Financial institutions that fail to identify which companies are most at risk from biodiversity issues can become exposed to biodiversity-related business risks themselves. This is what transpires from research I undertook for the World Conservation Union (IUCN) earlier this year The report identified the types of biodiversity-related business risks the financial sector faces when failing to incorporate biodiversity into its decision making.

Understanding the risks…
To understand the biodiversity-related business risks financial institutions currently face, I interviewed 13 commercial and investment banks. In addition, I also spoke with 13 non-governmental organizations, companies in other sectors and international organizations in order to gain a diverse perspective of the issues at play. More than two-thirds of the survey respondents said they believed financial institutions are exposed to significant reputational risk if loans, investments or other products are provided to companies which have a detrimental impact on ecosystems (e.g. oil & gas, mining, construction, forestry) or which are dependent on ecosystems for its services (e.g. tourism, agriculture, forestry). Respondents also recognized liability risk, social licence to operate, credit risk, and reduced shareholder value, although these were valued to be less important at present than risks to a company’s reputation.

Whilst it is difficult to systematically link biodiversity-related business risks to tangible financial metrics, such as market capitalization or credit risk, the report provides a number of case studies that demonstrate the growing importance of biodiversity conservation to the financial sector. In April 2004, for instance, the share price of Associated British Ports plummeted 10 per cent after the UK government rejected plans for a new container terminal in Dibden Bay near Southampton. One of the major factors behind the government’s refusal was the potential impact of the terminal on local wildlife.

Studies by F&C Asset Management and Oxera conclude that biodiversity is not considered on a broad scale within the financial services sector. Despite this, a number of internationally operating commercial banks do consider biodiversity risks during the loan approval process or when selecting companies for investment. In February 2007, Rabobank established ten categories for environmental risk analysis, including environmental pollution and depletion of natural resources. Client relations managers, risk analysts and other bank employees have to assess company performance in all credit transactions, irrespective of the amount And Goldman Sachs recently adopted a biodiversity benchmark, which was developed by Fauna and Flora International and Insight Investment. It allows financial institutions to determine which extractive companies are doing a good job from a biodiversity perspective and which ones are not.

Considerations like this may become increasingly important to companies as more stringent biodiversity laws are passed. The recent EU Environmental Liability Directive came into force on April 30 this year and holds companies financially liable for damage, in particular, to flora and fauna, water resources and natural habitats. The potential financial implications are significant not only for companies using these resources, but also the banks and insurance companies that service them. … and the opportunities Fortunately, there is good news when it comes to recognizing the importance of biodiversity for the financial sector. In addition to the mounting risks associated with biodiversity destruction, there are growing biodiversity business opportunities for financial institutions:

• Banks and investors could tap into growing markets for sustainable biofuels, along with markets for ethically-certified commodities like fish, timber and organic food. Estimates suggest a potential market size of about US$ 60bn annually by 2010

• Financial institutions that have built capacity in-house can also provide due diligence and advisory services for their clients for biodiversity sensitive transactions and projects. • Governments can also trigger investments in biodiversity-friendly projects. The Dutch government, for example, triggered demand by private investors to invest in green funds by providing fiscal advantages. Total capital invested in 2005 amounted to € 1.5bn, of which € 282m has been allocated to the project category “nature, forests and landscapes”.

Moving ahead
There needs to be a big effort to make the financial sector more aware of biodiversity issues. One way to trigger interest and increased awareness of the economic relevance of biodiversity conservation is to conduct, as suggested by the G8 in March 2007, a Stern-like review on the costs of biodiversity loss and benefits of biodiversity protection, similar to the climate change study that was issued by Sir Nicolas Stern last year for the UK government.

However, in order to attract systematic attention by financial institutions it is necessary to link biodiversity business risks as much as possible to tangible financial metrics, such as default risk, shareholder value or a company’s market capitalization. It is also important to keep in mind that although the financial implications of the risk side are likely to be more financially significant, it remains nonetheless important to focus on the opportunity side as well. To this extent, non-governmental organizations and governments should take the lead together with financial institutions that understand the material value of biodiversity protection in undertaking pilot projects for newly developing markets, such as biofuels, biodiversity offsets, and markets for sustainably produced commodities.

www.biodiversityeconomics.org/applications/library_documents/lib_document.rm?document_id=1092

F&C, 2004. Is biodiversity a material risk for companies? An assessment of the exposure of FTSE sectors to biodiversity Risk. F&C Investments: London, UK

Oxera, 2000. Accounting for the environment: an analysis of the quality of environmental reporting across the food and retail, oil and gas, utilities, and banking sectors. Oxera: Brussels, Belgium and Oxford, UK

For SMEs, the minimum loan request needs to be € 1 million.

Further highlighted in: Bishop, J., Kapila, S., Hicks, F. and Mitchell, P., 2006. Building Biodiversity Business: Report of a Scoping Study. Shell International Limited: London, UK and IUCN: Gland, Switzerland

Ivo Mulder is market developer and strategic advisor, Dutch Fund for Nature Development (Groenfonds). At the time of authoring the report he was an Alcoa Foundation Conservation and Sustainability Fellow at the World Conservation Union (IUCN).

i.mulder@groenfonds.nl