4. Assessing biodiversity business risks for commercial banks, asset managers and insurers

Where the previous chapter focused on what types of BBRs the financial sector is facing and what evidence is available to back this, this chapter will go into more detail to see how retail and commercial banks, asset management, and (re)-insurance firms can be exposed to BBRs. This way of dividing the financial sector is for example also used by the Global Reporting Initiative60, though it is recognized that these segments do not cover the full financial sector. However, both this chapter as well as the previous one are also useful for other types of financial institutions, most notably private and institutional investors. Section 4.1 outlines a number of factors that can contribute to differences in risk exposure for different types of financial institutions. Sections 4.24.4 provide further details of what this means for each type of FI.

4.1 Biodiversity risks can differ within the financial sector

Not all financial institutions face the same level of biodiversity risks (and opportunities).There are a number of factors that determine to what extent a financial institution is prone to biodiversity-related risks. These may include:

Table 2. High risk sectors listed on the FTSE indices according to biodiversity risk exposure

Red zone: High-risk sectors
Construction & Building materials
Food & Drug retailers
Food Producers & Processors
Forestry & Paper
Leisure & Hotels
Oil & Gas

The following sections will briefly focus on how biodiversity risks can emerge for retail and commercial banks, asset management, and (re)insurance. Please note that a considerable number of large financial institutions cover all of the above mentioned segments, so-called universal banks.bb

4.2 Commercial and retail banking

Retail banking involves the provision of commercial and private banking services to individuals, such as offering loans, making investments and transmissions. Commercial banking involves all transactions with organizations and business counterparts of all sizes. The types of services that are offered include, but are not limited to: Corporate banking, project and other types of structured finance, transactions with small and medium-sized enterprises (SMEs) and the provision of financial services to governments. It also includes corporate advisory services, mergers and acquisitions, equity/debt capital markets, and leveraged finance (i.e. lending money for transactions).

Note: The focus on this report has been put on commercial/corporate banks, as BBRs can foremost be expected from a bank's activities with commercial corporations, rather than with its retail clients.

The only true rationale for banks to factor-in environmental considerations, other than regulatory obligations, is when 1) environmental issues have an impact on a client's ability to pay back a loan – default risk; 2) security of an asset used as collateral; or 3) when it is directly held liable for environmental pollution (direct liability risk). Other than that, impacts on a bank's reputation and shareholder value (e.g., investors demanding good environmental practices by the bank in which it invests) are also factors that enhance the interest of commercial banks in ecosystems from a risk perspective.

4.2.1 Environmental risk management by commercial banks

About 15 years ago the first European and US banks started to integrate environmental considerations into their credit-lending activities.4 While a lot of banks are struggling to integrate overall environmental risks into their lending activities5, recent analysis indicates that more and more banks integrate these considerations into their credit risk management procedures.6,7 Typically, environmental considerations are considered in the early risk identification phase of the credit risk management process.8 Banks factor-in environmental risks to a different degree, ranging from merely acknowledging environmental risks on the sideline to fully integrating environmental risks in the whole credit risk management process.

ISIS Asset Management evaluated the Environmental Credit Risk Assessment (ECRA) policies of 10 banks in its Pan-European portfolio in 2002.The purpose of the study was to benchmark those 10 companies and enable ISIS to evaluate the potential impact of such practices on profitability and ultimately shareholder value40 (Table 3). Banks that participated were judged on both their written policy on ECRA and the degree to which such policies have been operationalized.

Table 3. Benchmarking of ECRA policies of 10 European banks40
Race leaders
Barclays Credit Suisse Group Lloyds TSB
Chasing pack
HSBC ING Group Royal Bank of Scotland Standard Chartered
Starting grid
Santander Central Hispano Société Générale UnoCredito Italiano

The differences in ECRA policies between the 10 banks are justified by the fact that the “starting grid” banks have just recognized the relevance of ECRA, while the “chasing pack” banks have established internal ECRA policies and have started to apply these policies in operating procedures in selected products. “Race leaders” can point to relatively mature and detailed review policies, training systems and communications.

“Besides project finance, long-term export finance / commodity finance would be another type of service where it is possible to account for biodiversity risks.”

Foster Deibert, WestLB AG

Most large banks apply due diligence to loans, these days, when there is reason to believe that impacts on the environmental may be significant. The Swiss bank UBS for example applies due diligence to identify (environmental) risks at an early stage. When it appears that no significant negative impacts on the environment are expected the analysis is finalized. When the environmental risks cannot be ruled out a more detailed environmental assessment will be carried out. Such an assessment can use international standards (e.g., the environmental policies developed and applied by the World Bank and the IFC). Should there remain reason for concern, UBS outlines that it may either 1) adapt the terms of the loan contract; 2) engage in a dialogue with its client; or 3) decline the transaction altogether.61 The European Bank for Reconstruction and Development (EBRD), which can be regarded as a bank under public law, does the same, but explicitly states that it uses national and international best practice in the areas of ecology, worker protection and local communities in all their loan activities. In addition the EBRD uses an “exclusion list” to refrain from financing certain activities or engage in certain sectors.62 Other banks have adopted the bank's extensive environmental guidelines as well.

4.2.2 How can commercial banks be exposed to biodiversity risks?

Generally speaking biodiversity is no different from other environmental (or social) issues. It only becomes truly material to banks when it impacts on a bank's reputation, credit risk, collateral, liability risk or when new regulations are imposed by a government. Taking into account these types of risks, it is worthwhile assessing what factors contribute to a certain type of financial product or service to be exposed to BBRs and what factors contribute to a bank's ability to respond to it. Factors that contribute to the exposure of BBRs include (but may not be limited to):

Table 4 provides a preliminary overview of how these factors may influence the extent to which different types of loans and other financial services are exposed to biodiversity risks.

Table 4. How different services and products by commercial banks may be prone to biodiversity risks
Type of service Characteristics Type of risk
Corporate finance Banks with large portfolios of companies that have a profound impact on ecosystems might be at risk, especially when the loan contract extends over a considerable period.
  • Credit risk/non-performing loans

  • Reputational risk

Specialized/structured finance (e.g.):
  • Project finance

  • Export credit

In case of recourse projects, for example project finance, a bank has a sound reason to back-up all possible risks including the biodiversity-related ones. But also for other types of specialized finance, such as export credit, biodiversity considerations can be factored-in.
  • Reputational risk

  • Regulatory constraints

  • Credit risk

4.2.3 Has biodiversity appeared on the radar screen of the commercial banking sector?

A report by Oxera63 in 2000 identified the extent to which a number of private sectors, including the banking sector, were engaged with performance measurements of biodiversity. It shows that at the time the report was released the banking sector scored worst out of four sectors; below 5% (Figure 10).

Figure 10. Average percentage score for engagement with and action on biodiversity63

A report by F&C Asset Management in 200434 provided an indication of how the issue has rooted in the financial sector in the UK. The study used the Environment Index (previously named the Business in the Environment Index – BiTCdd)64 as an indicator to assess whether companies in these sectors are addressing biodiversity. Companies that identified biodiversity as one of their most “significant impact areas” could fill out the biodiversity section of the questionnaire. It turned out that of the 96 financial institutions that are listed on the FTSE350 Index, 34 decided to complete the Environment Index questionnaire and of these 34 companies, about 12% completed the biodiversity question in the questionnaire. This means that on a national scale the issue has hardly appeared on the radar screen of banks and other FIs.ee

It is known, however, that next to alternative banks (which consider a positive influence on the environment as part of their strategy and business operations such as the Dutch-based ASN Bank) the issue is starting to be recognized by a number of large international banks as well. To get a feeling for how biodiversity has been addressed by these companies at present an assessment has been conducted of 11 commercial and investment banks (Table 6).These banks were chosen for their global reach and/or involvement in the development and adoption of the Equator Principles. Furthermore these banks represent about 17% of total assets in the commercial banking sector worldwide (Table 5),65 which provides a potentially huge influence of any biodiversity-related policies on their corporate clients (please note that Goldman Sachs, which is an investment bank, has been included as well).

Table 5. Banks that are covered in the assessmentff
Bank Total assets (US$ million) Dec. 2006
ABN Amro 1,038,970
Barclays 1,586,881
Citigroup 1,494,037
Deutsche Bank 1,170,323
Goldman Sachs 706,804
HSBC Holdings 1,501,970
JPMorgan Chase 1,198,942
Radobank Group 597,138
Royal Bank of Canada 398,051
Westpac 198,358
WestLB Group 312,532
Total assets 10,204,006
Total assets banking sector 60,500,000
% of total within sector 17%

The following information sources were part of this process: 1) expert consultations; 2) company websites (specifically the sections on environment and sustainability); 3) annual CSR/ Sustainability reports; and 4) other publicly available reports or guidelines.

The review provides information on the following indicators, which are elucidated in Table 6:

Table 6. Integration of biodiversity into banking operations at present

Figure 11. How the Equator Principles have been implemented by a number of corporations in the banking sector for the fiscal year 2005 (see also Box VIII)

Box VII provides an example of a leader in integrating biodiversity in credit lending – Rabobank. This bank is using a CSR policy for all its credit-lending activities as of the 1st of February 2007 where 3 out of 10 guiding principles touch upon biodiversity, which risk analysts and client relation managers are obliged to use.

Although most of these banks also have extensive programs in place that support various social and environmental initiatives, including biodiversity-related ones, this is regarded as philanthropy and is therefore left outside the scope of this assessment.

Box VII. Rabobank's CSR tool: Integrating ESG (including biodiversity) deep into the banks's operations

As of the 1st of February 2007 Rabobank is using a Corporate Social Responsibility tool throughout all its credit-lending activities (!) regardless of the credit sum (with regard to SMEs, there is a €1 million minimum).

The essence of the tool is that Rabobank engages with its clients in a dialogue on a number of social and ecological issues that are important within the sector, or within the country in which the company is active. For this purpose the bank applies ten general issues that it uses as a frame of reference for its sector-specific policy documents, the review of its clients and the assessment of credit applications. Three of these touch upon biodiversity (environmental pollution, depletion of natural resources and cruelty against animals).

To support its client relation managers and credit analysts the bank has developed sector-guidelines for the 1) leisure sector; 2) construction sector; 3) fisheries sector (Europe); 4) palm oil; 5) chemicals; and 6) timber sector. Furthermore the bank is in the process of developing guidelines for the soy sector and for biomass and climate change. The most important features of Rabobank's engagement strategy is that these are 1) issue-oriented (e.g., on child labour, environmental pollution); 2) use simple language to make it comprehensible to the client relation managers that are dealing with clients directly; and 3) specify unwanted practices (e.g., dynamite fishing) and good practices (e.g., nationally and internationally accepted industry standards, conventions and codes of conducts) in order not to appear biased towards their clients. Another very important feature of Rabobank's engagement strategy is that it is compulsory for the client relation managers and credit analysts to use the tool for every credit application. This is to avoid informal use of the tool.

The rationale for Rabobank to use such a tool or engagement strategy is that it believes that certain extra-financial issues can become a risk or an opportunity for its clients and therefore for the Rabobank Group. Firstly the bank believes that failing to account for social and environmental issues by its clients can undermine the continuity and the competitive position of these clients, thereby leading to increased default risk for Rabobank. Secondly the bank believes that identifying commercial opportunities connected to social and environmental issues, at an early stage, can lead to the development of new innovative products and services.

Source: Rabobank Group Corporate Social Responsibility Report 2006. Rabobank: Utrecht.

Box VIII. The Equator Principles (EPs), a trigger towards integrating sustainability into project finance and beyond?

Influenced by the campaigning of the NGOs Rainforest Action Network and Friends of the Earth, and developed by the IFC in 2003 in consultation with a number of major banks (such as Barclays, HSBC and ABN AMRO), subsequently redrafted in July 2006 in accordance with IFC Safeguard Policy Review, the Equator Principles represent the first global effort to streamline project finance towards a more sustainable path. The principles are applied to project finance projects with a capital cost of more than US$10 million.

The EPs consist of 10 principles which serve as guidelines for banks (more recently also other types of financial institutions are adopting the principles, such as export credit agencies) which voluntarily commit themselves to screening project-finance applications on a number of social, human-rights and environmental issues (including biodiversity), based on A, B and C categories (Figure 11).

The guidelines are naturally set more strictly for category A and category B projects (when carried out in non-high income countries, as determined by the World Bank methodology). In addition, the following exclusion criteria are used. If the project meets any of these criteria, it is rejected straight away:

The most serious critique of NGOs of the newly launched EPII, however, is the lack of consistent and rigorous implementation of the EPs. In addition, they feel that the scale of the impact, not the nature of the transaction, should be the common denominator when applying the EPs. It can be recognized though that the principles have triggered a greater effort by FIs towards sustainable finance as the new set of principles also includes project finance advisory services. In addition, recently a growing number of financial institutions are expanding the EPs to other financial services such as corporate loans, debt security underwriting and equity underwriting for clients in certain sectors (Table 6.). This can clearly be seen as a sign that financial institutions are making serious efforts towards financing more sustainable businesses and projects.

However, the real contribution of the principles will emerge in a few years when it becomes clear which FIs have acted according the principles and which ones have used it as a public relations stunt.

Source: www.equator-principles.com; Bank Track, 2006. Equator Principles II: NGO comments on the proposed revision of the Equator Principles. April 26, 2006.

It can be concluded from Table 6 and Figure 11 that on a general level environmental issues are starting to be recognized by these banks as nearly all have some sort of environmental policy in place as well as producing annual sustainability reports. When focusing specifically on biodiversity related issues, the following can be concluded:

4.3 Asset management

This category of the financial sector refers to the management of pools of capital on behalf of third parties. Asset management (AM) involves investing in the following types of asset classes: equities, bonds, cash, property, international equities & bonds, alternative assets (e.g., private equity, venture capital, mutual & hedge funds). It also encompasses elements of investment banking.

4.3.1 Environmental risk assessment by asset managers

Before proceeding with the actual environmental risk screening it is important to know how asset management works. The basic idea behind asset management is that a manager of an AM firm pulls together a number of companies in a fund, on behalf of its investors, often with a particular focus on a 1) sector; 2) commodity; 3) region, to buy-in stakes in the company. In the case of public companies, the fund will buy stocks of a company (e.g., mutual and hedge funds) and in cases of non-listed companies the fund will buy into a private company (i.e. private equity funds). Fund managers are usually seeking the highest returns on their investments for their investors, which may either be private investors or institutional ones (e.g., pension funds).

Socially Responsible Investing (SRI) has emerged over the last two decades within the AM world. SRI focuses on investments in sectors or companies that demonstrate progression towards sustainable development. SRI essentially involves the following strategies67:

While there is no single approach to SRI and although it remains difficult to define, there is a general trend in terms of absolute growth in SRI throughout Europe and the USA. The European Social Investment Forum (Eurosif), has made a division between “core SRI”gg and “broad SRI” and came to figures for core SRI of €105 billion and broad SRI €1.03 trillion (December 31st 2005, see Figure 12). Within the United States, total SRI assets rose from US$639 billion in 1995 to US$2.29 trillion in 200568 (Table 7).

Figure 12. SRI strategies as applied in Europe December 31st, 2005; Billion €)67,hh

Table 7. Trends in SRI in the USA (1995–2005)68
(in billions) 1995 1997 1999 2001 2003 2005
Social Screeing1 $162 $529 $1,497 $2,010 $2,143 $1,685
Shareholder Advocacy $473 $736 $922 $897 $448 $703
Screening and Shareholder2 N/A ($84) ($265) ($592) ($441) ($117)
Community Investing $4 $4 $5 $8 $14 $20
Total $639 $1,185 $2,159 $2,323 $2,164 $2,290

Source: Social Investment Forum Foundation

1 Social Screening includes mutual funds and separate accounts. Since 2003, SRI mutal fund assets have increased while separate account assets have declined as single issue screening has waned and shareholder advocacy increased on the part of institutional investors.

2 Assets involved in Screening and Shareholder Advocacy are subtracted to avoid double counting. Tracking Screening and Shareholder only began in 1997, so there is no dataum for 1995.

Many fundamental (i.e. conventional) investors consider environmental issues to be a topic simply for SRI markets, as SRI markets are associated with people who are putting environmental and social issues at the head of investment decision making (instead of financial ones) and would therefore be satisfied with lower returns.

It should be understood, however, that environmental issues can definitely have implications for fundamental or conventional investors as well. When environmental risks are not properly factored-in to the screening of companies for a certain portfolio, AM and investors neglect the fact that the respective companies may be at risk from regulatory, reputational and litigation risks. This might in turn have implications for the share or stock price of the company and thereby on the performance of the fund (and the eventual return for the investors). A report by Goldman Sachs that specifically focused on climate change, states that if companies do not act proactively on this issue it might become a liability, both for them as well as for their investors69.

Other than understanding that environmental issues are not solely related to SRI is the perception that SRI represents a niche market. Subsequently, there are doubts whether it can become more widely accepted to support a dedicated effort in this area. Notwithstanding the growth in SRI assets, prior investment results in this area have been mixed.69 Since SRI investing does not always deliver suitable investment returns, this may not be a sustainable option for several institutional investors and, therefore, there may not be high ongoing demand for SRI investment vehicles. However, recognizing that current SRI assets in the USA account for 9.4% of total assets under management68 this perception is somewhat outdated as well. It can therefore be argued that SRI is moving away from the perception that it represents “a niche market” within conventional AM.

In addition, recent academic work and developments in financial markets point to the fact that SRI can lead to superior portfolio performance compared to similar fundamental funds. Derwall et al. (2005)70 show evidence that large-cap companies labelled “most eco-efficient” sizably outperformed a less eco-efficient portfolio over the 1995–2003 period by six percentage points, under different transaction cost scenarios. The difference could not be explained by differences in market sensitivity, investment style or industry bias.

Even more recently GLG partners, which is a US$17 billion London hedge fund manager, announced to investors on 16 February 2007 that it planned to start an Environmental Fund filtering the greenest companies from its US$1.5 billion European Equity Strategy. GLG is aiming to pick stocks of companies that have a 30% “lighter” impact on the environment compared to average companies. GLG announced that backtesting proved the viability of their environmental approach, which assumed a long-only strategy that would not sell shares short to profit from price falls, produced annual returns of 27.6% after fees (compared to a main strategy (26.4%) from the European Equity fund).71 Another hedge fund that runs environmental screens is Green Cay Asset Management. The number of mutual funds that screen for environmental (and social) aspects, however, far exceeds the number of hedge funds. Currently in Europe alone there are about 300 mutual funds that screen on sustainability aspects.8

These developments have not only arisen because of concerns by private investors, institutional investors are also increasingly turning towards including environmental screening as part of the process. Two noteworthy developments should be mentioned. First, Investor Network on Climate Risk (INCR), a coalition of investors, representing US$2.7 billion in assets, promotes investor and corporate engagement and understanding of the range of risks posed by climate change69.The second is the Enhanced Analytics Initiative (EAI)jj, which is a collaboration of mainstream asset owners and asset managers who believe that extra-financial issues (EFI), which are fundamentals that have the potential to impact a company's financial performance or reputation in a material way, but are generally not part of traditional fundamental analysis such as climate change or branding, need to be incorporated in investment research. It is believed that incorporating these hard-to-monetize and quantifying EFIs will ultimately lead to more informed investment decisions and added value in the long term. EAI members, who represent assets under management of €1.3 trillion, have allocated a minimum of 5% of their respective brokerage commission budgets for the first half-year of 2005 to sell-side research houses who analyze EFIs and intangibles. Although biodiversity was not particularly mentioned, this is a sign that large institutional investors are also starting to realize that critical issues, such as the environment, have remained absent in traditional fundamental analysis for too long.

“Private equity would be another asset class where biodiversity risks can be explicitly accounted for, as private equity investors tend to be close to companies and maintain a lot of control.”

Alexandra Tracy, ASrIA

4.3.2 How can asset managers be exposed to biodiversity risks?

AM are less directly exposed to BBRs than commercial banks, since they are less directly engaged with companies. In addition, AM often have large numbers of companies in a portfolio. However, while individual underperformance of a particular company can easily be overcome at present, the business relevance of biodiversity is further set to increase. It is therefore important for AM, institutional & private investors to understand what factors are contributing to a greater exposure of BBRs to their services. These include (but may not be limited to):

Table 8 provides some preliminary insights on how these biodiversity risks can impact specific types of AM funds: private equity, mutual funds and hedge funds. In principle, all types of funds are potentially exposed to BBRs when it somehow leads to underperformance of a fund. In addition, fund managers can for example become exposed to increased regulation from policy makers.

Table 8. How different types of investment funds may be prone to biodiversity risks
Type of fund Characteristics Type of risk
Mutual funds Mutual funds, which typically turn over within a year, are perhaps the types of funds most exposed to BBRs (and other environmental risks). Currently, there are about 300 mutual funds available that are managed according to sustainability and social responsibility.73
  • Underperformance due to neglecting BBRs

  • Regulatory constraints

Hedge funds Their nature of pulling in and out of companies within days or months, make hedge funds extremely flexible or volatile and therefore appear to be less exposed to biodiversity (and other environmental) risks, except of course when a fund underperforms due to environmental reasons.
  • Underperformance due to neglecting BBRs

  • Potential regulatory constraints

Private equity These types of funds often operate on long-term strategies (> 3 years). These types of funds operate without the oversights and reporting requirements of public markets.
  • Underperformance due to neglecting BBRs

4.4 (Re)insurance

Insurance can be regarded as a promise of compensation for a specific potential future loss, in exchange for a periodic payment and includes both pension and life insurance services. The types of services that are offered in this type of category are provided directly or through independent financial advisors to the general public and employees of companies. It also covers the insurance of products or services for businesses and reinsurance services. Reinsurance involves the risks borne by insurance companies being taken on by another company or companies. In essence, reinsurers insure insurers.

4.4.1 Environmental risk assessment by (re)insurers

Arguably the financial segments that are most interested in environmental (and biodiversity) risks and how these emerge and transfer over time are the insurance and reinsurance sectors. They face environmental risks when there is an improper calculation of the possibility of an environmental harmful occurrence and the economic costs as a result of the damage, in relation to the price an insured party is paying to cover for these risks.

Environmental damage may manifest itself in many ways. Traditional types of environmental damage (re)insurance firms cover include:74

Recently, however, the insurance sector has had to grow accustomed to new types of environmental risks. The most noteworthy of all are the increases in extreme weather events as a result of climate change. Increases in number and especially severity of hurricanes across the Atlantic coast of the US are leading to high economic costs. While hurricane Andrew in 199276 caused the biggest loss in the history of natural catastrophes, a series of hurricanes in 2005, of which hurricane Katrina was the most expensive, have caused billions of dollars of damage again. As a result prices have risen by up to 300–400% for oil companies in the Gulf of Mexico seeking insurance and insurers seeking reinsurance to protect against offshore losses, including damage from hurricanes.77 In 2003, climate change took centre stage as countries across Europe experienced their hottest summer on record. Economic losses from crop failure and forest fires alone accounted for US$14 billion. During 2002, major floods across Europe caused total damage of almost US$ 16 billion and insured losses of just over US$3 billion.78 A study by Swiss scientists79 combined SwissRe's climate change loss model with current (IPCC) climate models to assess how trends in economic loss due to winter storms in Europe will likely emerge. They concluded that claims are forecast to increase by 16–68% over the period 1975 to 2085 (in constant currency).

Environmental risk assessment in the (re)insurance sector means that environmental events (such as extreme weather events) have to be systematically integrated into risk assessment and risk management processes. While climate change has risen up the agenda of the (re)insurance business, biodiversity is a different story.

4.4.2 How can the (re)insurance sector be exposed to biodiversity risks?

Biodiversity issues mainly come into play in the (re)insurance business when there are changes in liability. Specifically for biodiversity, this can happen when operators have caused damage to ecosystems in terms of sudden events or gradual pollution and they are being held liable for that. Liability is driven by changes in regulation and regulation in turn is driven by forces in society.

So far, liability from environmental damage has only extended to property damage or personal injury. This is because biodiversity comprises a number of characteristics that make it difficult to insure. Table 9 provides a number of conditions that need to be met in order for a commodity or activity to be insurable and to what extent this accounts for biodiversity.80

However, declining global biological resources and expectations that this will continue may extend environmental liabilities to fauna and flora issues as well.81 A noteworthy development is taking place in the EU at present, as environmental liability will be extended to not only include personal injury and property damage, but a stricter regime that makes operators of sites liable for damage to the environment including flora and fauna.82 This new directive will come into force as of 30 April 2007 throughout the whole EU.83 As traditional liability and property policies do not adequately cover environmental risks, the (re)insurance sector will need to adjust to this new liability directive.

In general, the (re)insurance sector will need to respond to changes in ecosystems and subsequent stricter national (liability) regulations. Also extreme weather conditions and the effects of climate change on ecosystems are elements the (re)insurance sector will need to respond to in order not to face excessive risks.

Table 9. The insurability of the risk of biodiversity loss80
Conditions for insurability Are these conditions met for biodiversity? How can the issue be addressed? What role for government action?
  1. Risk pooling across many insured persons/companies
As long as biodiversity is regarded a public good it is likely to be insurable. Possible use of reinsurance. Government could act as insurer, with the taxpayer bearing the costs of error if funds do not pay out.
  1. Clear, definable loss
Demonstrating quantified damage from biodiversity loss is extremely complex. Economic valuation techniques can minimize uncertainty. Potential for the government to act as insurer.
  1. Availability of prior information about probabilities and size of event
Rates of biodiversity loss are scientifically disputed, as are causal mechanisms on which to base probabilities. Possible use of reinsurance. Risk and environmental audit can reduce uncertainty about likelihood and scale of event. Government could act as insurer as above.
  1. No moral hazard
No, but could potentially be addressed. Address via acquisition of information, deductibles, co-insurance and upper limits. Government information campaigns could change behaviour.
  1. No adverse selection
No, but could potentially be addressed. Information acquisition to impose differentiated premiums by risk group. Assumes knowledge of causal factors in biodiversity loss and ascription of responsibility for loss. Government information source may help insurers.
  1. Must be enforceable
It remains difficult to enforce international biodiversity agreements (such as the CBD). Laws may impose penalties for non-compliance. Legal liability rules to be established by governments.

bb Universal banks typically cover: retail and commercial banking; investment banking. and asset management.

cc This is a lending arrangement, where the lender or creditor is not permitted to request repayment from the parent company (i.e. debtor) if the borrower (its subsidiary) fails to meet their payment obligation.

dd The Environment Index is a product of Business in the Community (BiTC). It is a business-led, voluntary and self-assessed corporate environmental benchmark. See http://www2.bitc.org.uk

ee This may also be due to an increasing phenomenon, namely “survey fatigue”.

ff Numbers for total assets were acquired from Forbes Fortune 500 (as of December 2006).

gg Core SRI: Ethical exclusions, positive screening (including Best-in-class, Pioneer screening); Broad SRI: Core SRI plus simple exclusions, including norms-based screening, plus engagement and integration.

hh Please note that the total of individual strategies will be superior to total SRI given the areas of overlap.

ii As far is this overview is concerned it can be concluded that at present only the Environment Index (from Business in the Community) is also factoring in biodiversity issues into their rating system.

jj The EAI currently has 14 full members and includes ABP Investments, which is the second largest pension fund in the world. See www.enhancedanalytics.com

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