Bringing biodiversity finance into the investment equation: a critical step in Montreal?

Could the newly agreed Post-2020 Global Biodiversity Framework mirror the Paris Agreement in terms of broadening understanding of the risks and challenges of biodiversity loss and biodiversity finance? 

For sure, it’s an important step forward, say IMS Luxembourg deputy director Sophie Öberg and Capitals Coalition executive director Martin Lok but now it falls to private-sector businesses and financial institutions to incorporate nature-related risks and opportunities into their strategic planning, risk management and asset allocation.

The approval of the Post-2020 Global Biodiversity Framework at the United Nations’ COP15 Biodiversity Conference in Montreal last December was an important step in worldwide understanding of the risks and challenges of biodiversity loss, say Öberg, deputy director of corporate responsibility network IMS Luxembourg and Lok, executive director at the Capitals Coalition, which emphasises the interdependence and impact of natural, social and human as well as economic capital.

They argue that while the agreement has been concluded between governments, the integration of biodiversity concerns into decision-making by private organisations is a critical element of the framework — acknowledging businesses and financial institutions as key stakeholders. “Nature loss poses both risks and opportunities for business, now and in the future,” they say. “More than half of the world’s economic output – $44trn of economic value generation – is moderately or highly dependent on nature.

“All sectors rely on healthy ecosystems and the numerous services they provide, either directly or through their supply chains. Many of the implications of loss of biodiversity for business, finance and society are still unclear, so financial institutions are therefore not pricing risks in their portfolios appropriately. Furthermore, agreeing on measurement and disclosure methods for nature loss is tough – much more complex than tracking carbon reduction, for example.”

Business risks of biodiversity finance

Photo of Martin Lok
Martin Lok, Capitals Coalition

Öberg and Lok argue that the necessary first step is an increasing awareness on the part of financial institutions that the destruction and degradation of nature pose significant commercial risks: “To halt this damaging process and reverse the trend, market players must act quickly. They must assess how their individual organisations are exposed to nature-related risks and evaluate the commercial opportunities that come with the transition to nature-positive outcomes.”

It’s a logical extension, they say, of the work institutions are already doing to address climate change and the transition to net zero carbon emissions. Facilitating a common global approach to nature-related risk assessment and disclosure is the goal of the Taskforce on Nature-related Financial Disclosures, which was launched in 2021 and recently released the latest 0.4 beta version prototype of its framework for review and testing by market participants. 

Feedback from the market will help to improve future prototypes of the framework as well as the taskforce’s final recommendations to be issued in September this year. 

Over the past two years, the Network for Greening the Financial System, whose members consist of central banks and financial regulators, have examined risks linked to biodiversity and nature, with support from members in both emerging markets such as Brazil and Malaysia and developed markets including the Netherlands and France. 

De Nederlandsche Bank, for example, has estimated that Dutch institutions’ exposure to companies dependent on ecosys­tem services totalled €510bn, equivalent to 36% of the assets in the port­folios examined.

A recent study published by the network, Öberg and Lok note, argues that these risks could potentially be systemic for the financial sector, although difficult to quantify; all sectors are exposed to risks related to nature loss but some more than others. While agriculture depends on pollinating insects and many other ecosystem services, the authors say the consequences of biodiversity loss are potentially much broader, for example in leading to more pandemics, and it is therefore important to integrate these risks into financial regulation. 

Nature-positive transformation

Sophie Öberg photo
Sophie Öberg, IMS Luxembourg

“Currently, financial institutions and companies don’t have the information they need to understand how nature impacts an organisation’s immediate financial performance or the longer-term financial risks that may arise from how it impacts nature, positively or negatively,” they say. “Better information will enable financial institutions and companies to incorporate nature-related risks and opportunities into their strategic planning, risk management and asset allocation decisions.”

Öberg and Lok say the agreement in Montreal underlines the importance of private sector entities assessing their impact and dependency on biodiversity in order to make a commitment to transforming their processes and activities to contribute to a nature-positive world – and to help develop momentum.

“Although ground-breaking businesses and financial organisations are already showing good progress in this area, the majority are not yet taking the action needed. In addition, business and finance need an enabling environment from governments that ensures a level playing field and supports upscaling and accelerating the transformation.”

These pioneers are focusing on two areas: disclosure and reforming harmful subsidies. 

“Many businesses and civil society organisations have successfully advocated the adoption of an ambitious goal dubbed Target 15 that requires financial institutions and businesses to assess and disclose impact and dependency on nature across both their operations and value chains by 2030, incentivise companies to progressively reduce their negative impact and align their activities with a nature-positive economy. Now Target 15 is adopted, the vast amounts of data from disclosure will help institutions to understand sustainability better and make improved ESG decisions.”

Ending incentives to do harm

Meanwhile, Öberg and Lok say, at least $1.8 trillion a year – 2% of global GDP – is being spent on subsidies that are driving ecosystem destruction and species extinction. “To change this requires governments to reform, redirect or eliminate all environmentally harmful subsidies, including indirect and direct incentives and tax exemptions. The Business for Nature coalition, for example, advocated reducing environmentally harmful subsidies by at least $500 billion a year while scaling up positive incentives to align public financial flows with a nature-positive economy.”

Placing a monetary value on natural capital is complex but a number of promising approaches are underway. Last June, the Taskforce on Nature-related Financial Disclosures and Capitals Coalition published a report providing the technical building blocks for practical and tangible actions that businesses can take and connects the Natural Capital Protocol with the task force’s LEAP approach guidance. 

That said, Öberg and Lok say it should be noted that although assigning monetary valuation can be useful in certain situations – such as for Capex-related decisions – it is often not a necessity. Plus, there are qualitative or alternative quantitative valuation methods that can better inform decision-making.

“More than 50 valuation methods and approaches, originating from diverse disciplines and knowledge systems, are currently available to assess nature values,” they say. Choosing appropriate and complementary methods requires assessing trade-offs between their relevance, robustness and resource requirements. Using tools that identify risks and opportunities most relevant to different sectors can help focus efforts.”

Öberg and Lok conclude: “The financial sector needs to think beyond ESG and streamline financial decision-making with a shared understanding of value. Although many institutions already use sustainability or environmental, social and governance tools and methodologies to evaluate environmental and social risks, they do not currently consider or measure the extent to which their activities have a positive or negative impact across nature or society.”

Sophie Öberg is the deputy director of Inspiring More Sustainability Luxembourg (IMS), the country’s leading network for corporate responsibility. A sustainability and communications expert, she also co-chairs the Sustainability Strategy for Boards committee at the Luxembourg Association of Independent Directors. She is a sustainability and communications specialist who has worked with strategy development and activation, change management, project leading and management, design thinking and facilitation in international environments. She also serves on VitalBriefing’s International Advisory Board.

Martin Lok is executive director of Capitals Coalition, a global collaboration redefining value to transform decision-making. He has more than 30 years of experience as a policy-maker for the Dutch government, working across several policy domains, including environmental, international nature and green growth policy. He is a co-author of several national policy documents and has led public-private collaborative programs on natural capital in the Netherlands since 2014.

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