Nagoya – From banks to insurance companies, some key financial institutions are beginning to recognize rising risks to investments from biodiversity and ecosystems loss.
Over the past 12 months, the likelihood that declines in biodiversity will have a ‘severe’, US $ 10 billion to US $ 50 billion impact on business has also climbed sharply. According to one new survey, this risk is now higher than that from international terrorism and almost on a par with extreme weather events.
These are some of the findings from a new CEO Briefing by the United Nations Environment Programme (UNEP), entitled, “Demystifying Materiality: Hardwiring Biodiversity and Ecosystem Services into Finance”, launched Wednesday at the UN biological diversity convention meeting in Nagoya, Japan.
Achim Steiner, UN Under-Secretary General and UNEP Executive Director, said, “The kinds of emerging concerns and rising perception of risks underlines a fundamental sea change in the way some financial institutions – alongside natural resource dependent companies – are now starting to glimpse and to factor in the economic importance of biodiversity and ecosystems.”
Companies vulnerable to biodiversity and ecosystem decline include those in natural resource-dependent sectors or ones in sectors that operate in ecologically rich and sensitive areas. These include sectors such as, fisheries; forestry; mining and metals; and power generation from hydropower to oil and nuclear power plants.
Reputational, Credit and Legislative Risks Top Concerns So Far
Over-exploitation of natural resources pose a reputational risk for companies, says the study. For example, if a company is found to be logging a sensitive habitat, accelerating the decline of a species or polluting a river system, its products could be shunned by consumers, hence, jeopardizing its reputation and, thus, its share price.
The CEO Briefing says some banks are also becoming concerned that losses of ‘natural capital’ may increase a company’s credit risk and rating. Triggered by loss of biodiversity and ecosystem services, more governments are imposing regulations to protect species and habitats, some of which effectively limit or ban access to biologically important areas. Limited access to resources may hit a company’s balance sheets.
Richard Burrett, Partner in Earth Capital Partners, and Co-Chair of the UNEP Finance Initiative, said, “As the global financial sector recovers and moves into the post-financial-crisis era, there is one notion that crystallizes before our eyes more acutely than ever: we need to understand systemic risk in a genuinely holistic way. This CEO Briefing underscores the critical natural capital that underpins our economic activity and financial capital. As the finance sector, we need to ensure that we operationalise this thinking in the management of investment and lending activities. The CEO Briefing shows why this is the case.”
Barbara J. Krumsiek, President & CEO of Calvert Group Ltd., and Co-Chair of the UNEP Finance Initiative, said, “Increasingly finance professionals are realizing the importance of protecting our world’s biodiversity resources. As a company specialized in sustainable and responsible investment management, Calvert includes language on biodiversity in our proxy voting guidelines. We encourage other investment companies to implement similar concrete steps into corporate operations and decision-making.”
The report makes several recommendations to ‘hardwire’ biodiversity and ecosystem services into finance, including:
- A set of principles, similar to the Principles for Responsible Investment, should be considered for embedding ‘natural capital’ into finance;
- Credit rating agencies should establish criteria for evaluating country-based biodiversity and ecosystem service risks;
- Financial institutions should consider partnering with existing initiatives such as the Natural Value Initiative, Forest Footprint Disclosure Project and the Global Reporting Initiative to build capacity in-house and better balance risks.
Some Further Highlights from the CEO Briefing
Losses of forests and mountain ecosystems, which provide water to two-thirds of the global population, could have serious implications for various industries.
Mining: Mining can be a water thirsty business. The report cites copper mining in Chile – a chief export industry – where water consumption could increase by over 40 per cent by 2020 in what are often arid and semi-arid areas.
Hydropower: Many investments in power generation are long term and future water supplies are uncertain. Says the report, “Lenders and investors are essentially increasingly placing bigger bets on adequate future water availability and on the financial viability of their loans and investments,” it adds.
- It cites a study by HSBC and the World Resources Institute (WRI) that estimates that, as a result of drought, each five per cent drop in the load factor of a typical Indian plant can lead to a 75-base-point fall in a project’s internal rate of return.
Fisheries: It is estimated that stocks have been depleted by 90 per cent when compared to pre-industrial levels resulting in economic losses annually of US $ 50 billion.
- The real, cumulative global loss of net benefits from inefficient global fisheries over the 1974 to 2007 period is estimated at US $ 2.2 trillion.
- The report cites The Economics of Ecosystems and Biodiversity (TEEB), hosted by UNEP, that suggest the fishing sector is at risk of losing US $ 80 billion to US $ 100 billion in income along with close to 30 million jobs.
Agribusiness: Intensified farming, over-use of chemicals and water, and overgrazing has resulted in the loss of productive land and output.
- TEEB estimates that around 85 per cent of agricultural land is considered degraded due to erosion, soil compression, nutrient depletion, biological degradation or pollution, while each year 12 million hectares are lost to desertification.
The report says there is growing evidence that companies are beginning to be held liable for impacts on biodiversity and ecosystem services.
- It cites the European Union’s Environmental Liability Directive as one example where it’s likely that companies will increasingly face legal actions for direct or indirect damage to species and natural habitats.
The report also cites examples of where some banks to pension funds and insurers are starting to factor biodiversity and ecosystems into their activities, operations and investment choices.
- Rabobank, a global food and agri-business bank, has factored biodiversity into its core business and supply-chain policies for a number of sectors in which the bank is active. These include fisheries, palm oil, aquaculture, oil and gas, and coffee.
- VicSuper, an Australian pension fund with over AU$ 7 billion in assets, explicitly considers biodiversity and ecosystem risks and opportunities when considering investing in a number of listed and private equities.
- HSBC Insurance Brazil offers a car and home insurance product that compensates for someone’s emissions by investing in native forests. Over the past three years, the scheme has assisted to conserve 27 million square metres including seriously threatened remnants of araucaria forest.
The UNEP FI CEO Briefing, “Demystifying Materiality: Hardwiring Biodiversity and Ecosystem Services into Finance” can be downloaded at www.unepfi.org.
Source: UNEP Press Release dated October 27, 2010.
