The financial sector’s dependence on biodiversity
Biodiversity comprises diversity within species and varieties, between species and varieties, and ecosystems. Loss of biodiversity is a source of financial risk. It is a threat to the availability of ecosystem services, such as wood, animal pollination and soil fertility, upon which economic activities depend. This means that banks, pension funds and insurers that finance these economic activities run physical risk. Dutch financial institutions have EUR 510 billion in funding outstanding worldwide to companies with a high or very high dependency on one or more ecosystem services. This amounts to 36% of the portfolio surveyed. One of these ecosystem services is animal pollination, and worldwide the financial sector is exposed to EUR 28 billion worth of pollination-dependent products.
The financial sector’s impact on biodiversity
Financial institutions are at risk in terms of both reputation and transition if they finance companies that have a major negative impact on biodiversity. Dutch financial institutions worldwide have EUR 97 billion in financing outstanding to companies with environmental controversies. Negative impact that can directly be traced back to a company causes reputational damage to both the company itself and the financial institutions.
Government policies or changing consumer preferences to limit biodiversity damage require adjusted business activities. The transition to less nitrogen-intensive business models, for instance, may result in transition risks for the EUR 81 billion in loans the three major Dutch banks have granted to Dutch sectors involving nitrogen-emitting activities.
Biodiversity risks: a profit warning
It is of vital importance for financial institutions to identify the extent to which their portfolios are exposed to biodiversity risks in good time. Insight into these risks allows for adequate risk management. The results of the DNB-PBL study provide a lower limit of the total exposure of financial institutions to risks in the area of loss of biodiversity. Just a limited number of biodiversity risks have been studied, partly due to the limited availability of data. Based on the results, it can thus not be concluded that other risks are less relevant. The further development of consistent and widely applied standards is important for measuring and reporting on biodiversity risks.
Climate and biodiversity
Climate change is one of the main causes of loss of biodiversity, while loss of biodiversity due to deforestation, for example, and CO2 emissions released in the process, may exacerbate climate change even further. On the other hand, good forest management may help to prevent further climate change. It applies to both climate and biodiversity that historical data are not representative to predict future developments. It is thus important for financial institutions to adopt a coherent view of climate-related and biodiversity risks in their risk management.
COVID-19 and biodiversity
DNB acknowledges that financial institutions are facing major challenges in relation to the COVID-19-pandemic. DNB is focusing its immediate attention on the consequences of this pandemic for financial institutions. At the same time, it remains essential to keep a focus on risks in the longer term, such as the loss of biodiversity. The DNB-PBL study should be seen in this light. The study did not deal with the relationships between the COVID-19 virus and biodiversity; too little is known about this as yet.
Source: DeNederlandscheBank (DNBulletin 18 juni 2020)