The Financial Sector’s Gain Must Not Be Biodiversity’s Loss

Robin Smale.

LONDON – You would expect financial institutions to understand investing in assets that deliver outsize returns. But when it comes to biodiversity and the broader category of natural capital, most investors still behave as if these assets were unlimited, even as they are being depleted or destroyed. They continue to assume that the services these assets provide are free, even as the COVID-19 pandemic shows the almost limitless cost of ignoring human encroachment on the natural world.

Human-induced decline in the natural environment is a fact, and it is happening fast. The World Wildlife Fund’s recent Living Planet report showed an average decrease of 68% in wildlife population sizes between 1970 and 2016. Inevitably, where populations crash, extinction follows. According to the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services, around one million species – or about a quarter of all assessed animal and plant groups – are threatened with extinction within decades, unless action is taken to mitigate the drivers of biodiversity loss.

Aware of such wildlife population declines and projections of extinction, politicians often call for action but stop short of implementing the necessary measures. And yet, as is clear from the response to climate change, if citizens engage and apply pressure on their leaders, inaction becomes too politically costly. European policymakers decided to embrace bold action on climate change – through measures ranging from binding renewable-energy targets to carbon pricing – because they knew that it was their responsibility to avoid the massive disruption that awaited a world which had heated up by several degrees.

Fortunately, the future of biodiversity will soon benefit from similar decisions – and the opportunities they imply. Politics and science are now rapidly converging on loss of biodiversity and natural capital broadly. Both the existence and the causes of the problem are now recognized in politics. Given dramatically weakened budgets, however, governments will not be able to pay for the next stage, in which the issue is actually addressed.

Regulators are prodding financial institutions toward the reporting and disclosure standards that will make green investments more transparent and attract much-needed private capital. Markets see and are responding to this change: total assets under management in funds emphasizing environmental, social, and governance factors rose to $1.1 trillion in the second quarter of this year.

Civil society is also making its voice heard and calling for faster change. Last month, Portfolio Earth released its Bankrolling Extinction report, in which it calculated the exposure of 50 of the world’s biggest banks to particular “biodiversity impact” sectors, including agriculture, forestry, mining, fisheries, infrastructure, and transport. The exposure of the top three banks – Bank of America, Citigroup, and JPMorgan – alone exceeded $550 billion in 2019, and loans and underwriting in these sectors by all 50 surpassed $2.6 trillion.

Very few of the banks assessed had introduced reporting systems to measure the impact of their loans and underwriting on biodiversity, a first step towards reducing adverse effects. And, aside from a few leading European banks, very few blocked the financing of companies causing the most harm.

The Bankrolling Extinction report highlights the financial system’s weaknesses, and suggests that banks’ balance sheets are at risk. That risk reflects both biodiversity damage, which threatens to reduce output (for example, food output, owing to shrinking fisheries) and the prospect of new regulations, which could devalue commercial investments such as forestry and mining concessions. As the report shows, financial institutions’ reputations are also at risk.

At Finance for Biodiversity, we believe that radical systemic change is needed to reform rules, rights, and norms. Last month, we made several recommendations that we hope can guide leaders in the field.

Financial institutions might implement many of these changes themselves, which could create an early-mover advantage, or do so once regulators make them mandatory. These include measuring and disclosing their activities’ impact on biodiversity and stress-testing expected risks. By making such risk data available, lenders can help companies, citizens, regulators, and governments join the dots between biodiversity loss and the real economy, thereby identifying risks and opportunities and heading off a biodiversity-related financial crisis.

We recommend that policymakers step up in three ways. First, they should assess the impact of their own actions on biodiversity, for example, through corporate bond purchases via so-called quantitative easing by central banks. Second, financial regulators should sharpen their prudential role in scrutinizing domestically domiciled institutions’ biodiversity exposure and impacts. And, third, policymakers can use the conditions and rules for licensing financial firms to change industry norms.

Governments should reform legal systems to remove financial institutions’ shield and extend companies’ liability for biodiversity loss to their bankers and other creditors. Holding financial institutions legally responsible for damage caused by the use of their capital is hardly unprecedented. Authorities investigating crime and human-rights offenses routinely impose financial sanctions when local or international laws are unfit for purpose.

Biodiversity can be made more important in financial decisions only by adopting systemic changes that recognize the interconnectedness of our society, economy, and planet. Only such changes can reduce pressure on biodiversity and reveal the financial opportunities to be gained from preserving our natural resources.

Robin Smale, Director and Co-Founder of Vivid Economics, is a Leadership Group member of the Finance for Biodiversity Initiative.

Copyright: Project Syndicate, 2020.