On 17 March 2007 the environment ministers of the G8 countries and the five major newly industrializing countries launched the “Potsdam Initiative – Biological Diversity 2010”.This initiative will set in motion a number of activities for the protection and sustainable use of biodiversity. The ministers specifically state that they will “approach the financial sector to effectively integrate biodiversity into its decision making”.1
This is one example in a growing body of evidence that new regulations and legislation, shifting consumer preferences, activism by NGOs, increased dependency by companies on ecosystem services and scrutiny of supply chains2 are among the key drivers leading to increased business relevance of biodiversity for companies. Companies increasingly acknowledge that their business activities bear a significant impact on the environment and ecosystems and that they hold a social and environmental responsibility. Responsibility is not only reflected in moral obligations as “to do something good for the environment”, it is increasingly reflected in business matters.
So far, attention has been mainly focused on those sectors that either have a direct high footprint on ecosystems (thus on biodiversity), such as the oil & gas, the mining and utilities sectors, or sectors that are dependent on ecosystem services, such as the tourism, agribusiness, forestry and fisheries sectors. As a consequence, industry bodies have emerged, such as the International Council on Mining and Metals (ICMM) in 2001c for the mining & metals sector and the International Petroleum Industry Environmental Conservation Association (IPIECA)d for the oil & gas sector in 1970.The Energy and Biodiversity Initiative (EBI)3, which was a joint initiative of a number of oil & gas companies, i.e. BP, Shell, Statoil and ChevronTexaco, with a number of NGOs and research institutes, focused specifically on how biodiversity could be integrated into oil & gas development.e For agricultural commodities a roundtable has recently emerged for oil palm.f
The financial sector has long remained absent on environmental issues. About 15 years ago the first European and US banks started to integrate environmental considerations in their credit lending activities.4 While a lot of banks are still struggling with how to integrate overall environmental risks into their lending activities,5 recent analysis indicates that more and more banks are integrating these considerations into their credit risk management procedures6,7 as well as into other types of financial services.8 As a result of increased concerns to address environmental issues in the financial sector, which is one of the largest sectors in the world (Box I), an increasing number of financial institutions (FIs) are also starting to voluntarily disclose information concerning the impact of their activities on the environment and the manner in which these impacts are managed within the firm. A report by KPMG9 indicated a huge increase in corporate sustainable reporting of 138% between 2002 and 2005 in the G250g (Figure 1).
Figure 1. Number and percentages of companies in the G250 with CSR reports in 2002 and 2005
Source: KPMG, 2005.9
These days FIs such as the World Bank,h international commercial and investment banks and export credit agencies are beginning to develop environmental standards and conditions for lending to large infrastructure developments, such as oil & gas projects. On biodiversity specifically, one of the leading companies is Insight Investment (the asset manager of the HBOS Group) which developed a biodiversity benchmark10 to assess biodiversity strategies, policies and management standards for a number of their clients in the mining & metals, oil & gas and utilities sectors. This benchmark has been endorsed by the Dutch and UK governments, Insight Investment, and recently also by Goldman Sachs. On a more global scale, the International Finance Corporation (IFC) in close collaboration with a number of large banks developed the Equator Principles11 for project finance. With respect to multilateral organizations, research institutes and NGOs, the most important organization is UNEP's Finance Initiative (UNEP FI).This organization encourages research on environmental, social and governance (ESG) issues and how these relate to financial institutions. In addition the organization provides a (convening) platform for its 160 members in the financial sector to learn more how extra-financial issues, such as ESG issues, touch upon their business and advocates adoption of policies and other means to integrate them in their operations. A couple of months UNEP FI officially launched its Biodiversity and Ecosystem Services work stream during its annual general meeting to guide their members on how to deal with emerging biodiversity issues.12 On a different note, there is Bank Track, a network of activist NGOs that aim to better integrate sustainable development issues, including biodiversity, in the financial sector.i,13
So far, the focus of environmental risk assessments and internal screening by FIs has mainly focused on issues such as climate change, waste and energy use. Examples of available environmental instruments that guide financial institutions on these issues include for example: 1) the FORGE guidelines;j 2) the London Principles for financial institutions;14 3) the OECD guidelines for Multinational Enterprises;15 and 4) the Dow Jones Sustainability Group Index (DJSGI).k Accounting for biodiversity has to a large extent remained nascent. At the same time, examples are building up that strengthen the point that biodiversity is increasingly becoming a business issue, either in the form of business risks or opportunities.
At the moment there are only a few tools available to guide FIs on how to integrate biodiversity into their risk management procedures and other business operations. Three noteworthy ones include:
Biodiversity Benchmark.10 This tool has been developed by Fauna & Flora International (FFI) and Insight Investment and focuses on assessing the biodiversity performance of UK extractive companies and utilities. Besides being endorsed by Insight Investment itself, Goldman Sachs uses it as well to guide their investment decision making.
Equator Principles.11 This tool has been developed by the IFC in collaboration with ABN AMRO, Barclays, Mitsui and WestLB. It is intended to serve as a common baseline for the implementation by each endorsing FI(currently 41) of its own internal social and environmental policies, procedures and standards related to project financing activities specifically.
Biodiversity Quickscan.16 This tool has been developed by CREM for the Dutch Association of Investors for Sustainable Development (VBDO).Although the tool has not been specifically developed for a type of private sector, the report outlines how it can be applied for the financial sector specifically.
A full overview of biodiversity tools is provided in Table 10.
These instruments are starting a process to encourage the financial sector to look at potential biodiversity risks and opportunities that may emerge from their indirect impacts on ecosystems (thus on biodiversity), as part of the wider spectrum of extra-financial issues. However, there is a need to build further on the business case for financial institutions and to effectively communicate it. This was highlighted by two UNEP FI meetings,17,18 where a number of FIs outlined key challenges/ barriers for financial institutions in the biodiversity/ecosystem services arena. These include:
Need to develop best practice case studies at the country and sector level to better inform financial institutions on risks and opportunities.
Difficulty in reconciling and communicating short-term private gains vs. long-term social (and private) impacts.
Need for disaggregating “ecosystem services” into more specific, “bite-sized” components or issues (e.g., fresh water, carbon, flood control); otherwise, the issue remains too big for an institution (e.g., bank) to tackle effectively.
Absence of relevant and effective regulatory frameworks and price signals.
Absence of consensus on ecosystem services valuation.
Need for developing capacity of consultants that work with banks on these issues.
In order for banks and other financial institutions to manage biodiversity risks that result from their investments, lending activities and insurance products, they need comparable, credible and reliable information on the size and nature of these impacts, how companies are dealing with them and how they affect their financial performance and/or shareholder value.19 This project aimed to contribute to the above mentioned challenges/barriers by focusing on 1) the biodiversity business case for FIs in terms of risks and opportunities; 2) how biodiversity-related business risks (BBRs) differ between financial institutions; and 3) how financial institutions can integrate biodiversity into their operations. By accounting for BBRs FIs are:
Better capable to understand their relation to biodiversity and how that affects their (financial) bottom line. While Goldman Sachs has stated that one-off (negative) environmental events have limited influence on a company's share price,20 banks and other FIs need to realize that when providing loans to or investments in high biodiversity impact sectors, such as the mining sector or oil & gas sector, biodiversity issues are becoming more important from a risk perspective. This sector will be increasingly looking for remote offshore oil and gas fields, which are more complex for exploration and production. This will likely induce higher BBRs. FIs that understand the relation between companies and ecosystems are better positioned to identify how this relates to their own financial bottom-line.
Increase capacity to proactively respond to biodiversity business risks (BBRs) in the short and long term. By understanding how biodiversity and related ecosystem service are touching upon the financial bottom-line FIs can build capacity to identify and mitigate at an early stage what types of BBRs they are exposed to in the short term, such as reputational risks, and in the long term, such as reduced investment returns or increased risk for default.
Identify and capture biodiversity business opportunities (BBOs). In addition to hedging risks, FIs that have built capacity are better positioned to identify biodiversity business opportunities (BBOs), such as growing markets for biocarbon, certified sustainably produced commodities and advisory services to clients that need to be guided on biodiversity-sensitive projects or transactions.
In terms of outreach, it is anticipated to feed the outcomes of this report into existing initiatives such as the Business and 2010 Biodiversity Challenge,21 UNEP FI's Biodiversity and Ecosystem Service work stream, and IUCN's Business and Biodiversity Programme.
This project focused on the following four objectives:
Identify the business case for biodiversity for financial institutions from a risk perspective;
Assess how commercial banks, asset managers and insurance firms can be exposed to biodiversity risks;
Identify the tools that are available for financial institutions at present that enable them to integrate biodiversity into their risk management procedures;
Identify biodiversity business opportunities for financial institutions.
The research for this project was conducted between September 2006 and January 2007. In general, information for this project was gathered through literature reviews and interviews with representatives from financial institutions, mainly in the banking sector, and other stakeholders (i.e. NGOs, multilateral institutions, consultancies and research institutes).
This report is primarily written for financial institutions to enable them to better understand the business risks and opportunities related to biodiversity.The information that is provided throughout the report is useful for a range of FIs, including retail and commercial banks, institutional and private investors, asset managers, and (re)insurance companies.
In addition, this report is also written for other stakeholders, most notably policy makers, NGOs, and multilateral organizations, that are interested in understanding the linkages between the financial world and ecosystems and what their role can be in increasing awareness of the business case for biodiversity and mainstreaming the issue throughout capital markets.
Biodiversity. The most widely used definition for biodiversity is the one used by the Convention on Biological Diversity (CBD), which defines it as “the variability among living organisms from all sources including, inter alia, terrestrial, marine and other aquatic ecosystems and the ecological complexes of which they are part. This includes the diversity within species, between species, and of ecosystems.”22 This report follows this definition and emphasizes that it forms the foundation of the vast array of ecosystem services that critically contribute to human well-being.
The financial sector. This is one of the largest (Box I) and most complex sectors in the world. It comprises institutions and companies. The sector includes banks, investors, asset managers, insurance and reinsurance, credit rating agencies and import-export agencies.
Following the introduction, chapter 2 briefly explains the context of biodiversity loss:What are the direct and indirect drivers, what are future trends and how does this relate to the private sector. Since biodiversity business risks are likely more significant from a financial perspective, the larger part of this report focuses on the risk side. Chapter 3 starts by explaining the relationship between the financial sector and biodiversity. The core of this chapter focuses what types of BBRs financial institutions can become exposed to, and what evidence is available to strengthen (or weaken) the business case. Chapter 4 argues that biodiversity risks (and opportunities) may differ between different types of financial institutions.Through it is recognized that there are other (important) segments in the financial sector, the chapter focuses specifically on retail and commercial banks, asset managers/investors, and the insurance sector. Chapter 5 provides a general procedure for FIs to integrate biodiversity into their risk management process.Where the last three chapters focus on the business case from a risk perspective, chapter 6 outlines a number of biodiversity business opportunities that FIs can capture, including potential market sizes. Chapter 7 draws conclusions from the findings of the research project. Chapter 8 provides recommendations on how to work towards a more widespread integration of biodiversity throughout the risk management practices and other business operations within financial institutions.
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