Human rights impacts should be part of nature disclosure

When it comes to business engagement with Indigenous Peoples & Local Communities, financial materiality is only part of the picture. Nature disclosure must go further.

Marina Comandulli

Senior Human Rights and Deforestation Associate at Global Canopy

Nature, communities and economies are inextricably intertwined. When nature is treated solely as a resource to be exploited for profit, the financial benefits are typically short-lived and confined to a handful of beneficiaries, as the environment is degraded and displaced Indigenous Peoples and local communities (IP&LCs) can no longer act as land custodians.

Take, for example, the Cerrado in Brazil, Latin America’s second largest biome and a vast water store now threatened by agricultural expansion. The Cerrado’s traditional communities stewarded this natural environment for generations, protecting the health of its waterways, ensuring a reliable flow of clean water through rivers across Brazil. But industrial-scale agriculture has converted native vegetation into farmland on a massive scale, making the local climate drier and hotter, and displacing traditional communities. Not only does this come at great human cost, without these communities looking out for the long term health of this region, its days of supporting bumper financial gains for the agriculture sector are likely to be numbered.

As evidence mounts of how nature loss poses financial risks to economies, governments are contemplating how best to shift business practice in line with the Kunming-Montreal Global Biodiversity Framework’s Target 15 and to build economic resilience. The inclusion of both nature and IP&LCs in international disclosure standards and regulation is gaining momentum, though approaches vary. Different disclosure frameworks emphasise different elements of the intertwined trio – nature, people and economies – with different results. 

Governments deciding on a sustainability disclosure model face a particularly important choice of whether to focus on financial materiality or double materiality. Financial materiality requires reporting of the impacts that a business has on nature or people only when these are deemed to affect the business’ financial prospects. By contrast, a double materiality lens attaches importance to – and requires disclosure of – the impacts on nature or people for their own sake, whether or not these impacts are financially material. How businesses make disclosures concerning IP&LCs illustrates how these models can diverge sharply in practice. 

Business impacts on IP&LCs can certainly cause risks or opportunities that may affect their business’ financial prospects, so a financial materiality approach can result in some important disclosures. Recent research from Shift highlights that when businesses impact nature and engage insufficiently with communities, this can result in community opposition, litigation and protests which can cause financially material effects such as project shut-downs, cost over-runs and delays. By contrast, businesses that undertake high quality community engagement can address related social risks and avoid regulatory, lender and buyer intervention. This can create positive financial outcomes including lower capital expenditure risk and predictable cash flow. 

Notably, the International Sustainability Standards Board (ISSB) – whose focus is exclusively financial materiality – decided in April to include guidance in its upcoming draft on how engagement with IP&LCs and other affected stakeholders can give rise to nature-related risks and opportunities. This is positive recognition of the intertwined relationship between IP&LCs, business and nature, when viewed from the perspective of financial materiality. 

However, this lens ultimately gives only a partial view of the impacts of businesses on IP&LCs and nature. To truly ensure that business disclosure provides comprehensive insights into these impacts requires a double materiality standard combined with a rights-based approach to engagement with IP&LCs. While this falls outside the ISSB’s remit, some frameworks and regulations, such as the updated European Sustainability Reporting Standards (ESRS), released by the EU commission for public consultation in May, take a double materiality approach, requiring disclosure of both negative and positive impacts irrespective of whether they affect business prospects. Similarly, the Global Reporting Initiative (GRI) Standards require businesses to report their impacts on people and nature regardless of whether those impacts affect their financial prospects.

For example, a company might clear native vegetation for agricultural production, affecting IP&LCs’ access to land or water and their traditional livelihoods. Under financial materiality, these impacts would be disclosed only if they give rise to consequences such as community opposition, litigation, reputational damage or project delays that are financially significant for the company. By contrast, under a double materiality approach, the company would have to disclose these impacts regardless of their financial significance. 

For governments and standard-setters that are serious about ensuring robust transparency around how businesses impact IP&LCs, a financial materiality approach is not sufficient. They should require more comprehensive disclosures from businesses through a double materiality model grounded in a rights-based approach and aligned with international standards. At a minimum, such disclosures should include:

• Whether Free, Prior and Informed Consent (FPIC) was sought and obtained, including disclosure of agreed terms and how fair compensation and equitable benefit-sharing arrangements were determined. Consistent with the UN Declaration on the Rights of Indigenous Peoples, an FPIC approach should also respect the right of Indigenous Peoples to withhold consent and, where applicable, revisit consent throughout the lifecycle of activities affecting their rights or territories.
• Human rights due diligence systems, in line with the UN Guiding Principles on Business and Human Rights (UNGPs) and the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct, including the company’s processes for identifying and assessing risks, preventing and mitigating adverse impacts, monitoring performance, and providing remediation where harms occur, as well as the outcomes of these processes. 

When it comes to ensuring respect for the rights of IP&LCs, mandatory business disclosures are only part of the story – other forms of regulation, engagement and investment will also be needed. But transparency has a critical role in both motivating improvements and enabling proper scrutiny of business conduct. As governments, regulators, investors and business leaders consider the disclosure models that can best support a just nature transition, a double materiality lens that incorporates rights-based approaches is an essential part of their toolkit.