Strict targets are urgently needed to reduce biodiversity loss in nine sectors where the financial sector is exposed through loans, investments or underwriting activities, according to a report by The United Nations Environment Programme and the Natural Capital Finance Alliance.
Banks, investors and insurers have made progress on setting climate and sustainability targets, but few have begun to address biodiversity loss, according to the report, although the issue is gaining impetus as the coronavirus crisis highlights the link between human health and biodiversity loss.
Around US$44trn of economic value – more than half of the world’s GDP – is dependent on nature, according to a recent report by the World Economic Forum and PwC, and biodiversity loss is increasing operating costs and risks for financial institutions, according to the OECD.
“The emergence of Covid-19 has underscored the fact that, when we destroy biodiversity, we put our lives, livelihoods and economies at risk,” said Eric Usher, head of UN environment programme finance initiative.
The report looks at how financial institutions can mitigate risk by helping to stop biodiversity loss, and restore biodiversity by financing lower impact sectors and opportunities, including ecosystem restoration, biodiversity conservation, and the sustainable use of natural resources.
“The finance sector needs to strengthen risk management and develop opportunities to align portfolios with global biodiversity goals, to fulfil its critical role in contributing to halting and reversing the current global crisis facing nature and society,” the report said.
CALL FOR ACTION
Investors calling for action include Lombard Odier Investment Managers, the asset management business of the Swiss private bank, and one of the top 25 green bond investors with more than US$1bn in holdings.
"I think it’s still very piecemeal," said Chris Kaminker, head of sustainable investment research and strategy at Lombard Odier. "There are some leaders in this space, there are laggards and I think that is not where it should be in our perspective. A lot of improvement is warranted.
"Banks have to take into account material considerations to their business and to the business that they provide and show to clients. I think what we've seen over the last few years, is an increasing realisation that nature, biodiversity, ecosystem services, natural capital and climate change are material issues to financial markets, to securities, and could even be to financial stability."
RISKY BUSINESS
The report outlines nine sectors with large financial flows that are either dependent on biodiversity or are high impact through direct operations or supply chains.
Of the nine sectors, those that are most dependent on "ecosystem services" are agricultural products, apparel accessories and luxury goods, brewers and electric utilities, and sectors with the highest impact through land use and pollution are headed by agricultural products, distribution and mining.
The report recommends mapping exposure to sectors and the most harmful production processes before setting targets and gathering data to produce new targets aimed at reducing impact and restoring biodiversity. These include "no net loss" in natural and critical habitats, biodiversity "net gain", zero deforestation or zero net deforestation.
This is expected to change lending, sector policies and client relationships over time, and allow financial institutions to report on progress and plans with fixed timeframes as part of Corporate Social Responsibility frameworks.
Green bonds, impact investing and blended finance also have the potential to be expanded and scaled up to address biodiversity loss, according to the report.
Banks focusing on sustainability are lobbying for the creation of a biodiversity data-sharing platform for the banking sector.
Lenders such as ING are testing the web-based "ENCORE" tool which assesses natural capital, opportunities, risks and exposure, and working with non-profits such as Global Canopy to test the ability of open-access information system Trase Finance to assess deforestation and biodiversity risks.