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.
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.
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:
Use of the loan. It is easier for banks to assess potential risks tied to a particular loan when the bank is aware for what purposes/activities a client is using it. This is often the case with structured finance. Corporate finance, however, is a different story. Only when the use of the proceeds is known to have an effect on ecosystems, are banks fully able to react proactively on it (e.g., in the case when corporations use large parts of loans for one particular activity). However, in practice banks can be assumed to be aware which companies have sound environmental and social structures embedded in their business operations and which ones have not. This makes it possible for banks to pay extra attention to those clients that are likely facing biodiversity risks.
Client-bank relation. A bank has much more influence on its client's corporate policies if there is a good relationship between the parties and the bank is the so-called “house-bank”. In the case where a (small) bank does business with a large multinational firm and that firm has connections with other banks as well, it is much more difficult to use its influence to change a client's corporate strategy or risk management process.
Position in the chain. A bank will likely impose stricter standards on clients that are at the start of the supply chain (which naturally have the highest impacts on ecosystems) than clients that are for example intermediate traders.
Type of product. For certain products, with complicated supply chains and stakeholders, it is more difficult to account for biodiversity risks than for products that are straightforward and easy to assess.
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:
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.
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.
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.
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.
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:
Conservation International's Biodiversity Hotspots.kk The tool aims to provide an overview of the richest and most threatened reservoirs of plant and animal life on Earth.
WWF's Ecoregions.11 It identifies a set of ecoregions whose conservation would achieve the goal of saving a broad diversity of the Earth's ecosystems. These ecoregions include those with exceptional levels of biodiversity, such as high species richness or endemism, or those with unusual ecological or evolutionary phenomena.
World Database of Protected Areas.mm It provides the most comprehensive dataset on protected areas worldwide and is managed by UNEP-WCMC in partnership with the IUCN World Commission on Protected Areas (WCPA) and the World Database on Protected Areas Consortium.
BirdLife's IBAs.nn Their programme aims to identify, monitor and protect a global network of sites for the conservation of the world's birds and other biodiversity. The selection of Important Bird Areas (IBAs) has been a particularly effective way of identifying conservation priorities. IBAs are key sites for conservation – small enough to be conserved in their entirety and often already part of a protected-area network. They do one (or more) of three things:
Hold significant numbers of one or more globally threatened species;
Are one of a set of sites that together hold a suite of restricted-range species or biome-restricted species;
Have exceptionally large numbers of migratory or congregatory species.
Centres of plant diversity.84 Two hundred and fifty sites and areas that are important centres of plant diversity at a regional and global level. The compilers used expert knowledge, and mixed criteria emphasizing species richness and endemism.
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
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.
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:
The sectors that are included in this table have been recognized by the European Bank of Reconstruction and Development (EBRD) and by F&C Asset Management as having a high impact on the environment (EBRD) or biodiversity specifically (F&C Asset Management).
A distinction is made between tools that fully focus on biodiversity and those that factor-in biodiversity considerations as one element.
Industry bodies are included to enable financial institutions to contact the respective industry representative body for further information.
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:
Convention on Biological Diversity (CBD).nnn This convention has three objectives: 1) The conservation of biological diversity; 2) the sustainable use of its components; and 3) the fair and equitable sharing of the benefits from the use of genetic resources.
Convention on International Trade in Endangered Species of Wild Flora and Fauna (CITES).ooo Its aim is to ensure that international trade in specimens of wild animals and plants does not threaten their survival.
Convention on Migratory Species (CMS).ppp Also know as the Bonn Convention, it aims to conserve terrestrial, marine and avian migratory species throughout their range.
World Heritage Convention.qqq This convention seeks to encourage the identification, protection and preservation of cultural and natural heritage around the world considered to be of outstanding value to humanity.
Ramsar Convention on wetlands.rrr This treaty provides the framework for national action and international cooperation for the conservation and wise use of wetlands and their resources.
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:
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.
Needs to be easily implemented in existing business structures. Any additional tools should be easy to implement within existing risk management processes.
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.
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.
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||
|Oil & Gas||
|Mining & Metals||
|Building & Construction & Utilities||
|Agriculture; Food processors & producers; Food & Drug retailers||
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