Biodiversity loss poses a significant threat to our planet, yet in comparison to climate change, global mobilisation has been nascent. However, the UN Biodiversity Conference: COP15 that occurred in Montreal, Canada, offers hopes to change that by adopting a globally agreed plan, similar to the Paris Agreement, but for nature.¹

A recent report by the Commonwealth Climate and Law Initiative (CCLI) analyses the material financial risks biodiversity loss poses to businesses and the responsibility of directors to address such risks in order to fulfil their fiduciary duties. Biodiversity risk is the threat to a business’s future prospects due to the loss of biodiversity and the ecosystem services that nature provides (more on this below). As the impacts of biodiversity loss become more evident, directors may be in breach of their duties under existing corporate law if they don’t adequately consider and mitigate such risks.

This article will introduce biodiversity risk as a material financial risk, explore how the fashion industry is exposed to such risks and outline why directors of fashion companies should begin to consider such risks as part of their regular strategic risk management.

Our relationship with biodiversity

Biodiversity is the diversity of species among living organisms.² Although it only relates to the living elements of nature, it can influence nature’s non-living elements, like water. Nature provides an abundance of ”assets” that society and the global economy relies on; these are referred to as ”natural capital”, and the flow of benefits provided are ”ecosystem services”. Ecosystem services can be classified as provisioning services (i.e. the provision of raw materials), regulating services (i.e. the regulation and maintenance of ecosystem processes like the atmosphere or flow of water) and cultural services (i.e. non-material benefits like education).³ Biodiversity loss threatens the stability of and access to ecosystem services as lower biodiversity within natural stocks can lead to lower-quality ecosystem services.⁴

To put our dependence on nature in perspective, the value of ecosystem services is estimated at US$125-140 trillion per year, with US$44 trillion of generated economic value either moderately or highly dependent on such services.^{5, 6} Yet, in mainstream economic and accounting practices, this cost is not generally accounted for, despite growing international consensus that biodiversity loss can pose a material financial risk.

Companies often have dependencies on biodiversity through their need for particular ecosystem services and impacts on biodiversity through specific practices that damage biodiversity. As impacts on nature increase, physical, transition, and legal risks can evolve into material financial risks and threaten an organisation’s performance. Read our article on directors’ duties to better understand how these risks can materialise.

A closer look at fashion – dependencies, impacts and risks

The fashion industry has significant dependencies on ecosystem services due to its reliance on the agriculture and forestry sectors for the provision of raw materials, which are supported by regulating services such as pollination and soil quality regulation. In addition, the industry significantly impacts biodiversity, particularly in three stages of the value chain: raw-material production, fibre production and processing and end-of-life.⁷

Agriculture, as an example, supplies the fashion and textile industries with raw materials and natural fibres such as cotton, hemp, flax, wool and leather for garment production. The agricultural sector relies heavily on an extensive range of biodiversity-dependent ecosystem services such as nutrient cycling, pest and soil regulation, air quality, climate regulation, and natural hazard control, which are crucial for agricultural production.⁸ The delivery of these services is supported by biodiversity in the relevant ecosystem, but this value is often overlooked.⁹ For example, pollination is an ecosystem service that has tremendous value. It is estimated that at least 35% of global agricultural output requires pollination, with the annual economic value of these services being approximately between US$195 billion and $387 billion, provided for free.^{10, 11}

Conventional cotton agriculture requires vast quantities of land, water, fertilisers and pesticides and causes soil degradation and habitat loss from toxic chemical use. This degradation threatens the stability of and access to high-quality ecosystem services that the fashion industry relies on to create and sell products. For example, while cotton crops are not directly dependent on pollination, a 2014 study found that bees increased cotton production by over 12% for fibre weight and more than 17% for seed number.¹² Recognition of the role biodiversity plays in maintaining healthy ecosystems has increased regenerative agricultural practices that, in addition to acting as a mechanism for carbon sequestration, have been adopted for co-benefits that include increasing soil health, which leads to better cotton yields.¹³

The fashion industry significantly impacts biodiversity loss across the supply chain. For example, in the forestry sector, the production of wood-based fibres and MMCFs is estimated to result in the deforestation of more than 200 million trees annually, leading to soil pollution and habitat loss.¹⁴ Moving further along the supply chain, once textile dyeing and treatment effluent enter waterways, it can lower oxygen levels in the water, kill aquatic plants and animals, and harm sensitive marine and freshwater ecosystems. In addition, chemical-laden water is used to irrigate crops.¹⁵ In the same vein, due to the high use of synthetic materials in fashion, microplastics enter the waterways and poison marine life. Finally, when textile waste ends up in landfill, it contributes to habitat loss.¹⁶

These impacts damage biodiversity, which ultimately affects the accessibility of ecosystem services and poses a risk to future access.

Industry awareness

In 2020, Textile Exchange released the Biodiversity Insights Report as the first global baseline for the apparel and textile industries.¹⁷ However, while more than half of the companies included in the report have identified biodiversity-related risk as a priority, with 59% making public commitments, only 8% have established a clear biodiversity strategy. The same year, the G7 Fashion Pact, made up of 200 fashion brands, identified biodiversity as one of its main priorities, along with reducing global warming and protecting oceans.¹⁸

Kering, which launched its biodiversity strategy in 2020 included biodiversity in its environmental profit and loss (EP&L) methodology. One goal of the EP&L is to develop more robust business policies to address the risks and opportunities presented by environmental challenges.¹⁹

Fast-forward to 2022, the Climate Fund for Nature, launched by Kering and L’Occitane Group, is aiming to raise Euro 300 million for projects in countries where investee brands source their raw materials and fund initiatives such as nature protection and restoration, as well as supporting farmers transition to regenerative practices.²⁰

Further, the Taskforce on Nature-related Financial Disclosures and the ‘30 by 30’ deal signed at COP15 show the topic is gaining prominence on the international agenda.²¹

This mobilisation by the industry affirms a growing awareness of the importance of biodiversity for sustainable supply chains and the risks biodiversity loss poses for sourcing and maintaining access to high-quality raw materials.

Duties and considerations

Across most jurisdictions, directors have two primary duties: the duty of loyalty and the duty of due care, skill and diligence judged by a ‘reasonable person’ test: whether in the circumstances, a reasonable person in the directors’ position would have acted in the same way. The CCLI outlines that these duties could be breached by a director who fails to consider biodiversity risks and opportunities adequately.

Evidence from the agriculture and forestry sectors shows that the negative impacts on biodiversity affect the yield of ecosystem services, creating a physical risk due to the lower quantity and quality of commodity goods used by the fashion industry. Further, as policies develop, consumer sentiment changes, stakeholder expectations shift, and businesses move toward nature-focused practices and disclosures, transition risks arise for businesses that don’t adapt. Consequently, this presents biodiversity loss as a foreseeable risk, which increases reputational risks and liability for company directors.

As these risks continue to materialise, company directors should actively consider biodiversity impacts and risks within their supply chain by integrating its assessment into overarching risk mitigation processes and strategic decision-making.