Every day around 50 living species disappear around the world, a rate estimated to be up to 1,000 times higher than the natural extinction rate (ISPRA). Ecosystems urgently require conservation and restoration actions: it is essential to reorient the capital market accordingly bridging the biodiversity resource gap – which, according to estimates, reaches up to 824 billion dollars per year – and reduce investments with a negative impact on nature. To raise awareness of the importance of biodiversity also from an economic and financial point of view, and provide concrete indications to investors, banks and insurance companies, the Forum for Sustainable Finance created the paper Sustainable finance and biodiversity. A guide for operators. The publication, the result of a working group launched by the Forum with its members at the beginning of 2024, was created with the support of ADVANT Nctm, AXA Investment Managers and Etica Egr.
The paper answers the question “Why is biodiversity relevant to finance, and vice versa?”. Starting from the current state of conservation of ecosystems, the risks associated with the loss of biodiversity and the financial tools to protect it are analyzed, also providing guidelines for including the topic in products and processes
financial. The paper arrives at a crucial moment for environmental policies, a week after the green light of the
Council of the European Union to the Nature Restoration Act, and a few months before COP16 on
biodiversity.
Biodiversity today
According to WWF data, between 1970 and 2018 wildlife species declined by an average of 69%. The direct causes of biodiversity loss are connected to human activities and concern in particular the
direct exploitation (for example, fishing or intensive agriculture), the change in use of land and seas (for
example, deforestation), climate change, air, soil and resource pollution
water, the spread of alien and invasive species.
The value of biodiversity and the funding needed to protect it
An adequate level of biodiversity keeps ecosystems in balance, thus guaranteeing essential benefits for our species (calledecosystem services”), including clean air, drinking water, climate regulation, pollination, prevention of hydrogeological instability. Furthermore, biodiversity represents a crucial factor in terms of both mitigation (thanks to the absorption of CO2), and adaptation to climate change. Over half of the world’s GDP (around 44 trillion dollars) is closely linked to natural resources (World Economic Forum), with entire economic sectors directly dependent on ecosystem services (for example, agriculture and the food industry, textiles, tourism, construction). Despite these benefits, human activities generate highly negative impacts on ecosystems.
The risks associated with the loss of biodiversity
There is one direct connection between the stability of the natural ecosystem and that of the economic system: The loss of biological diversity implies an increased risk of climate-related extreme events and the compromise of food and water security. Furthermore, the loss of natural habitats and the reduction of
species can lead to a decrease in agricultural and fisheries productivity, causing direct economic damage
for these sectors.
The paper highlights how i physical risks (connected with the alteration of ecosystem balances and the loss of
related services) ei transition risks (deriving from the difficulty of anticipating the evolution of the framework
regulatory, reference market and technological) may have significant impacts on risks
financial: credit and counterparty risk, operational risk, market risk and liquidity risk. AND
It is therefore essential that financial institutions carefully evaluate and manage these risks, such as
also highlighted by the Network for Greening the Financial System (NFGS) which brings together central banks and
supervisors globally.
Tools and approaches to include biodiversity
To reverse the trend of biodiversity decline by 2030, between 722 and 967 billion dollars annually are needed globally over the next ten years, with a funding gap that reaches, according to estimates, up to 824 billion per year (Paulson Institute). In contrast, the public and private financial flows associated with
negative impacts on the environment, and which therefore it is essential to redirect, amount to almost $7,000
billion per year (UNEP). Banking, financial and insurance market operators can adopt different tools, methodologies and approaches to take biodiversity into account. The paper illustrates, also through concrete examples, the best solutions currently available on the market: indicators to analyze issuers’ transition plans; exclusions and disinvestment for sectors, companies and countries with the most negative impacts on biodiversity; green bonds, Sustainability-Linked Bonds and Sustainability-Linked Loans to finance ecosystem conservation or restoration projects; nature-related certificates and biodiversity credits to demonstrate quantifiable improvements; ad hoc insurance coverage to mitigate physical and transition risks, also thanks to nature-based solutions.
Guidelines for operators
The paper concludes with a series of guidelines dedicated to financial operators to reduce negative impacts
on nature and increase the positive repercussions. In summary, it is recommended to:
- Include analyzes and assessments relating to biodiversity (in terms of both risks and impacts) in the
governance, in all internal decision-making processes and in the offering of products and services; - Publish a sustainability report annually also including, where relevant, information on
biodiversity; - Encourage invested, financed or insured companies to collect and publish risk data and
on impacts related to biodiversity; - Join global initiatives (for example, the Finance for Biodiversity Pledge);
- Dialogue and collaborate with other entities (financial and otherwise) to improve the standards of
assessment and measurement of risks and impacts; - Include biodiversity protection in all lobbying and dialogue activities with public institutions.
“Financial operators can make a fundamental contribution to the protection and promotion of
biodiversity: the inclusion of the topic in products and processes represents an opportunity to generate impacts
positive, it offers new investment opportunities and gives the opportunity to test innovative tools and approaches for
invest in favor of nature. Given the crucial importance of ecosystems, the Forum wanted to do its own
part for the growth of awareness on a topic that is still little known, but crucial for the stability of the environment in which we live and of the economic and financial systems”, declares Francesco BicciatoDirector General of the Forum for Sustainable Finance.
