- Published on April 20, 2022
Increasingly, investors and consumers are expecting organizations to have nature-positive supply chains. And soon, regulation will catch up with this expectation.
Many countries and regions are already using incentives and regulations to shift economic activities to support biodiversity. Deforestation laws around the world have evolved from once being focussed on just illegal deforestation itself to placing obligations on operators who place illegally harvested timber and timber products on the market (e.g. the EU Timber Regulation). France has adopted a first-of-its-kind due diligence legislation preventing deforestation-linked commodities from entering its markets and the United Kingdom is making it a legal requirement for companies to address deforestation within their supply chains. The EU considers biodiversity in both its taxonomy for sustainable activities, which includes ‘the protection and restoration of biodiversity and ecosystems’, and its rules on corporate sustainability due diligence, which require businesses to address adverse impacts of their actions, including in their value chains – both inside and outside Europe. Now, an EU-wide regulation is being proposed that will mean any commodity entering the market will need to be strictly traceable for deforestation.1
But organizations shouldn’t wait until laws require them to demonstrate nature positivity or report on risks and opportunities relating to biodiversity in their supply chain. There are compelling reasons for businesses to identify and mitigate biodiversity risks in their supply chains right now. Already, one in five companies faces significant operational risks as a result of collapsing ecosystems.2 These material nature risks are typically around:
- Dependency – When a business directly depends on nature (fresh water, pollination or productive soils) as part of its business model. For example, beverage companies need a reliable supply of fresh water; food companies rely on the stability of crops and arable land; and biopharma companies rely on ecosystems to derive novel sources of medicines.
- Impact – Where business activities either directly or indirectly negatively impact nature, which in turn can impact the business through reputational damage, legal action or financial losses. Increasingly, employees, consumers, investors, policy makers and communities expect companies to manage their biodiversity impact to preserve their social license to operate.
- Disruption – Where the loss or impacts on nature disrupts societies or markets, such as in 2019 when the encroachment on natural habitats created a zoonotic disease that led to a global pandemic.
When it comes to assessing and addressing these risks, the supply chain is often the place where an organisation must start. Because, in most industries, organizations have a greater impact on biodiversity through their extended supply chains than in their immediate operations. As companies start to look at how to move to nature-positive supply chains, technology will be a key enabler. Cloud computing, satellite imagery and AI are already being harnessed by global leaders to manage risks in supply chains for commodities like palm oil and deforestation. But just as important is the way organizations approach this complex task. In my experience, three guiding principles can make managing biodiversity risk faster and more cost-effective:
1. Leverage existing capabilities
Biodiversity isn’t the only supply chain vulnerability organizations are searching for. The track and trace capabilities being put in place to capture Scope 3 emissions and modern slavery risks can be repurposed. Like Scope 3 emissions and modern slavery, many of the most significant biodiversity impacts are found deep within supply chains at the raw material or extractive level – areas where organizations typically have the least visibility. Efforts to map these risk points should extend to cover biodiversity and be performed in concert, rather than implemented by separate project teams on an issue-by-issue basis. This is especially important because human rights violations and biodiversity risks, in particular, can have the same underlying drivers – and therefore frequently occur in the same place.
2. Partner for success
When mapping supply chains to identify biodiversity risks, organizations should look for opportunities to collaborate in impact hot spots. Engaging with other supply chain actors and stakeholders unlocks positive actions and interventions not possible when going it alone. As a place to start, I recommend thinking about collaborating:
- With suppliers – Often, efforts to improve supply chain transparency creates too much impact where it can least be borne. Typically, the smaller a supplier the less capable they are of providing quality biodiversity reporting. This doesn’t mean organizations should stop sourcing from small businesses. Smaller companies are often closer to nature and local communities – their participation in global supply chains is an important economic input to their region. Instead, downstream companies need to actively engage with and educate suppliers – and even invest in reporting systems or achieving certifications.
- At an industry level – Improving biodiversity is a system-wide challenge that can be efficiently tackled at an industry level. Already, we’re seeing telcos collaborate on human right related issues, creating industry standards and a collective platform for people to share audit reports.
3. Engage to protect biodiversity
As well as acting ahead of legislation, organizations should actively engage with regulators and standard setters to encourage sufficient biodiversity protection. Organizations seeking to become nature positive need a supportive regulatory environment to maintain a level playing field – closing the gap between what is regulated and social and stakeholder expectations. In addition, there are a number of global initiatives, including the Taskforce for Nature-related Financial Disclosures that are likely to drive significant change across industries, and organisations should engage early and often to ensure these initiatives are fit for purpose.
Start now to support supply chain continuity, predictability and resilience
Those moving early to protect biodiversity in their supply chains will future-proof business models that depend on ecosystem services. They will also improve access to capital from public and private equity and debt – and gain entry to new markets, products and services that rely on a nature-positive approach. The result will be increased market share through increased customer loyalty, cheaper finance and stronger operational resilience.
For further reading, click here to access our latest article: What boards and executives should know about biodiversity | EY Australia
The views expressed in this article are the views of the author, not Ernst & Young. This article provides general information, does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Liability limited by a scheme approved under Professional Standards Legislation. Report this
Alexandra Banks Director at EY | Climate Change and Sustainability ServicesPublished • 4d10 articles FollowingRounding out our mini-series on biodiversity – sharing some thoughts here on how biodiversity issues are likely to play out in supply chains. As we know, regulations requiring the consideration and management of nature or biodiversity impacts throughout supply chains have been around for a while in various forms, and this is only going to increase. This is just one of the areas I touch on in this article, and I would love to hear your thoughts on how you think the global response to biodiversity loss is going to play out in supply chains. hashtag#biodiversityhashtag#supplychainshashtag#sustainabilityreporting