Betting on biodiversity: how financial institutions can invest in the irreplaceable power of nature

A year ago, at the
launch of COP26's Private Finance Agenda, David Attenborough called on the finance sector to take the lead on climate action and nature protection. He has since laid out the shocking reduction in wilderness between the 1930s to today in his 2020 Netflix documentary. In parallel, the COVID-19 pandemic has made the link between biodiversity and financial risk ever more clear.

New initiatives are putting a price on natural capital

With more than half of the world's total gross domestic product dependent on natural resources, this is not just an ecological crisis, but an economic one too. The latest
Terra Carta announcement by HRH Prince Charles reflects the urgent need for financial institutions to build resilience to future disruptions by measuring and disclosing the biodiversity impacts of their products and services.

The industry has taken note: initiatives such as the
Taskforce on Nature-related Financial Disclosures aim to redirect financial capital flows towards activities which allow nature and the planet to flourish. Others focus on the risk management of natural capital, forests and biodiversity and represent a broader movement towards analysing and investing into ecosystem services. These include the likes of the Investor Initiative for Sustainable Forests and the Finance for Biodiversity Pledge.

In the realm of disclosures, the
CDP questionnaire for financial services will be expanded to include questions on the impact of financing and investments on water and forests. However, despite high-profile announcements and conservation-related projects drawing larger amounts of investor money, biodiversity remains a relatively new topic for the mainstream financial sector to get to grips with.

A growing suite of metrics and tools to evaluate biodiversity impacts

Sustainable finance datasets, metrics and tools that measure carbon emissions are quickly moving to business-as-usual for many finance professionals. A sustainable finance professional once described carbon emissions data to me using a whisky analogy: while the information on emissions data still needs some time to mature in a good quality barrel before it is the perfect drop, it can be consumed with appropriate instructions. Using this analogy, biodiversity datasets, metrics and tools are still in the distillation process for most mainstream financial institutions!

Three areas which give some clues about the final taste of the firewater are described below.

1. Metrics on conservation and biodiversity impact: The Species Threat Abatement and Recovery (STAR) metric, measures the contribution that investments and financing activities can make to conserving threatened species and improving the status of their habitat. Developed by IUCN with partners, the tool was applied to conservation finance blueprints created by the Coalition for Private Investment in Conservation (CPIC) – a South Pole-managed platform made up of academics, finance industry experts, and NGOs. The metric assesses the relative contribution of different pressures to the extinction risk of threatened species on IUCN's Red List. The STAR metric is applicable to all sectors with potential or actual geographic impacts on biodiversity. From a risk perspective, the integration of this metric into financial decisions could quickly identify any investment that has a negative impact on biodiversity. In theory - if STAR shows that an investment is in an area with many threatened species, it could prompt a discussion among investors on whether that investment is ensuring that wildlife is adequately protected – or not. The Red list itself makes for a grimly fascinating read, it is an indicator of the health of the world's biodiversity. The negative human impact on struggling species is evident, from the smaller Sulawesi Cardinal Shrimp to the larger White-backed vulture.
2. New tools and technologies for better analysis: Geospatial (GIS) images from satellites can be used to analyse biodiversity impacts of forestry and land use management. WWF's spatial finance team has already been working in this area, providing new analysis on how to measure environmental risk in sovereign debt portfolios together with Investec. South Pole has an in-house GIS team that uses satellite information to identify biodiversity Net Gains and verified Enhancements in projects, which can then, once verified, issue biodiversity credits for financial institutions and other businesses. GIS information could also be integrated into mainstream SDG impact financial products. Technology will play a significant role in improving the way we protect the planet's wild areas, especially those that are too remote for us to access.
3. Industry-wide pledges: The Biodiversity for Finance pledge has been signed by 37 signatories from 13 countries. The Partnership for Biodiversity Accounting Financials is developing accounting methods, six Dutch investors have signed up.

These new developments to better measure and understand the commercial risks and opportunities related to biodiversity are incredibly timely – and challenging. For some finance professionals, the growing demand to consider and disclose biodiversity impacts could become another set of actions to add to an ever-expanding sustainability 'to do' list. Carbon emissions are not yet fully embedded in organisations, and improvements in
sustainability reporting will take time to mature.

Financial institutions should take this challenge as an opportunity to grow their talent pool, as more professionals are
drawn towards sustainable finance and purpose-driven work. Adequate resources for finance teams should be part of the financial sector's response to sustainability challenges. This extends from examining their own activities, to looking more closely at those of the companies that they directly finance.

Trista Bridges and Donald Eubank, principles of the sustainable business advisory firm Read the Air and co-authors of "
Leading Sustainably", see the reduction in biodiversity as an existential issue for many businesses. "It is critical that companies, particularly those in the food, beverages, ingredients, agricultural, cosmetics and fashion sectors, take this reduction in biodiversity very seriously," say Bridges and Eubank. "Over-farming, over-fishing and industrialized agriculture may take our ecosystem to the point of no return. Such resource destruction will result in long-term negative impact to their own businesses, and most likely expose them to the kinds of legal challenges that we are now witnessing the fossil fuel industry face in response to the climate crisis."

Bringing financial value to life

Biodiversity is a risk with many direct and indirect connections with both climate change and the financial resilience of companies. We still live in a world where our planet's precious natural resources, from trees and plants to tigers and rhinos, have a higher financial value when dead rather than alive. Understanding the positive and negative biodiversity impacts related to investing and lending opens up new, attractive opportunities to provide services and products aligned with the wellbeing of our wildlife and our communities. By doing this, we can finally start to value nature properly and leave our precious natural world in a fit state for generations to come.