Why Green Finance cannot ignore Biodiversity

A dive into the risks presented bidirectionally between biodiversity loss and financial activities, and the action required from financial actors to manage biodiversity risk

The growing green finance agenda has mobilised the finance industry in the fight against climate change. But beyond the climate, it has so far neglected another critical part of our environment - biodiversity. Biodiversity encompasses the variety of animals, plants, fungi, and microorganisms that live on our planet, and every one of these living things live and work together in a delicate ecosystem to support life. Currently, species are disappearing at a rate 10 to 1,000 times faster than the normal rate of extinction, so much so that this has been labeled the “sixth mass extinction event”.¹ Biodiversity risk or nature-related risk refers to the systemic threats that biodiversity loss and ecosystem degradation pose to finance and other economic activities.

Biodiversity risk matters because economic activity ultimately derives from the fruits of nature. A business cannot thrive unless it has access to the natural resources it trades in or the energy required to power its operations. This creates a dependency of business on nature. At the same time, the operations of a business may also have impacts on nature. It could adversely affect nature and biodiversity through the overuse of natural resources or the destruction of land and ecosystems. The relationship between nature and the economy goes both ways - all economic activities depend on and impact nature.

The finance industry should therefore treat nature and biodiversity loss as seriously as it is starting to treat climate change. According to the World Economic Forum (WEF), over half of global GDP is moderately or highly dependent on biodiversity and ecosystem services.² Yet, worldwide, biodiversity is declining at a significant rate with humans at the forefront of its destruction. Financiers should begin investing in nature to reduce the economic losses that will result from ecological degradation.³ On the other hand, finance will accelerate the loss of biodiversity if it continues to be channelled towards ecologically destructive activities. Reforming finance would mean negating financial flows towards loss in biodiversity.

“The relationship between nature and the economy goes both ways - all economic activities depend on and impact nature.”

The landmark Economics of Biodiversity: The Dasgupta Review (2021) suggests that this can be done by introducing and integrating natural capital into national accounting systems for the economy. It further suggests that we should come up with a new way to measure economic wealth and embrace measurement of “inclusive wealth” instead. This would better evaluate societal wellbeing through the combination of produced capital, human capital and natural capital.⁴

The Way Forward for Dealing with Biodiversity Risk

Beyond the suggestions proposed by the Dasgupta Review, a few approaches can be undertaken to deal with the risks posed to human and economic systems by biodiversity loss. The first is a disclosure-based approach. Just as the Task Force for Climate-related Financial Disclosures (TCFD) has gained widespread acceptance through the voluntary disclosure of climate risks by firms and financial institutions, so too has the Task Force for Nature-related Financial Disclosures (TNFD) been driving efforts in the disclosure of nature-related risks.

Another risk-based approach would be to recognise the radical uncertainty that comes with quantifying biodiversity risk, and instead make use of the Precautionary Principle when dealing with natural capital.⁵ This means that in the face of uncertainty over how the future unfolds, actions are taken to prevent the worst-case scenarios from occurring. This prevents “small and reasonable risks” building up and cascading into much larger, unmanageable risks, and also seeks to avoid reaching ecological tipping points.⁶

Financial actors may also consider targeting high performing natural capital. Adoption and investment towards Nature-based solutions are a nascent but promising solution that addresses biodiversity risk and climate risk, and one that Singapore is paying increasing attention to.⁷ Wildlife payment mechanisms are another option to improve the quality of biodiversity within protected areas as well as increase the volume of carbon sequestered as compared to areas without wildlife protection.⁸

Finally, international cooperation will be essential. On that front, the United Nations Biodiversity Conference (COP15) agreement on biodiversity may well be a historic breakthrough. The agreement, signed in December 2022, pledges to protect 30% of nature by 2030, reform $500 billion of harmful subsidies, and restore 30% of degraded terrestrial, inland water, coastal and marine ecosystems.

The threat to biodiversity is one that beseeches urgency. In many cases, the consequences on nature are irreversible. Getting on top of biodiversity risks is therefore an essential task alongside the myriad of financial and environmental risks the world faces today. As David Attenborough has put it, “If we take care of nature, nature will take care of us.”.

footnotes

¹ Gerardo Ceballos, Paul R. Ehrlich, Rodolfo Dirzo, “Biological annihilation via the ongoing sixth mass extinction signaled by vertebrate population losses and declines”, PNAS Volume 114 No. 30, 2017

² Amanda Russo, "Half of World’s GDP Moderately or Highly Dependent on Nature, Says New Report", World Economic Forum, 19 January 2020

³ Matthew Agarwala et al., "Nature Loss and Sovereign Credit Ratings", Finance for Biodiversity Initiative, June 2022

⁴ Partha Dasgupta, "The Economics of Biodiversity: The Dasgupta Review", London: HM Treasury, January 2021

⁵ Katie Kedward, Josh Ryan-Collins, Hugues Chenet, "Managing nature-related financial risks: a precautionary policy approach for central banks and financial supervisors", Institute for Innovation and Public Purpose, Working Paper Series (IIPP WP 2020-09)

⁶ Nassim Taleb et al., "The precautionary principle (with application to the genetic modification of organisms)", New York University, 4 September 2014

⁷ Koh Lian Pin and Audrey Tan, "Looking to 2023: A wishlist for nature in a world on fire", National University of Singapore, 21 February 2023

⁸ Amy J Dickman et al., "A review of financial instruments to pay for predator conservation and encourage human–carnivore coexistence", PNAS Volume 108, No. 34. 2010