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Responsible Banker - 19 October 2020

  • Published date: 19.10.2020
  • Category:

ARTICLE OF THE WEEK

How can the financial sector address biodiversity loss?

What’s happening? A 10-point pledge to prevent the destruction of nature, developed by governments and the EU, has been signed by 64 international leaders. Signatories to the Leaders’ Pledge for Nature, including Jacinda Ardern, Boris Johnson, Emmanuel Macron, Angela Merkel and Justin Trudeau, have pledged to take action on pollution, while boosting sustainable economic systems and eliminating the dumping of plastic waste in the ocean by mid-century. The plan includes commitments on reducing deforestation, unsustainable fishing and environmentally harmful subsidies, and supporting the transition to sustainable food production and a circular economy.

Why does this matter? This is a particularly pressing topic considering an estimated 20% of countries face the risk of ecosystem collapse due to biodiversity loss, according to a recent Swiss Re report. Moreover, more than half of the world’s GDP is “moderately or highly dependent” on nature, as found in a recent report co-authored by the United Nations Environment Programme Finance Initiative (UNEP-FI).
 
Furthermore, last month the UK was alleged to have missed 17 out of 20 biodiversity targets, according to the RSPB, while globally a UN report found that the world fell short of all 20 biodiversity targets for 2020.
 
It’s unlikely governments alone can single-handedly bring about meaningful change. It’s therefore critical financial sector also includes biodiversity targets, which are often less of a focus area within ESG for some banks, corporates and investors.
 
Broadly speaking, banks can bolster government and multilateral organisations’ wider efforts by building on steps like the HSBC Pollination Climate Asset Management venture to support natural capital while also delivering financial returns. On a practical level, stakeholders can also assess portfolio companies for biodiversity risks, as well as engage with companies to address issues, or disinvest where engagement fails. 
 
Lenders can also lend support to initiatives looking to curtail biodiversity loss. In Brazil, for example, the country’s agriculture minister has mooted green bonds as a solution to the country’s soaring levels of deforestation. Proceeds could be provided to farmers occupying land legally to ensure they are given the appropriate financial support.
 
Banks could also take biodiversity considerations into account when devising forecasts and analysis. This is an area where the does appear to be a gap emerging within financial services. It was recently reported, for example, that Citibank and ANZ said Indonesia’s incoming jobs law could make the country an attractive investment opportunity if it is implemented correctly. In contrast, investors representing more than $4tn in assets under management voicing opposition to the law, partly over its potential implications for biodiversity.
 
An example of taking biodiversity risk into account can be seen when looking at the actions of the Netherlands’ central bank, DNB. The bank has quantified the risk of biodiversity loss to the financial sector, identifying more than a third of the Dutch financial sector is dependent on one ecosystem.
 
Taking such steps could also go some way to addressing criticism that’s been levelled at the sector. Accusations have been put forward, for example, that almost $2bn has been provided by UK lenders and other financial institutions to beef firms linked to deforestation.

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