advantage.

As organisations consider their compliance approach, one focus area should be the TNFD framework, not least as it already has the backing of the G7 and G20 international leaders. With TCFD (climate-related financial disclosures) being used as the basis for mandatory corporate reporting, it is possible a similar path will be followed for TNFD. There are likely to be distinct advantages to starting to report (or at least to gather data) in line with TNFD now, especially for those businesses obligated by other legal requirements.

Organisations should consider buying credits via a marketplace if they are required to comply with current BNG and nutrient neutrality requirements.

When buying carbon credits via a voluntary carbon marketplace, credits should always be obtained from high-integrity sources which are properly certified. An organisation should always first seek to reduce emissions, only offsetting any residual emissions. Claims relating to decarbonisation should be reviewed carefully to ensure there is no risk of them being discredited as greenwashing.

We anticipate an ever greater focus on natural capital. The EU has formally adopted the Nature Restoration Regulation (on 17 June 2024) – its first regulation spotlighting the centrality of natural capital and preserving the natural environment. The regulation requires Member States to submit plans within two years on how they intend to meet and monitor their targets of nature restoration (restoring 30% of poor habitats to good condition by 2030, 60% by 2040, and 90% by 2050). This will affect organisations, particularly developers, who are likely to be impacted by the measures Members States bring in to ensure they can comply with their plans.

Natural capital is not just a trend; it is a fundamental aspect of our ecosystem that all businesses should integrate into their operations. By being proactive and adapting to these changes, businesses can gain a first mover advantage, ensuring sustainability and compliance in the long term.

If you would like to understand more about this, you can request access to our recent webinar on this topic.