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Why is biodiversity relevant to the financial sector?

“Financial institutions have a crucial role to play in preventing further biodiversity loss and restoring nature. The role of banks, insurers, asset managers and investors is becoming increasingly relevant due to pressures such as strengthening liability regimes, intensifying scrutiny of supply chain practices and shifting consumer preferences.”

– Finance for Biodiversity, Guidance to the Pledge

Financial sector’s activities and investments affect biodiversity and, in turn, are exposed to risks resulting from its loss.
Specifically, biodiversity loss may translate into three types of risks for asset managers, pension funds, and other financial institutions investing in companies with a highly negative impact on biodiversity: physical risks, transition risks, and reputational risks. Ultimately, such risks translate into financial risks, leading to macroeconomic deterioration, which, in turn, undermines the financial system’s stability.

What are physical risks?

Biodiversity loss threatens the availability of ecosystem services, on which economic activities depend (e.g., a joint study by De Nederlandsche Bank and PBL Netherlands Environmental Assessment Agency reveals that the financial sector’s exposure to products that depend on pollination amounts to € 28 billion).

What are transition risks?

Changes in government policies, technological developments or consumer preferences aimed at reducing the harm to ecosystems can translate into transition risks for investors, as companies have to adapt to new conditions.

What are reputational risks?

Negative impact (resulting, for example, from controversial activities) that can be traced back to a specific company results in reputational damage for the company itself as well as for the institutions financing it.

Financial institutions have a role to play

Financial institutions, by allocating capital, have an unprecedented potential to reinvent our economy and be agents of positive change.
Banks and investors are more and more expected by society to take action within the environmental crisis, start assessing and disclosing the natural impact resulting from their activities, and integrate nature-related considerations in their decision-making processes.

Addressing the issue

Tackling the crisis requires exceptional and consistent coordination at an economic, political, and cultural level.

As largely emphasized by the report ”The Economics of Biodiversity: The Dasgupta Review” (2021), change should be oriented towards some fundamental transitions:

1. Global policies must facilitate a progressive but substantial shift in our current pattern of production and consumption, ultimately leading to systemic change. Countries’ efforts and resources must be oriented towards integrating natural capital into national accounting systems, thus establishing a more inclusive measure of wealth than GDP. Moreover, with the world’s population growing, it is of utmost importance to ensure an equilibrium between our demands to Nature and its supply.

2. Transformative changes in global financial and education systems, are crucial in the effort of restoring and preserving biodiversity. Investment flows need to be channeled towards economic activities that enhance our natural assets rather than harm them. Finally, environmental education programmes can help empower citizens to make responsible choices and demand business’ accountability, so that they can play their role as informed individuals.

What are relevant initiatives and policies for acting on the issue?

Finance for Biodiversity Pledge: A group of 26 financial institutions from around the globe launched the Pledge in September 2020, calling on global leaders and committing to protect and restore biodiversity through their finance activities and investments. The number of Pledge signatories has grown since then and currently stands at 75.
The EU Biodiversity Strategy for 2030: A comprehensive, ambitious, long-term plan for protecting nature and restoring degraded ecosystems adopted by the Commission on May 2020. The Strategy emphasizes the importance of multi-stakeholder partnerships and contains specific commitments, including the integration of biodiversity into institutional decision-making; the promotion of tax systems and pricing that reflect environmental costs; the mobilisation of EU funding towards nature-based solutions; the formulation of a sustainable corporate governance legislation proposal to support corporate due diligence and accountability across value chains.
Convention on Biological Diversity: The 15th Meeting of the Conference of the Parties to the Convention on Biological Diversity (CBD COP15) – hosted in Kunming, China – is the biggest biodiversity conference in a decade. The first phase took place virtually from 11-15 October 2021. A second face-to-face meeting will follow in Montreal, Canada, from 7 to 19 December 2022.

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