Biodiversity: Why it should also be the driving force in funding

The "green" transformation has become standard for companies. The need to reduce the negative effect of economic activity on the environment and global resources, is largely undisputed (even if opinions vary about the timing and scope of implementation). While attention was initially on climate change and its trigger CO2 emissions, biodiversity has increasingly been the focus for the last few years.

A wide variety of plant and animal species is of existential importance to humans. More than 75 percent of global crops are reliant on pollination by animals, around four billion people primarily use natural remedies for their health care and almost 70 percent of the world's cancer drugs are based on natural healing substances or are synthetically copied from them.

Biodiversity under threat

These resources are under threat: Around 25 percent of all animal and plant species globally are currently endangered, and of these almost one million species are at risk of becoming extinct within the next decade. In the tropics alone, which have a particularly high level of biodiversity, 32 million hectares of forest were lost between 2010 and 2015.

In December 2022, the Kunming-Montreal Global Biodiversity Framework was adopted at the UN Biodiversity Conference in Montreal. In it, four long-term goals and 23 action-oriented global targets were defined to stop the loss of biological diversity and reverse the trend. Among other things, the final agreement provides for the designation of more nature reserves, the restoration of damaged ecosystems and the reduction of environmentally harmful subsidies. Companies will be obligated to account for how they contribute to the loss of biodiversity, but also how they are affected by it.

A look at the conference participants shows how seriously the topic is now being taken: With around 1400 company representatives, the Montreal conference was considerably better attended than the previous conference in 2019. The protection of biodiversity is relevant for companies for different reasons. On the one hand, the loss of biodiversity and ecosystems can have specific effects on business operations. According to World Economic Forum estimates, sectors that are profoundly dependent on nature generate around 15 percent of global GDP, and there is a further 37 percent that are moderately dependent – an overall economic output of approximately 44 billion US dollars. The most dependent sectors include the building sector, agriculture and the food sector.

On the other hand, the topic increasingly influences legal issues in addition to economic ones. First, there is the EU taxonomy. So far, the criteria for the first two environmental objectives "climate change mitigation" and "climate change adaptation" have been made available here. The criteria for the four other environmental objectives, including "protection and restoration of biodiversity" should follow this year. The Platform on Sustainable Finance advisory council has already presented a blueprint for the corresponding technical recommendations. In addition, further reporting standards such as the International Stability Standards Board (ISSB) or the Corporate Sustainability Reporting Directive (CSRD) expand the reporting obligations for companies in relation to their influence on biodiversity, thus increasing the pressure.

Risks for banks increasing

This also makes biodiversity a high priority for banks, as risks that arise for a company can quickly become credit risks. The ECB has indicated several times that risks that result from a reduction in biodiversity can be a source of risk for individual financial institutions and therefore for the financial system as a whole. In 2020, the ECB issued a guideline in which it specified its expectations of banks with regard to dealing with climate and environmental risks, including the loss of biodiversity. All credit institutions should meet these expectations in their area of supervision at the latest by the end of 2024.

Since 2019, banks worldwide, including ING, have been signing the United Nations Principles for Responsible Banking (PRB). The more than 300 signatories today have committed to harmonising their strategy and their business practices with the global and local climate and sustainability objectives and to specifying and implementing appropriate objectives.

In concrete terms, this is about dialogue with our own customers. How can negative impact be avoided or at least be reduced? How can a business model be designed so that nature is respected, and how can the bank assist in this change?

Biodiversity is threatened by different factors: by changes in land usage, the exploitation of natural resources, environmental pollution, climate change and the spread of invasive species. This is where the banks can come in. For example, ING has excluded certain projects and business activities from financing from the outset if they affect high-significance, sensitive ecosystems.

In addition, the credit portfolio is being screened to get a sense of which sectors have the greatest influence on biodiversity. With a view to the risk factors mentioned, there are tighter requirements for chemicals, energy, agriculture and forestry, manufacturing, metals and mining, and transport sectors, which are of particular relevance here.

Green funding as a lever

Around 200 billion US dollars is provided annually as part of the Kunming-Montreal Global Biodiversity Framework, of which about 20 billion US dollars is for developed countries to support developing countries, where a large part of Earth's biodiversity can be found. At the same time, however, banks are also asked in their role as international intermediaries to mobilise financial resources for appropriate initiatives and to steer them in the right direction.

Financial solutions such as credits or loans linked to ESG criteria are advisable in order to deploy capital where it is needed and to also provide a lever to improve the sustainability performance of companies. They reward progress and changes in the protection of nature and the climate, because, for example, the interest payments are linked to achieving certain goals, such as improving waste disposal, increasing the proportion of recycled waste, soil conservation or responsible procurement management.

Companies and banks are facing high societal expectations to prioritise the protection of biodiversity. Their interests are complementary. They should therefore jointly explore ways and means of driving the transformation forward.

By-lined article by Booy Rodermond, Global Sustainability Advisor of ING Group and Stefan Zeller, Sustainable Finance Lead of ING Deutschland
18.03.2023, Börsen-Zeitung, Supplement „Sustainability“