Introduction
The interdependence between biodiversity and economic stability is an emerging focus for the finance industry, particularly in Europe. The accelerating loss of biodiversity and the associated risk of ecosystem collapse pose significant threats to financial markets, investment portfolios, and long-term economic growth. Chief Financial Officers (CFOs) and other financial leaders must grasp the magnitude of these risks and the critical role they play in shaping sustainable financial practices.
Understanding biodiversity loss and ecosystem collapse
Biodiversity refers to the variety of life on Earth, encompassing species diversity, genetic diversity, and ecosystem diversity. Ecosystem collapse occurs when an ecosystem undergoes a drastic reduction in its function and productivity, often leading to the extinction of species and loss of ecosystem services. Key drivers of biodiversity loss include habitat destruction, climate change, pollution, overexploitation of resources, and invasive species.
Economic impacts of biodiversity loss
The economic implications of biodiversity loss are profound and multifaceted. Biodiversity underpins ecosystem services that are essential for human survival and economic activity, such as pollination, water purification, disease regulation, and climate stability. The degradation of these services can lead to significant economic losses. For instance, the decline in pollinator populations can affect crop yields and food security, leading to increased costs for businesses and consumers.
The World Bank estimates that ecosystem services contribute $125 trillion to $140 trillion per year to the global economy. A decline in these services can disrupt supply chains, increase operational costs, and reduce profitability for companies across various sectors.
Sector-specific risks
- Agriculture and Food Industry
The agriculture and food industry is highly dependent on biodiversity for crop production, pest control, and soil fertility. The loss of pollinators, such as bees and butterflies, can severely impact crop yields. The Food and Agriculture Organization (FAO) has warned that 75% of the world’s food crops rely on animal pollination. A significant decline in pollinator populations could jeopardise global food security and increase food prices.
- Pharmaceutical and Biotechnology
Biodiversity is a critical source of raw materials for the pharmaceutical and biotechnology industries. Many drugs are derived from plant and animal sources. The loss of species due to habitat destruction and climate change can limit the discovery of new drugs and therapies, impacting the profitability and innovation potential of these industries.
- Insurance and Real Estate
Insurance companies face increased risks from biodiversity loss and ecosystem collapse. Natural disasters, such as floods and hurricanes, can become more frequent and severe due to the degradation of ecosystems that act as natural barriers. This can lead to higher claims and premiums. The real estate sector is also vulnerable, as properties in ecologically sensitive areas may lose value due to environmental degradation and increased risk of natural disasters.
Integrating biodiversity risks into financial decision-making
For CFOs and financial leaders, integrating biodiversity risks into financial decision-making is crucial for mitigating potential impacts and ensuring long-term sustainability. This can be achieved through several strategies:
- Environmental, Social, and Governance (ESG) Criteria
Incorporating ESG criteria into investment decisions can help identify and manage biodiversity risks. Companies with strong environmental practices are better positioned to mitigate the impacts of biodiversity loss. Investors are increasingly recognising the value of ESG criteria, with ESG-focused assets under management reaching $35 trillion in 2020, according to the Global Sustainable Investment Alliance (GSIA).
- Natural Capital Accounting
Natural capital accounting involves quantifying the value of natural resources and ecosystem services in financial terms. This approach allows businesses to understand the economic benefits of biodiversity and the potential costs of its loss. The United Nations’ System of Environmental-Economic Accounting (SEEA) provides a framework for integrating natural capital into national and corporate accounts.
- Sustainable Supply Chain Management
Ensuring that supply chains are sustainable and resilient to biodiversity risks is essential for maintaining business continuity. This involves sourcing raw materials from sustainable sources, reducing waste and emissions, and supporting conservation efforts. Companies can leverage certifications such as the Forest Stewardship Council (FSC) and the Marine Stewardship Council (MSC) to ensure sustainable sourcing.
Case studies: leading the way in biodiversity integration
Several companies and financial institutions are leading the way in integrating biodiversity considerations into their operations and investment strategies.
- AXA Group
AXA, a global insurance company, has committed to integrating biodiversity risks into its investment and underwriting processes. In 2021, AXA launched a biodiversity strategy that includes a €1.5 billion investment in biodiversity-related projects and the exclusion of companies involved in deforestation from its investment portfolio.
- Unilever
Unilever, a multinational consumer goods company, has implemented a comprehensive sustainable sourcing programme. The company sources 100% of its palm oil from certified sustainable sources and is working towards deforestation-free supply chains. Unilever’s commitment to biodiversity is reflected in its Sustainable Living Plan, which aims to halve the environmental footprint of its products by 2030.
- BNP Paribas
BNP Paribas, a leading European bank, has integrated biodiversity considerations into its financing and investment activities. The bank has committed to financing projects that support biodiversity conservation and sustainable land use. BNP Paribas has also launched a biodiversity policy that includes strict criteria for financing activities in ecologically sensitive areas.
Policy and regulatory landscape
The policy and regulatory landscape is evolving to address biodiversity loss and its economic impacts. Governments and international organisations are implementing policies and regulations to promote biodiversity conservation and sustainable business practices.
- European Union (EU) Biodiversity Strategy for 2030
The EU Biodiversity Strategy for 2030 aims to put Europe’s biodiversity on a path to recovery by 2030. The strategy includes targets for protecting 30% of the EU’s land and sea areas, restoring degraded ecosystems, and promoting sustainable agriculture and forestry. The strategy also emphasises the integration of biodiversity considerations into financial decision-making and corporate reporting.
- Task Force on Nature-related Financial Disclosures (TNFD)
The TNFD is an international initiative that aims to develop a framework for assessing and reporting nature-related risks and opportunities. The framework will provide guidance for companies and financial institutions to integrate biodiversity considerations into their risk management and disclosure practices. The TNFD is expected to launch its final recommendations in 2023.
- Convention on Biological Diversity (CBD)
The CBD is an international treaty aimed at conserving biodiversity, promoting sustainable use of natural resources, and ensuring the fair and equitable sharing of benefits from genetic resources. The CBD’s post-2020 Global Biodiversity Framework, expected to be adopted in 2022, will set global targets for biodiversity conservation and provide a roadmap for achieving these goals.
Outlook and opportunities
The finance industry has a critical role to play in addressing biodiversity loss and ecosystem collapse. By integrating biodiversity considerations into financial decision-making, companies can mitigate risks, capture new opportunities, and contribute to global sustainability goals.
- Green Bonds and Sustainable Finance
The green bond market is growing rapidly, providing an avenue for financing biodiversity conservation projects. Green bonds are debt instruments used to fund environmentally friendly projects, including those that support biodiversity and ecosystem restoration. The Climate Bonds Initiative reported that green bond issuance reached $270 billion in 2020, with significant potential for growth in biodiversity-related projects.
- Impact Investing
Impact investing focuses on generating positive social and environmental outcomes alongside financial returns. Biodiversity conservation is a key area for impact investors, who can support projects that protect and restore ecosystems while achieving financial returns. The Global Impact Investing Network (GIIN) reported that impact investing assets under management reached $715 billion in 2020.
- Innovative Financial Instruments
New financial instruments, such as biodiversity credits and conservation finance, are emerging to support biodiversity conservation. Biodiversity credits allow companies to offset their environmental impacts by investing in conservation projects. Conservation finance involves leveraging private capital to fund conservation initiatives, often through public-private partnerships.
Conclusion
Biodiversity loss and ecosystem collapse present significant risks to the finance industry, but they also offer opportunities for innovation and sustainable growth. CFOs and financial leaders in Europe must recognise the importance of biodiversity and take proactive steps to integrate these considerations into their financial strategies. By doing so, they can contribute to global sustainability efforts, mitigate risks, and secure long-term economic prosperity. The path forward requires collaboration, innovation, and a commitment to preserving the natural world that underpins our economies and societies.
