The Biodiversity Imperative in CSRD

Coauthored by Leo van der Westhuijzen and Ravi Kantamaneni

The rising tide of attention on nature-related concerns, particularly around biodiversity decline, has extended to developments in the European sustainability reporting landscape as well. In April 2021, the European Commission announced the adoption of the Corporate Sustainability Reporting Directive (CSRD), an important component of the European Green Deal. Within the European Sustainability Reporting Standards (ESRS) that underpin the CSRD, ESRS E4 (Biodiversity and Ecosystems) focuses on biodiversity in significant detail, while trying to harmonize the various forms of guidance already populating the space, such as the Taskforce on Nature-Related Financial Disclosures (TNFD) framework.

When considering impacts, risks, and opportunities related to biodiversity, it is important to also consider other aspects of the environment that affect and are affected by biodiversity. Biodiversity decline has various drivers, including climate change, pollution, land-use and sea-use change, direct exploitation, and invasive alien species. Therefore, E4 has strong ties with the other ESRS Environment standards: E1 (Climate Change), E2 (Pollution), E3 (Water and Marine Resources), and E5 (Resource Use and Circular Economy).

The Kunming-Montreal Global Biodiversity Framework (GBF), released after the UN Biodiversity Conference (COP 15) in December 2022, has been instrumental in setting the strategic direction for biodiversity and nature-related standards and frameworks currently under development. E4 seeks to ensure that business models and strategies are compatible with the GBF targets of no net loss by 2030, net gain from 2030, and full recovery by 2050.

As with several other nature-related guidelines, and in alignment with the ESRS focus on stakeholder engagement, E4 also stresses the importance of local and indigenous knowledge while companies embark on this journey. Indigenous communities are a storehouse of knowledge on local biodiversity, and their systems and practices can help significantly in arresting its decline.

What Is Required of Companies?

E4 includes six reporting requirements, all of which must be met by companies that have determined biodiversity to be a material sustainability matter. However, undertakings or groups not exceeding 750 employees during the financial year (on a consolidated basis where applicable) may omit the information specified in E4 for the first 2 years of preparation of their sustainability statements.

The six requirements are as follows:

1. An understanding of the organization’s nature-related transition plan: Such a plan should be compatible with the targets outlined in the GBF. If one is missing, it can be replaced with an explanation of the organization’s biodiversity and ecosystems-related ambition and whether it will eventually adopt a transition plan.
2. Policies implemented to manage impacts, risks, and opportunities: The assessment of impacts, risks, and opportunities must cover the value chain (for instance, in areas such as traceability of raw materials and protection of designated sites). Such policies would be based on material impacts, risks, and opportunities related to nature that the organization discovers. For this discovery process, TNFD’s LEAP approach—in particular, its first three phases (Locate, Evaluate, Assess)—can guide organizations through a nature risk assessment journey, covering physical risks (caused by changes to the state of nature), transition risks (related to policy requirements or reputation), and systemic risks (for instance, a full ecosystem collapse). E4 also values the use of scenarios that test the resilience of strategy and business models.
3. Actions planned by the organization and resources allocated for this purpose: These actions should be in place to achieve the policy objectives and targets set by the organization. Here, it is important to denote actions with and without offsets, as the latter are likely to be treated differently. Biodiversity offsetting is encouraged only when onsite and direct actions have been exhausted, as locally relevant actions are required to affect biodiversity.
4. Targets based on conclusive scientific evidence: This is where organizations can utilize tools such as the Science Based Targets Network’s target-setting methodology, which is currently being piloted by a handful of companies across various sectors.
5. The adoption of impact metrics: Once organizations identify sites of biodiversity sensitivity that its operations affect in a material way, it is important to start allocating metrics to measure and eventually track this impact. Considering the variety of biodiversity-related metrics, these could be in terms of area of land affected, number of species affected, or any of several other relevant areas of impact. Crucially, E4 stresses the need to monitor the dynamic nature of impact metrics. Therefore, organizations need to start disclosing changes to their chosen metrics over time.
6. Potential financial effects: Finally, the scale of financial impact arising from the identified risks and opportunities has to be disclosed under E4. Financial effects need not necessarily be monetary; they can also be qualitative depending on the limitations of the effect in question.

Planning Ahead for E4

Disclosures under the ESRS start from 2024 for specific companies based on turnover, asset size, number of employees, and listing status and will widen to include more companies in the following years. A detailed understanding of nature-related dependencies and impacts, risks, and opportunities and an informed target-setting and action-planning process will take several months, if not years, to accomplish.

Therefore, for most organizations that will need to disclose under E4, there is no better time to start than now. A prudent first step would be to plan a nature-positive journey starting with the identification of a company’s corporate sphere of influence in relation to nature. Timely planning around the various steps involved in this journey will inform a nature strategy that can help organizations be well prepared when it’s time to disclose.