2. Biodiversity loss: a growing relevance for the private sector

The materiality of social, environmental and governance issues in investment decision-making has been highlighted by various reports.23,24 Climate change is a good example.This phenomenon rose up the international agenda when a growing body of scientific evidence showed that human-induced greenhouse-gas emissions had a direct impact on the atmosphere and would cause shifts in climates both globally and regionally. Although this phenomenon was hardly recognized by anybody 20 years ago, today as a result of international treaties, national legislation and the creation of carbon markets, climate change has become a real business issue for the private sector.The recent emergence of the European Emissions Trading Scheme (ETS) also means that the financial sector is becoming more and more active in this new market, as brokers, traders and types of other intermediary services.At the moment there is about £ 5.8 billion under management in 51 carbon funds.l

In a report by F&C Investments (2004)
Tom Massey, from RWE Power, states that
“Fifteen years ago, companies were saying that climate change was not relevant to business. You could not measure it, companies had no individual responsibility for it, and there were no global regulations to control it. Many companies argued it was not happening at all. Scientific evidence and government action have fundamentally changed this scenario. I believe that the issue of biodiversity could well take the same path.”

Source: F&C Investments, 2004. Is biodiversity a material risk for companies? An assessment of the exposure of FTSE sectors to biodiversity risk. London, United Kingdom.

The question of course is whether biodiversity will follow the same path as climate change.This depends on a number of factors, including whether a clear business case for FIs can be developed and effectively communicated, the ability to create and sustain biodiversity markets, and how trends in degradation and loss of biodiversity will emerge in the coming years and decades.The most authoritative and recent publication that contributed to answering this question is the Millennium Ecosystem Assessment (MA).25 The MA assessed the consequences of ecosystem change for human well-being and established the scientific basis for actions needed to enhance the conservation and sustainable use of ecosystems and their contributions to human well-being. It involved the work of more than 1360 experts worldwide.

This chapter therefore briefly highlights the direct and indirect drivers of biodiversity loss, current trends, and based on these findings predict a plausible range of how biodiversity loss will further develop in the coming decades and how this will affect business in general.

2.1 Direct drivers of biodiversity loss

The following direct drivers have been identified:

  1. Habitat change. This has been the most important direct driver for changes in terrestrial ecosystems. Cultivated systems, as a result of agricultural activities, cover at present 24% of the Earth's surface. Agriculture causes a net loss in global forest cover of around 13 million hectares per year (Figure 2), of which Brazil accounts for 24%.26 With respect to primary forests there is an annual reduction of 0.52%. Especially in Latin America, some 70% of previously forested land in the Amazon is used as pasture, and feed crops cover a large part of the reminder.27

  2. Climate change. This driver has emerged over the last decades and is causing a rapid increase in impact across all ecosystems in the world.The new 4th assessment by the Intergovernmental Panel on Climate Change (IPCC)28, released on 6 April 2007, indicates that evidence is growing that climate change has very significant impacts on natural and human environments and that the net effects tend to be negative for industry and society. A study by Thomas et al. (2004)29 predicts that between 15–37% of species (which can be a proxy for biodiversity) in their sample of regions and taxa will be ‘committed to extinction’ by 2050 as a result of a mid-range climate-warming scenario.The study covered 20% of the Earth's terrestrial surface and used geographical range sizes of species to measure extinction risks. Since the Intergovernmental Panel on Climate Change predicts an increase in temperature of 2.0–6.4o Celsius above pre-industrial level in 2100, climate change will probably become the key driver in global biodiversity loss by the end of the century.

  3. Invasive species. The introduction of non-native species, especially in freshwater ecosystems and on islands, is among the most important drivers for species extinction (other then physical changes, modification of water regimes and pollution).

  4. Overexploitation. Especially for marine ecosystems, the most important driver for loss of biodiversity has been over-fishing. A shocking example is the major over-fishing of cod off Newfoundland (Figure 3).

    Overexploitation of bush meat (wild meat taken from the forests by local people) share similar concerns to those of fisheries, where sustainable levels of exploitation remain poorly understood. Reduction of quantities (and qualities) of specific commodities (types of meat and fish) can cause scrutiny in the supply chain and lead to extra costs for companies in the chain. This is turn can influence FIs when companies are unable to pay-back a loan (default), lower returns on investment (ROI) or reputational risk for financing companies with a bad reputation.

  5. Pollution. This has been an important driver for change in terrestrial, freshwater and coastal ecosystems and mainly concerns synthetic nitrogen and phosphorus used as fertilizers. Especially the last two decades saw a sharp increase in the use of nitrogen and phosphorus and future scenarios predict a further increase, especially in developing countries.

Figure 2. Annual net change in forest area by region 1990–2005 (million ha per year)

Source: FAO, 2005.26

Figure 3. Cod landings in tons off the coast of Newfoundland

Source: Millennium Ecosystem Assessment.2

2.2 Indirect drivers of biodiversity loss

The MA indicates that while biodiversity change is clearly a consequence of the above-mentioned direct drivers, these direct drivers are being fed by indirect drivers of biodiversity change. They are the root causes of changes in ecosystems.The following indirect drivers have been identified:

  1. Changes in economic activity. Global economic output has increased almost sevenfold between 1950 and 2000 and is projected to grow a further three- to sixfold by 2050.

  2. Demographic changes. Global population doubled in the past 40 years, reaching 6 billion in 2000, and is projected to grow to 8.1–9.6 billion by 2050. Furthermore, a major urbanization wave is occurring especially in developing countries (which will generally lead to an increase in demand for food and energy, thereby increasing pressures on ecosystems worldwide).

  3. Socio-political factors. The past 50 years have witnessed significant changes in socio-political drivers, including a decline in centralized authoritarian governments and a rise in elected democracies, which allows for new forms of management, in particular adaptive management, of environmental resources. Examples in recent years include Ukraine and Kyrgyzstan.

  4. Cultural and religious factors. This can influence people's perceptions of nature and consumer preferences.

  5. Scientific and technological change. Looking at it from a biodiversity perspective, this can be regarded as a double-edged sword. On the one hand it can lead to increased efficiency in resource use and on the other hand it can provide the means to increase the exploitation of resources.

2.3 Trends and estimates for future biodiversity loss

There is a growing body of literature that provides trends on the decrease in populations and/or extinction of certain specific taxa of species, such as mammals, amphibians, birds, etc.A yearly global study, undertaken by WWF since 1998, is called the Living Planet Index.m This index is a measure of the state of the world's biodiversity based on trends from 1970 to 2003 in over 3600 populations of more than 1300 vertebrate species from around the world. It is calculated as the average of three separate indices that measure trends in populations of 695 terrestrial species, 274 marine species, and 344 freshwater species.The overall index in the 2006 report shows a 30% drop, compared to the baseline year 1970.30 Further evidence on biodiversity decline can be provided from IUCN's Red List Programme.n Its indices illustrate the relative rate at which a particular set of species changes in overall threat status (i.e. projected relative extinction-risk), based on population and range size and trends as quantified by Red List categories.The indices provide evidence of the decline in (critically) threatened and/or vulnerable species, which have declined on average about 8% in 16 years for threatened mammal, marine and freshwater bird species from its baseline year 198831 (Figure 4).

Figure 4. a. WWF's Living Planet Index (1970–2003)30 and b. IUCN's Red List Index for birds in different ecosystems (1988–2004)31

With respect to trends of future losses, the direct drivers will likely increase their impact on biodiversity in the coming decades according to the Ecosystem Millennium Assessment (MA).The four scenarios that the MA used indicate a loss in habitat, calculated with the IMAGE model, between 13–20% using 1970 as a baseline. Based on well-established species-area curves for vascular plant species the loss in habitat will lead to a loss in biodiversity between 10–15%.This rate of extinction will further increase through overexploitation, invasive species and climate change. Based on data that the MA team had available they predicted a huge increase in loss of species of more than 100 times the current extinction rates (Figure 5).

Figure 5. Estimations of species loss for the past and future

Source: Millennium Ecosystem Assessment.2

2.4 Translating biodiversity loss into business risks and opportunities

From a business perspective it is important to understand how these trends and expectations translate into business risks and opportunities for the private sector. The MA2 recognized the following opportunities:

Compared to carbon, it can generally be said that biodiversity as a commodity is much harder to quantify, package and trade. However, in order to increase leverage for biodiversity conservation a noticeable development has emerged that attempts to internalize the value of biodiversity and other ecosystem serviceso into tradable products.This is called “payments for environmental services” or “payments for ecosystem services”, which can be seen as a means of broadening the types of financial mechanisms from purely public donations, governments' Overseas Development Assistance (ODA) and private donations, to market mechanisms.Two sizeable markets have already been established in the United States: wetland mitigation banking (offsetting damage done to wetlands) and conservation banking (offsetting of land containing endangered species).These markets have been similarly established as those for carbon, namely by placing a gap or floor.At present, these markets represent market volumes of US$290 (wetland mitigation banking) and US$40 million (conservation banking).p Valuable and rewarding attempts have been made as well in Latin America (particularly Costa Rica), Europe,Asia and to a lesser extent in Africa32 although these often consist of one-off deals rather then fully grown markets.

Other than opportunities, the risks and challenges that the private sector faces are arguably more substantial. Consider the case of Associated British Ports.This company saw a drop in its stock of almost 10% in a single day after the announcement by the Ministry of Transport to block a harbour development plan for Southampton by this company. One of the reasons was that the company had insufficiently taken account of the environmental and biodiversity risks (see Box VIII).The MA recognized the following challenges and risks for the private sector in general:2

The example of Associated British Ports is one in a growing body of evidence that indicates that global decline in biological resources is slowly setting in motion a number of powerful drivers, such as concerns by governments and policy makers, shifting consumer preferences, scrutiny from pressure groups and investors who increasingly demand good company-husbandry. These drivers tend to interact and amplify each other, which is culminating in a growing relevance of biodiversity to the private sector (see Figure 6).

Figure 6. Linking biodiversity loss to business relevance

The question of course is to what extent do the above-mentioned risks apply to the financial sector? Is there a business case for biodiversity from a financial sector's perspective? This will be the scope of the following chapter.

l See New Energy Finances website: www.newcarbonfinance.com

m http://www.panda.org/news_facts/publications/living_planet_report/index.cfm

n http://www.iucnredlist.org/

o These include: 1) Provisioning services (food, fiber, genetic resources); 2) Regulation services (e.g., climate regulation); 3) Cultural services (e.g., spiritual and religious values and recreation and tourism).

p See www.ecosystemmarketplace.com.The market volume for wetland mitigation banking has been measured between 1 January 2000 and 30 April 2005.The market volume for conservation banking has been measured between 1 January 1992 and 25 May 2005.

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