In November 2021, the IFRS announced the formation of the ISSB, which will be developing disclosure standards pertaining to climate change and other sustainability issues. The ISSB will merge the work done by the CDSB, TCFD and VRF with the intention to launch the IFRS SDS by 2023.
While the document explores and discusses multiple forms of biodiversity impact metrics, the CDSB Framework already explicitly discusses the use of monetary valuation as a common measurement for biodiversity. The CDSB continue to state that the monetary value should be treated as a minimum monetary value. This supports the service provided by Endangered Wildlife OÜ, whereby the company calculates a verifiable, justifiable minimum baseline financial value for biodiversity.
The drive to establish biodiversity related reporting standards is due to the complexity of the topic. In particular, the complicated principles in applying existing accounting standards when dealing with biodiversity is the issue pertaining as to how to report on and to value biodiversity from a financial perspective.
According to IAS 41, biological assets, particularly from an agricultural perspective, are living plants or animals. This basic definition does not preclude wildlife. However, under agricultural activity, an added clause states that it specifically refers to “the management by an entity of the biological transformation of biological assets
- for sale,
- into agricultural produce, or
- into additional biological assets.”
As a stress test, we can consider each of these three activities:
- For sale – is the transformation of the biological assets (wildlife) for the purpose of selling them and the income generated therefrom form part of the normal business operations.
- For agricultural produce – are products harvested from the biological assets.
- For additional biological assets – this means managing the biological transformation of the biological assets into additional biological assets. The key concept within this activity is the term “managing”, including controlling the breeding of wildlife from a conservation perspective (including being involved in disease treatment, nutrition, safety and security).
In Endangered Wildlife OÜ’s opinion, under such circumstances the wildlife stock should not be excluded from the scope of IAS 41.
In order to therefore incorporate the animals into a company’s books, it is necessary to also understand the accounting behind the recognition and measurement of the animals. According to IAS 41, there are three further requirements for recognising biodiversity, including:
- The Company has control of the asset as a result of past events, which includes the enactment of legislation, proof of legal ownership of the wildlife, exercising access control, and establishing other general controls. Ownership is a particularly difficult barrier to overcome as many countries do not permit private ownership of native wildlife.
- It is probable that any future economic benefits derived from the assets will be attributable to the Company.
- It is possible to reliably measure the fair value or cost of the assets, for example through the use of prices quoted at an active market(s), whereby an active market is one in which (1) the items traded within the market are homogeneous; (2) there exist both willing buyers and sellers; and (3) prices are publicly available. If no active market exists, the value can be linked to the most recent market transaction prices or adjusted market prices for similar assets.
These last two points have been a bone of contention, which has led to measurement becoming the main tool for biodiversity. This is where Endangered Wildlife OÜ is placed, in that the company is able (1) to identify the future economic benefits from biodiversity, and (2) to reliably measure a fair value for biodiversity.
Even though the intention is to develop biodiversity-specific standards, it is the opinion of Endangered Wildlife OÜ that, once all three of these conditions can be met, by definition a company should be able, under IAS 41, to recognise biodiversity in its financial statements.
About Endangered Wildlife OÜ
Endangered Wildlife OÜ is an award-winning ESG SaaS company that is contributing towards solving the climate crisis by developing the Biodiversity Valuator, a disruptive solution that allows its users to calculate and understand the financial value of their impact through biodiversity. Endangered Wildlife OÜ has been nominated for the Earthshot Prize 2022.