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Biodiversity crisis also challenges financial actors.

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The real and financial economy depend to a large extent on functioning ecosystems. That is why it is not only ethically imperative, but also, an own interest to commit to the preservation of biological diversity. International pioneers show how this can be done. But where are the big banks, investment companies, pension institutions, asset managers or insurers?

Did you know that 55 percent of the global gross domestic product depends on healthy ecosystems? What ecosystems provide is what we and you, dear readers, need - not only to get fed, but also to earn money with financing. Biodiversity provides pollination, fertile soils, clean water, health, flood protection, functioning rain cycles and oceans, and numerous other ecosystem services.

But: this foundation is extremely threatened - by the sixth mass extinction in world history, which is proceeding more rapidly and radically than ever before. Ecosystems are threatening to collapse in many countries, including Europe. Biologists, UN organisations, the OECD, the World Economic Forum, Swiss Re and the Dutch Central Bank warn of this.

Do financial actors share responsibility?

Yes, because they invest in business models that often only work so well because there are no prices to pay for the external ecological costs. But this cannot remain the case, because the extinction of species harms the economy and also the financial sector when tipping points are exceeded and systems collapse. In 2020, the management consultancy PWC and the environmental organisation WWF stressed: "As climate change and biodiversity loss reinforce each other, policymakers face a huge challenge in responding to this dual crisis, as the risk of financial market instability increases significantly."

More than a third of the Dutch financial sector's €1.4 trillion financial asset positions depend on environmental wealth.

The Dutch central bank has quantified the dimensions for its country: More than one third of the €1.4 trillion financial asset positions of the Dutch financial sector depend on ecological wealth, meaning €510 billion of globally placed financing is at risk of biodiversity loss. This gives financial actors great leverage for decisions for or against biodiversity protection.

Do investors get involved?

Mostly not. While many capital owners refer to the 17 UN Sustainable Development Goals, the 2015 SDGs, life on land and in water engages only some, according to research firm Novethic. This is true even for impact-oriented investors: the SDGs are playing an increasingly important role as a global frame of reference, but the focus is on few of these goals, as the Centre for Social Investment at the University of Heidelberg determined. Asked about the greatest global need, investors mention climate protection, health and well-being, affordable and clean energy, and quality education - but not natural livelihoods, which are a basis for social justice as well.

According to a study by the environmental organisation Global Canopy from the beginning of 2021, almost 73 percent of 150 financial institutions analysed had no guidelines for limiting rainforest destruction through financing. The environmental organisation Global Witness annually denounces the financing of deforestation by more than 300 banks and large investors. In a survey by Responsible Investor, the World Conservation Union(IUCN) and other financial and conservation partners, nearly four-fifths of responding houses from 35 countries expressed concern about biodiversity loss, but this is not reflected in policies or guidelines: More than 90 per cent of the 250 investors responding to a question on this issue have no measurable biodiversity targets.

Investor initiative CDP Forests is committed to combating deforestation

Only the investor initiative CDP has recognised the explosive nature of the issue. Founded by concerned investors in 2010 and growing under the CDP umbrella, the Forests Disclosure Project initiative warns: "Deforestation is a real business risk." CDP, now an NGO, won't accept that companies barely address it. That is why it surveys hundreds of large companies every year on behalf of well-funded investors about what they are doing strategically and practically to combat deforestation.

There is also criticism of lenders. Germany's 15 largest banks are very hesitant to use anything other than existing approaches and methods to deal with biodiversity-related risks, according to a WWF study from autumn 2021. According to the study, there are no visionaries, no pioneers, not even followers! But the European Central Bank expects banks to disclose their environmental risks more strongly, after all, a wide variety of environmental factors such as water stress, biodiversity loss, resource scarcity and environmental pollution are the cause of the risks affecting them.

The ECB has been calling for active management since 2020 and referred at the time to an unnamed bank that assesses the environmental impact of its financing. Its rating is derived from an assessment of the climate impact of the respective transaction and takes into account all significant environmental factors such as water consumption, pollution, waste and biodiversity. Negative impacts mean more risk and can make loans more expensive or alienate investors. But banks are now here near ready to adapt to this, as Bundesbank board member Sabine Mauderer told Handelsblatt's Sustainable Investments briefing in mid-2022.

Regulatory conditions put nature at a disadvantage

The fact that most investors and lenders mostly ignore the risks associated with deforestation and ecosystem losses is partly due to the fact that exploiting nature is still financially rewarding. Moreover, it is costly to integrate biodiversity criteria. However, inaction or ignorance is also strongly linked to political framework conditions that set the wrong incentives. In the absence of political focus on biodiversity conservation,there are no regulatory requirements or incentives for investors.

Recently, however, something has been happening in the wake of the EU Sustainable Finance Action Plan: since March 2021, trustees in the EU have been obliged to report on environmental, social and governance risks. However, this disclosure requirement (SFDR) does not mean that institutions have to commit to biodiversity protection. On 54 pages of the regulation, ecosystems are not mentioned at all and biodiversity only once in the definition of a "sustainable investment" that contributes to it.

Nor does the EU taxonomy of sustainable economic activities that lend themselves to sustainably oriented investments require any commitment. The first building block is the classification system of climate compatible activities and activities suitable for climate adaptation. Although biodiversity is essential for both, only the "do-no-significant-harm" rule applies, according to which strong interventions in ecosystems are taboo. Financial institutions and companies have had to report on the extent to which they comply with the climate taxonomies since the beginning of 2022 for the 2021 financial year.

But a taxonomy on biodiversity is to be developed. The EU Platform on Sustainable Finance, an expert group commissioned by the EU Commission, has made a draft for this in 2022; it could possibly take effect as early as 2023.

How can financiers mitigate negative effects on ecosystems?

Investors can already take action to explore portfolio risks, build up a risk management system and take action against deforestation.The possibilities are manifold.

Investors can exclude bonds from countries that have not ratified the UN Convention on Biological Diversity (CBD). Some mutual funds also exclude countries that violate it. Nordea AM, a large Norwegian assetmanager, stopped buying Brazilian government bonds in 2019 because the government was not doing enough to combat slash-and-burn agriculture in the Amazon. For equities or corporate bonds, analysts and investors can research whether an issuer addresses biodiversity risks in its business model and how it deals with them. Some mutual and special funds have biodiversity criteria.

"What good is a low-emission paper manufacturer that gets its wood fromclear-cutting?"

Some investors ask how not only eco-companies but also stock exchange groups integrate ecological wealth into strategies, decision-making or business models. In climate investing, it is too short-sighted to consider only CO2 emissions and not the protection of forests, wetlands, peatlands and grasslands. What good is a low-emission paper manufacturer that gets its wood from clear-cutting? Some corporations destroy mangroves - nurseries of countless species, livelihoods of millions of people -through factories or oil tanker accidents like the one in 2020 on the coralreefs off Mauritius. "Mangrove habitats are in greater decline than coralreefs or tropical rainforests," warns Udo Gattenlöhner of the Global Nature Fund (GNF).

Renewable raw materials that are harmful to the climate, such as biodiesel from palm oil, should be questioned. In the case of real estate and large-scale projects, it must be examined whether ecosystems have to give way and good compensation areas have to be developed, not just green roofs. Care should be taken with conventional players: for example, the fundgiant BlackRock pledged in 2020 to divest coal investments, but according to NGOs, the US corporation is one of the largest shareholders in companies that deforest the most.

Demand change as active shareholders

Moreover, one can be an active shareholder: Dutch fund providers require palm oil producers to grow more sustainably or exclude them. Norges Bank IM, the asset manager of the Central Bank of Norway, excludes palmoil investments and talks to both banks that finance deforestation and companies that buy soy and meat from Brazil. In 2019, 251 major investors with a combined $17.7 trillion in assets under management called for companies to commit to rainforest conservation.

An initial success was achieved in July 2020 by a group called the Investor Policy Dialogue on Deforestation (IPDD) with, at the time, 34 mostly European large investors with a combined $4.6 trillion undermanagement: Following their public pressure and a personal conversation, the Brazilian government banned slash-and-burn agriculture in the Amazon for 120 days. With the statement "We want to continue investing in Brazil", they had asked the government by open letter to stop deforestation and to respect the rights of indigenous peoples. Most of the signatories also belong to the Investor Initiative for Sustainable Forests.

"The investors' letter was the most effective international initiative against the Amazon fires in recent times," Lutz Weischer, political director of Germanwatch in Berlin, told the author at the time. Since bans are not monitored and illegal arson occurs, "investors have to keep up their pressure". This proved true when widespread fires flared up again in August 2020. There must be many more such actions, said climate expert Adam Pavloff of Greenpeace, "because investors have a lot of power. That there has been an immediate public response shows that such dialogues are effective."

In early 2021, IPDD held a meeting with Brazil's Vice President Hamilton Mourão, who they say pledged to tackle illegal deforestation. Investors are demanding a consistent regulatory framework. Whether they will be able to assert themselves remains to be seen. In the meantime, other capital owners and asset managers from many countries have joined: Currently, 61 financial institutions with a total of 8.8 trillion dollars in assets under management are participating in the IPDD Investor Coalition (June 2022). Those who sign must contribute to the initiative but are not obliged to draw consequences for their own portfolios from the insights gained. The signatories are not publicly named.

Diverse investment options - perseverance required

There are also investment options in favour of species-rich forests, organic farming or nature-based business models. The first players are treating biodiversity protection as an investment criterion and are investing,for example, in renewable energy projects that reforest parts of the land. Conservation is part of some business models. For example, investors bought a bond from Hylea Foods in 2019: Their business model is based on the fact that Brazil nut trees only grow in healthy ecosystems in rainforests. It provides an income for thousands of people. This makes clearing less attractive for them and indirectly protects the rainforest.

European investors have been participating in the Eco-Business Fund since 2016, which finances, for example, the conversion of coffee monocultures into species-rich shade plantations, and in the Sustainable Ocean Fund since 2019: it gives around 100 million US dollars to small and medium-sized companies that, among other things, operate sustainable fisheries, work to preserve marine and coastal ecosystems and reduce plastic pollution in the oceans through circular economy.

Individual investment products afforest large areas of mixed forests with native species in countries of the Global South for nature conservation. Under plantation-like afforestation, also with several tree species, some of which bear fruit, animals can graze. These are agroforests. Many projects are young and cannot yet demonstrate a measurable impact. However, investors are increasingly pushing for this.

In any case, donors need to be persistent - trees and ecosystems need time to develop and grow. And direct investments carry the risk of total loss. But without courageous companies and investors, there would be no innovations - not even for human livelihoods.

International initiatives to strengthen biodiversity

Methodologically, companies and the financial sector are at the beginning. But some international initiatives have developed guidelines, tools and best practices for natural capital assessment, risk management, due diligence and transparency and reporting. Among them is the Task Force on Nature-related Financial Disclosures (TNFD), which in spring 2022 presented prototypes for a reporting framework on financially relevant nature aspects of business for discussion, with the final framework planned for 2023.

By July 2022, 98 financial houses from 19 countries have committed to protect biodiversity through their financing in the Finance for Biodiversity Pledge.

Pioneers are even setting out to support biodiversity through finance. In the Finance for Biodiversity Pledge, 98 financial institutions from 19 countries have pledged to protect and strengthen biodiversity through their financing by July 2022. They represent a total of 14 trillion dollars in assets.

The impetus came from Dutch actors who cooperate in the Partnership Biodiversity Accounting Financials (PBAF). Its initiator, the ASN Bank, wants to have a positive effect on biotopes and species by 2030 with financial investments and loans for restoration and the circular economy.

However, large German institutions are missing from all the initiatives. Only one dark green German financial institution is participating in PBAF and Shareholders for Change. The Finance for Biodiversity Initiative's pledge to make a positive contribution to biodiversity is shared only by GLS Bank, Deutsche Oppenheim Family Offices and Planet A Ventures. And among the TNFD members, no German houses are involved; only KfW Bank is among the 400 Forum members!

Anahita Yousefi, founder of the Norwegian NGO Harvest, says: "While many European investors play a leading role, major German financial players have a low awareness of the problem, are the least engaged in this compared to their peers and have not yet committed to deforestation-free portfolios."

But that would be the least that investors, lenders and insurers in this country could do. After all, financing can help secure biodiversity and thus livelihoods. Complexity is no reason to sit back and do nothing!

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