There is a growing business case for financial institutions (FIs) to address and mitigate biodiversity-related risks (BBRs). Results from an interview survey among 26 financial institutions, other private sectors and NGOs revealed that 19 out of 26 respondents (> 70%) believed FIs are exposed to reputational risk. The report also provides a wide range of cases indicating that FIs can be exposed to a wide range of other risks as well, both directly and indirectly.
FIs can be directly exposed to reputational risk, liability risk or new regulations. For example, the environment ministers of the G8 countries and the five major newly industrializing countries launched the “Potsdam Initiative – Biological Diversity 2010”, on 17 March 2007, where they outline that they will “approach the financial sector to effectively integrate biodiversity into its decision making”. FIs can become indirectly exposed to BBRs from their investment portfolios, loans and insurance products to companies that have a major impact on ecosystems. This particularly concerns:
Companies depending on ecosystem goods and services. These include for example the tourism, fisheries, forestry and the agricultural sectors.
Clients having (high) impacts on ecosystems. These can be subdivided into companies with direct footprints on ecosystems, such as the oil & gas, mining, and construction sector, as well as sectors that have significant impacts through their supply chains, such as the food retail sector.
Goldman Sachs outlined that since the oil & gas sector will have to look for more remote offshore gas and oil fields in the future, which are more complex exploration and production areas, these types of companies will very likely become more exposed to BBRs. When these types of companies come under increasing biodiversity-related scrutiny, for example through new liability regulations, pressures from NGOs, concerns by policy makers or shifting consumer preferences, it may impact their ability to pay back loans (increased risk for default), impact their shareholder value or lead to an increase in insurance claims.
Although BBRs are likely to be more significant in terms of the financial consequences, there are also biodiversity business opportunities (BBOs) to be captured. These include, but are not limited to:
Growing markets for certified sustainable produced commodities, such as for wild fish, aquaculture or agricultural products. Estimates suggest a market size of about US$60 billion annually by 2010.There are also market opportunities for biodiversity offsets, biocarbon, NTFPs, PES and biofuels among others. Estimates for market sizes range from US$35 million–10 billion annually by 2010.
Due diligence or advisory services to clients that need assistance in biodiversity-sensitive project and transactions.
Biodiversity-related insurance cover. For example, around 65% of the insurance premium of the shipping companies using the Panama Canal is environment-related, such as covering for too little water or delays because of regular dredging. Reforestation along the slopes of the canal will drastically cut insurers' exposure to BBRs.
Government-induced opportunities. The Dutch government for example triggered demand amongst private investors to invest in green funds. Total capital invested in 2005 amounted to € 1.5 billion, of which € 282 million has been allocated to the project category “nature, forests and landscapes”.
Conservation land as a result of default or debt work-out. Should a bank acquire a significant amount of biodiversity-sensitive land as a result of default or debt work-out situations, collaborations with NGOs, local conservation organizations, or the government might be helpful in finding suitable (conservation) purposes for the land, while the bank remains owner of the land. At the same time, this could be used to bolster a financial institution's reputation or be used for marketing purposes.
At present, though the issue has hardly appeared on the radar screen of the financial sector in general, there are already a number of major banks that have started to integrate biodiversity (as part of other extra-financial issues) into their risk management procedures (RMP) or other business operations. An assessment of 11 commercial and investment banks revealed that a considerable number of banks have already started to go beyond the Equator Principles to develop sector-specific guidelines that they apply to an increasing number of credit and investment products. Rabobank appears to be a leader in biodiversity, as they are applying a CSR tool as of the 1st of February 2007 to all their lending activities where three of the ten guiding principles refer to biodiversity to some extent. The bank's client relation managers and risk analysts are obliged to use this tool for all products. And Goldman Sachs recently adopted the Biodiversity Benchmark (developed by Fauna & Flora International and Insight Investment), which they use for their investment decision making.
For those FIs that understand the materiality of the issue and that want to identify how to integrate biodiversity into their risk management procedures (RMP), thereby mitigating any adverse BBRs, the report outlined a general procedure. The procedure provides an overview of existing tools to:
Identify biodiversity important areas. A number of NGOs have developed (spatial) tools that identify important biodiversity areas, although most areas are quite broad. Work is underway at present to develop a biodiversity tool for the private sector that identifies much more in detail where biodiversity hotspots are situated.
Identify what tools have been developed for the private sector that factor-in biodiversity. These can be used by FIs, both in their own RMP or as indicators for their clients to assess their ability to address biodiversity.
Identify sector-specific industry guidelines and international conventions. Several FIs indicated during the interview survey that they would greatly benefit by knowing what the best-management practices are sector-by-sector. By knowing this, they can inform their clients, as part of their conditions in issuing contracts or use it in developing sector guidelines.
To further support the integration of biodiversity into financial business models, a number of FIs outlined general criteria that will contribute to successfully integrating any biodiversity-related tools into their RMP. These include:
Any tool should be easy-to-use by those working with it on a daily basis, such as client relation managers, risk analysts and fund managers.
It should be possible to implement it within existing business structures in order not to overburden the credit or investment process.
Any tool should be sector-specific and identify sustainable industry standards (e.g., multilateral conventions, industry guidelines, benchmarks).
Ideally a tool should be adopted by a wide range of FIs thereby operating in a level playing field (such as for project finance, where a level playing field was created when a large number of major banks voluntarily committed themselves to the Equator Principles).
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