5. A general procedure to account for biodiversity risks

Following chapter 3 and 4, which focused specifically on how biodiversity risks can impact on FIs, chapter 5 provides a general procedure for those FIs that understand the potential materiality of the issue and that want to identify how biodiversity can be integrated into their business structures. Section 5.1 outlines first of all the abilities by FIs to retain BBRs. This provides the bases for the procedure, which is highlighted in section 5.2, how biodiversity can be integrated in (existing) risk management procedures (RMP). Section 5.3 outlines a number of factors that contribute to a successful integration of biodiversity into risk management procedures.

5.1 Financial institution's ability to mitigate biodiversity business risks

Before focusing on a procedure to account for biodiversity in a company's RMP, it is foremost important to realize what sorts of possibilities different types of FIs have in retaining biodiversity risks.

5.1.1 The ability of commercial banks to mitigate biodiversity business risks

Commercial banks have the ability to respond to BBRs by means of thorough due diligence work and/or environmental impact assessments (EIA) that include biodiversity components. Also, constructive dialogues with clients, engagement, are an important means to reduce exposure to BBRs, for example by pointing clients to sector-specific best management practices (BMPs).

However, even when banks have identified biodiversity as being material in their credit activities, there are a number of factors that determine whether banks are capable of addressing and mitigating these BBRs:

5.1.2 The ability of asset managers to mitigate biodiversity business risks

Where commercial banks can integrate biodiversity performance tools/indicators into their risk management procedures, asset managers have two different mechanisms in place to mitigate biodiversity risks:

  1. Voting during shareholder meetings. AM have the ability to ask questions and to use (proxy) voting as a means to force the management of a company in which it has a stake to change its policies on biodiversity.

  2. Negative and positive screening. AM can screen-out sectors, companies or specific issues (e.g., child labour) for all or certain portfolios. Although it is becoming more common to screen-out certain unethical sectors, such as the weapons sector, it can be difficult to screen-out on issues such as these (biodiversity, child labour, human rights). Rather, it is better to engage with companies in a constructive dialogue to solve any unethical or environmental issues.

5.1.3 The ability of (re)insurance firms to mitigate biodiversity business risks.

As biodiversity possesses a number of characteristics that make it difficult to develop insurance products for, should the insurance and reinsurance sector start to develop services and products tailored to biodiversity, the most likely strategy for (re)insurers would be to start offering products with higher-than-normal insurance premiums.

5.2 A general procedure to account for biodiversity in risk management procedures

The procedure, which provides a systematic overview of existing tools, is one possible way for FIs to see how impacts on ecosystems can be identified, and what tools are available to mitigate any BBRs they might be exposed to, as well as what procedures banks, asset managers and insurers have in place to mitigate BBRs (e.g., due diligence, EIA, engagement, etc).The steps are highlighted below (see Figure 13).

Figure 13. A general model to account for biodiversity risks in different segments of the financial sector

Identifying important biodiversity areas. The first step concerns identifying if there are any biodiversity-adverse impacts to be expected from a certain project or investment. There are a number of tools available.

If so, a FI should look at the possibilities there are to reduce the impact on ecosystems thereby mitigating any business risks that can emerge.

Tools that factor-in integrating biodiversity into RMP. In order for FIs to mitigate biodiversity risks they need to be fully aware of the tools they can use in their risk management processes. Depending on the type of transaction and the type of financial service, FIs could pick the appropriate ones. These can be integrated into existing risk management procedures (RMP).

Conventions and sector-specific BMPs. In addition to available tools, client relation managers, credit analysts, fund managers and anybody else who will be working on a day-by-day basis with projects, corporate loans and different types of equity, need to be aware of the international accepted standards sector-by-sector to work with their clients or the companies in which they want to invest, for them to adhere to the highest standards.

All these tools can be used by FIs to strengthen and enhance their existing RMP. They can be integrated into a FI's EIAs, due diligence procedures, voting procedures at shareholder meetings, positive & negative screening for (new) investment portfolios, and insurance premiums, among others. The different steps are further specified in Figure 13 and sections below.

5.2.1 Identifying important biodiversity areas

When identifying if there are business risks at stake it is important to be aware if the presumed activities and impacts will occur in areas that have a significant biodiversity value. This includes, but is not limited to, areas of high endemism levels or high levels of species richness. There are a number of organizations and initiatives that have attempted to classify areas of specific biodiversity value through specific tools. These include, but are not limited to:

These systems are very helpful in identifying regions and areas that have high biodiversity values. However, it is virtually impossible to rule out economic activities in areas that are recognized by the above-mentioned tools. Consider for example a WRI report that concluded that “...three quarters of active mines and exploratory sites overlap with areas of high conservation value and areas of high watershed stress”.53 In order to be fully useful to the private sector, a certain refinement would be helpful to identify what areas are particularly important from a biodiversity perspective. In effect, this means that a tool should be as site-specific as possible (smallest geographical scale).

An effort led by Conservation International and BirdLife International is in the process of forming a consortium with various environmental NGOs and many representatives from the private sector to connect the various databases each organization has with respect to its own method or algorithm to classify areas of exceptional biodiversity and how this should be transformed into a format that would be useful for private business. The idea behind this initiative is to develop a “bottom-up” tool whereby data being gathered by each environmental NGO is transformed into such a format as to be useful to a wide range of private sectors that have an impact on ecosystems. Such a tool would describe in much more detail which spots contain exceptional biodiversity and/or endemism values, including possible guidance for companies how to minimize their impact on these areas.85

5.2.2 Tools developed for the private sector that factor-in biodiversity

There is a wide variety of tools available for the private sector to enable them to incorporate environmental considerations within their business operations. Some of these tools specifically factor-in biodiversity considerations. Others include it as one factor out of several (ESG) factors. Table 10 provides an overview of the different tools available that make reference to biodiversity in some way and which can be used by FIs to assess if a company is addressing biodiversity in its operations.

Each of these tools has its own strength in terms of focusing on a specific corporate segment (i.e. governance; strategy/policy; management and implementation; assurance and reporting).A preliminary attempt is made to point out how these tools can be used as indicators of biodiversity management/performance in the risk management processes of different types of financial services/products.

The Equator Principles and the Biodiversity Quick Scan focus specifically on the financial sector. These tools enable FIs to take account of biodiversity (i.e. their impact and/or how it can be reduced).

Most of these instruments and initiatives can function as indicators in different types of financial services, while others appear to be useful only for specific types of financial services.

5.2.3 Industry standards and international conventions

In addition to available tools that FIs can use for their operations, a number of FIs have indicated (during the interview survey) that they would greatly benefit by knowing what good sector-specific industry practices there are. In this way, they can refer to these standards when issuing loan contracts or advising clients what the best available industry guidelines, benchmarks and industry bodies are that they can follow in order hedge BBRs. The difficulty with sector-specific best management practices (BMPs) is that there are so many in certain sectors (e.g., for the tourism sector alone there are already 150 different types of certification). Table 11 provides an overview of some guidelines for those sectors that can be considered relevant for biodiversity. The list has been structured according to the following criteria:

Please note that this list is by no means definitive. Rather, it can be used as a simple overview by risk analysts, client relation managers, fund managers, etc to see what is available to base their policies and contract conditions on.

In addition to the sector-specific BMPs there are five well-known and less well-known international conventions that are biodiversity-related and that FIs can use generally to align with international BMPs. These concern:

5.3 Factors contributing to a successful integration of biodiversity into risk management procedures

There are a number of factors that contribute to a successful integration of BBRs into a financial institution's risk management procedures. The following ones were highlighted by some FIs during the interview survey:

  1. Not cost too much time. In order not to overburden the credit-lending and investment process it is important that any biodiversity tools to be incorporated should not cost account managers and analysts too much time to go through.

  2. Needs to be easily implemented in existing business structures. Any additional tools should be easy to implement within existing risk management processes.

  3. Be sector-specific and promote sustainable industry standards. One bank representative indicated that for most transactions clients or the bank are simply not aware of the best-management practices (BMP) or sustainability guidelines for the sector. In addition she highlighted the need to develop an approach that was sector-specific, meaning that different guidelines or BMPs should apply for different sectors.

  4. Operate in a level playing field. Though project finance typically only concerns a few percent of a bank's total revenue, it has been argued that its endorsement could only have been possible as 80% of worldwide project finance now operates under the EP umbrella. This means that banks are less afraid of losing a project to a competitor as it is very likely it also operates under the same guidelines. Therefore, in order for any biodiversity-related procedure or tool to be successful it helps when several FIs adopt similar procedures or tools thereby creating a level playing field.

“A tool to account for biodiversity risks should not overburden the investment process; rather it should complement it.”

Nelson Switzer, Royal Bank of Canada

“For an instrument to be successful, it has to be 1) simple to implement; 2) promote standards; 3) be sector-specific; and 4) create a level-playing field.”

Maria Anne van Dijk, Fortis

Table 10. Tools developed for the private sector that focus on or factor in biodiversity

Table 11. Sector-specific sustainability guidelines, benchmarks and industry bodies

Fully biodiversity focused

Biodiversity included as one factor

Sector Sustainability guidelines Benchmarks Sustainability guidelines Benchmarks – certification Industry bodies
Forestry & Paper
  • Sustainable Forestry Initiative (SFI)vv

  • he Forest Dialogue Review86

  • HSBC Forestry Guideline87

  • The Forest Dialogue (TFD)

  • International Tropical Timber Organization (ITTO)ww

  • Global Forest Industry CEO Forum

  • Forest Stewardship Council (FSC)

Oil & Gas
  • Energy & Biodiversity Initiative (EBI)3
  • Biodiversity Benchmark (Fauna & Flora International/ Insight Investment10

  • A survey by F&C asset management88

  • Goldman Sachs Energy Environmental and Social Index (GSEES)20
  • International Petroleum Industry Environmental Conservation Association (IPIECA)xx

  • International Association of Oil and Gas Producers (OGP)

Mining & Metals
  • Biodiversity Benchmark (Fauna & Flora International/ Insight Investment10

  • A survey by F&C asset management88

  • The Extractive Industries Review (EIR by the World Bank)yy

  • Mining, Minerals and Sustainable Development Working Group (MMSD)89

  • Guidance for the Mining Industry in Raising Awareness and Preparedness for Emergencies at the Local Level (ICMM & UNEP)

  • International Council on Mining and Metals (ICMM)zz

  • Global Mining Initiative (GMI)

Building & Construction & Utilities
  • Biodiversity Benchmark (Fauna & Flora International/ Insight Investment10
  • GRI sector supplement (Energy Utilities)aaa

  • UNEP Dams and Development Project90

  • Cement Sustainability Initiative Charterbbb

  • HSBC Freshwater Infrastructure Guideline91

  • World Commission on Dams (WCD)ccc

  • Cement Sustainability Initiative (CSI by the WBCSD)ddd

Tourism CBD guidelines
  • Prince of Wales International Business Leaders Forum/Conservation International: Sustainable Hotel – Siting, Design and Construction92

  • WTO/UNEPF Sustainable Tourism Guide for Policy Makers93

  • The Green Globeeee
  • International Business Leaders Forumfff

  • The International Tourism Partnershipggg

Agriculture; Food processors & producers; Food & Drug retailers
  • IFC-WWF Better Management Practices Programmehhh

  • The Sustainable Food Labiii

  • Biodiversity and Agricultural Commodities Programme (BACP)jjj

  • Rainforest Alliance Certified Labelkkk
  • Marine Stewardship Council
  • Roundtable on Sustainable Palm Oil (RSPO)lll

  • Roundtable on Sustainable Soy

  • Marine Stewardship Council (MSC)

  • The Sustainable Agriculture Initiative (SAI)mmm

kk http://www.biodiversityhotspots.org/xp/Hotspots/

ll http://www.worldwildlife.org/science/ecoregions/g200.cfm

mm http://www.unep-wcmc.org/wdpa/

nn http://www.birdlife.org/action/science/sites/index.html

vv www.aboutsfi.org

ww http://www.itto.or.jp

xx www.ipieca.org

yy web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTOGMC/0,,contentMDK:20605112~menuPK:336936~pagePK:148956~piPK:216618~theSitePK:336930,00.html

zz www.icmm.com

aaa www.globalreporting.org

bbb http://www.wbcsdcement.org/land.asp

ccc www.dams.org

ddd www.wbcsdcement.org

eee www.greenglobe21.com

fff www.ibfl.org

ggg www.internationaltourismpartnership.org

hhh http://www.ifc.org/ifcext/enviro.nsf/AttachmentsByTitle/art_CCF-BMPIntro/$FILE/BMP-Intro.pdf

iii www.glifood.org

jjj http://www.ifc.org/ifcext/enviro.nsf/Content/Biodiversity_BACP

kkk http://www.rainforestalliance.org/programs/agriculture/certification/index.html

lll www.rspo.org

mmm www.biodiv.org

nnn www.biodiv.org

ooo www.cites.org

ppp www.cms.int

qqq http://whc.unesco.org/

rrr www.ramsar.org

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