The Dutch Central Bank stated in 2020 that: “all business depends on and impacts biodiversity via ecosystem services and other natural capital assets, either directly through their operation or indirectly through their supply chain.”
The international finance community, which has traditionally set its sights on the businesses that will be the most profitable and provide the best returns, are starting to appreciate that there are other factors that must be considered. This more wholistic way of looking at business and finance is beginning to be appreciated throughout our global community.
“Since AR5, there is increasing attention on the need for coordination among previously independent international agendas, recognizing that climate change, disaster risk, economic development, biodiversity conservation and human well-being are tightly interconnected. The current COVID-19 pandemic provides an example of the need for such interconnection, with its widespread impacts on economy, society and environment…” (Intergovernmental Panel on Climate Change Sixth Assessment Report)
There is a shift underway in the investment community. Financial institutions are now being asked to address biodiversity risk when prospecting company and funds to invest in. “Investors are prioritizing ESG-conscious projects and companies,” says Patrick Lafrance, National Vice President of Ecology and Environmental impact assessment at WSP in Canada. “Financial companies are considering climate changes in their risk when investing, but biodiversity is also becoming a key risk to consider. We clearly see the increase in interest of some financial companies for the analysis of the natural capital and biodiversity of their assets to develop green and sustainable investment and portfolio.” Investors must ensure they have a clear understanding of the exposure of their portfolios to biodiversity risks in a timely manner, since in-depth understanding of these risks informs adequate risks management.
The finance community is already taking global strides towards protecting biodiversity. As an example, the Finance for Biodiversity Pledge was launched in September of 2020 “calling on global leaders and committing to protect and restore biodiversity through their finance activities and investments in the run-up to the Conference of the Parties (COP 15) to the Convention on Biological Diversity (CBD) in 2021.” Launched originally by 26 financial institutions, the Pledge currently (as of August 2021) has 55 signatories from 15 countries representing an estimated $9 trillion Euros in assets under management (AuM). Several other initiatives related to biodiversity and finance have been launched in the last two years.
There are also standards for biodiversity that have been put in place by some global investors. International lenders, such as the International Finance Corporation, which is the largest global development institution focused on the private sector in developing countries, have sets performance standards related to biodiversity and require the compliance to it for projects they finance. Performance Standard 6 as it is known, Biodiversity Conservation and Sustainable Management of Living Natural Resources (2012), “recognizes that protecting and conserving biodiversity, maintaining ecosystem services, and managing living natural resources adequately are fundamental to sustainable development.”
The trend is real and is being integrated into regulations. In France for example, the new decree under Article 29 of the French law on Energy and Climate requires the financial institutions to disclose how their financial activities depend on climate and biodiversity, as well as how their financial activities impact on climate and biodiversity.
For those financial institutions that haven’t already pursued biodiversity protections within their investment portfolio, Lafrance has a few recommendations on the immediate steps that can be taken.
“To start, an investor can incorporate biodiversity in ESG policies, set biodiversity targets based on best available metrics, and disclose biodiversity results annually. Investment companies should utilize science-based data gathered from a wide range of studies to help them make informed investment and business decisions that can potentially yield a positive return on investment and on nature. This could be initiated by integrating within the investment decision process the assessment of the impact on biodiversity and compliance with international best practice regarding biodiversity and ecosystem protection. Lastly, they can and should participate in initiatives such as Finance for Biodiversity Pledge or other regional, national and global programs.”
By taking action, investment groups can realize potential opportunities to invest in natural capital & biodiversity assets to develop green and sustainable investment and portfolio. They can also manage their reputational risk associated with their investments, and contribute to a healthier ecosystem and biodiversity will help support a sustainable economy.
If you’re a member of the investment community looking to understand how best to incorporate biodiversity into your portfolio, visit our Biodiversity Hub or reach out to Patrick Lafrance.
This is the fourth in our series highlighting the importance of biodiversity in Canada:
Protecting and Restoring Canadian Ecosystems
Biodiversity in the Mining Sector
Biodiversity in the Utility and Energy Sector