How Financial Institutions
Are Seeing the Threats
and Moving Towards Managing Them
Nagoya, 27 October 2010-
From banks to insurance companies, some
key financial institutions are beginning
to recognize rising risks to investments
from biodiversity and ecosystems loss.
Over the past 12 months,
the likelihood that declines in biodiversity
will have a 'severe', US$10 billion to US$50
billion impact on business has also climbed
sharply.
According to one new
survey, this risk is now higher than that
from international terrorism and almost
on a par with extreme weather events.
These are some of the
findings from a new CEO Briefing by the
UN Environment Programme (UNEP), entitled,
Demystifying Materiality: Hardwiring Biodiversity
and Ecosystem Services into Finance, launched
Wednesday at the UN biological diversity
convention meeting in Nagoya, Japan.
Achim Steiner, UN Under-Secretary
General and UNEP Executive Director, said:
"The kinds of emerging concerns and
rising perception of risks underlines a
fundamental sea change in the way some financial
institutions-alongside natural resource
dependent companies- are now starting to
glimpse and to factor in the economic importance
of biodiversity and ecosystems."
Companies vulnerable
to biodiversity and ecosystem decline include
those in natural resource-dependent sectors
or ones in sectors that operate in ecologically
rich and sensitive areas.
These include sectors
such as, fisheries; forestry; mining and
metals; and power generation from hydropower
to oil and nuclear power plants.
Reputational, Credit
and Legislative Risks Top Concerns-So Far
Overexploitation of
natural resources pose a reputational risk
for companies, says the study. For example,
if a company is found to be logging a sensitive
habitat; accelerating the decline of a species
or polluting a river system, its products
could be shunned by consumers, hence jeopardizing
its reputation and thus its share price.
The CEO Briefing says
some banks are also becoming concerned that
losses of 'natural capital' may increase
a company's credit risk and rating.
Triggered by loss of
biodiversity and ecosystem services, more
governments are imposing regulations to
protect species and habitats, some of which
effectively limit or ban access to biologically
important areas. Limited access to resources
may hit a company's balance sheets.
Richard Burrett, Partner
in Earth Capital Partners, and Co-Chair
of the UNEP Finance Initiative, said: "As
the global financial sector recovers and
moves into the post financial crisis era,
there is one notion that crystallises before
our eyes more acutely than ever: we need
to understand systemic risk in a genuinely
holistic way. This CEO Briefing underscores
the critical natural capital that underpins
our economic activity and financial capital.
As the finance sector, we need to ensure
that we operationalise this thinking in
the management of investment and lending
activities. The CEO Briefing shows why this
is the case."
Barbara J. Krumsiek,
President & CEO of Calvert Group, Ltd.
and Co-Chair of the UNEP Finance Initiative,
said: "Increasingly finance professionals
are realizing the importance of protecting
our world's biodiversity resources. As a
company specialized in sustainable and responsible
investment management, Calvert includes
language on biodiversity in our proxy voting
guidelines. We encourage other investment
companies to implement similar concrete
steps into corporate operations and decision-making."
The report makes several
recommendations to 'hardwire' biodiversity
and ecosystem services into finance, including:
A set of principles,
similar to the Principles for Responsible
Investment, should be considered for embedding
'natural capital' into finance;
Credit rating agencies
should establish criteria for evaluating
country-based biodiversity and ecosystem
service risks;
Financial institutions
should consider partnering with existing
initiatives such as the Natural Value Initiative;
Forest Footprint Disclosure project and
the Global Reporting Initiative to build
capacity in-house and better balance risks.
Some Further Highlights
from the CEO Briefing
Losses of forests and
mountain ecosystems, which provide water
to two-thirds of the global population,
could have serious implications for various
industries.
Mining can be a water
thirsty business. The report cites copper
mining in Chile -a chief export industry-
where water consumption could increase by
over 40 per cent by 2020 in what are often
arid and semi-arid areas.
Hydropower: Many investments
in power generation are long term and future
water supplies are uncertain. Says the report:
"Lenders and investors are essentially
increasingly placing bigger bets on adequate
future water availability and on the financial
viability of their loans and investments,"
it adds.
It cites a study by
HSBC and the World Resources Institute that
estimates that, as a result of drought,
each five per cent drop in the load factor
of a typical Indian plant, can lead to a
75-base-point fall in a project's internal
rate of return.
Fisheries: It is estimated
that stocks have been depleted by 90 per
cent when compared to pre-industrial levels
resulting in economic losses annually of
US$50 billion.
The real, cumulative
global loss of net benefits from inefficient
global fisheries over the 1974 to 2007 period
is estimated at US$2.2 trillion.
The report cites The
Economics of Ecosystems and Biodiversity
(TEEB), hosted by UNEP, that suggest the
fishing sector is at risk of losing US$80
billion to US$100 billion in income along
with close to 30 million jobs.
Agribusiness: Intensified
farming, overuse of chemicals and water
and overgrazing has resulted in the loss
of productive land and output.
TEEB estimates that
around 85 per cent of agricultural land
is considered degraded due to erosion, soil
compression, nutrient depletion, biological
degradation or pollution, while each year
12 million hectares are lost to desertification.
The report says there
is growing evidence that companies are beginning
to be held liable for impacts on biodiversity
and ecosystem services.
It cites the European
Union's Environmental Liability Directive
as one example where it likely that companies
will increasingly face legal actions for
direct or indirect damage to species and
natural habitats.
The report also cites
examples of where some banks to pension
funds and insurers are starting to factor
biodiversity and ecosystems into their activities,
operations and investment choices.
Rabobank, a global food
and agribusiness bank, has factored biodiversity
into its core business and supply-chain
policies for a number of sectors in which
the bank is active. These include fisheries;
palm oil; aquaculture; oil and gas and coffee.
VicSuper, an Australian
pension fund with over AU$ 7 billion in
assets, explicitly considers biodiversity
and ecosystem risks and opportunities when
considering investing in a number of listed
and private equities.
HSBC Insurance Brazil
offers a car and home insurance product
that compensate for someone's emissions
by investing in native forests. Over the
past three years, the scheme has assisted
to conserve 27 million square metres including
seriously threatened remnants of araucaria
forest.
Notes to Editors
The UNEP FI CEO Briefing
Demystifying Materiality: hardwiring biodiversity
and ecosystem services into financee can
be downloaded at www.unepfi.org
