Mitigating climate change has become a key issue in the financial world, as banks continue to bolster their ESG credentials. However, the protection of biodiversity is also fast becoming one of the most significant concerns when it comes to sustainable finance.
LIBF Insights hears from ClientEarth on why banks should be concerned about the loss of biodiversity and what they can do to help prevent it.
Biodiversity – what is it and why is it important?
The term biodiversity refers to the living things that make up an ecosystem – including all fungi, flora, fauna, and even microorganisms like bacteria. It is essential for the things we need to survive – food, clean water, medicine, and shelter.
But biodiversity is in decline – and largely because of human activities. Land use changes, pollution and climate change are having a significant impact on the environment and there could be far reaching consequences if steps are not taken to reduce this impact.
From an economic perspective, a loss of biodiversity can have a significant impact on businesses. Some sectors are more directly impacted than others, such forestry or agriculture, but there is a knock-on effect for any companies that rely on natural capital.
Why banks should care about biodiversity
“The uncomfortable truth for many companies is that their continued ability to create value for stakeholders relies on functioning ecosystems,” says ClientEarth Lawyer, Jamie Sawyer. “If bees are in decline and can’t pollinate crops, it has a direct effect on agrifood businesses. If a drought in Germany makes a shipping route impassable, that’s a major value chain issue.”
“That's why climate change and the breakdown of ecosystems can have seismic effects for the financial sector – they affect how all companies operate and therefore how financial institutions should make decisions.”
What risks does biodiversity loss pose for banks?
“Banks are often primary funders of environmentally damaging projects or facilitate fundraising by the companies involved. And they are increasingly finding themselves under public scrutiny – including in the courtroom – over that involvement,” says Sawyer.
“We’ve seen a landmark case launched in France this year against banking giant BNP Paribas over its continued oil and gas financing, which the claimants say puts the bank in non-compliance with France’s corporate duty of vigilance law.
“Meanwhile, HSBC was taken to task by the UK advertising regulator over its pre-COP26 advertising campaign, which tried to highlight its sustainable financing and tree-planting efforts while omitting mention of its active fossil fuel investments.”
What can banks do to help protect biodiversity?
Banks are ideally placed to help reduce biodiversity loss. However, efforts to protect the environment are time sensitive so both banks and businesses need to move fast if they are to make a meaningful impact. According to ClientEarth, there are several things that need to happen.
Firstly, there needs to be a swift move towards banks making disclosures on nature-related financial risks, with regulation making this a mandatory requirement in due course, ie, the Taskforce on Nature-related Financial Disclosures currently being developed as a follow up to the Task Force on Climate Related Financial Disclosures.
With TCFD, take-up of voluntary reporting wasn’t what it needed to be, leading to mandatory reporting requirements on climate-related financial risks being implemented in many jurisdictions – ClientEarth hopes to see a similar dynamic playing out with nature-related financial risks.
Banks should also make clear commitments to the protection of biodiversity, and, in particular, draw up financing policies committing them to stop financing activities and/or companies causing harm to biodiversity.
Regulators’ role in protecting biodiversity
ClientEarth point out that regulators also have an important role to play in ensuring that the financial sector is working towards preventing biodiversity loss.
“Financial regulators need to issue regulation and/or guidance on how banks should manage biodiversity-related risks – as many already have for climate change,” comments Sawyer. “In addition, where financial institutions make misleading statements or omissions about their environmental credentials (including those related to biodiversity), financial regulators must hold them to account, as the ASA has done in relation to HSBC’s advertising.”
“While some countries have made a start – France with its Duty of Vigilance Law, the German Supply Chain Due Diligence Act, and the EU’s Corporate Sustainability Due Diligence Directive – we need more due diligence laws making sure banks consider and mitigate the environmental impact of their financing activities.”
Financial institutions need to educate themselves on biodiversity loss
“Nature risk, like climate risk, represents a significant threat to the status quo, and there is a growing understanding among leaders that environmental risks are business risks that must be properly managed if senior managers are to meet their obligations,” says Sawyer.
“Long misunderstood as non-material ‘Corporate Social Responsibility’ issues by key decision-makers, environmental risks are relevant in every boardroom. Central banks and banking supervisors are getting on the front foot with nature-related financial risks. But executives must act now to get ahead – the risk of litigation looms for those failing to manage material risks.”
“While initiatives such as the Taskforce on Nature-related Financial Disclosures are making inroads on environmental risk management, many businesses and financial institutions still have far to go in this area.”
“Banks, companies and all financial institutions need to educate themselves fast – they’re doing business in a changing landscape.”
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