Looking ahead: threats of loss of biodiversity, nature risks and ways to prevent them in the financial sector

Short summary 

Loss of biodiversity and nature risks pose significant threats to global ecosystems, with implications for human societies, economies and the financial sector (LSE, 2022). Central banks and financial regulators are increasingly aware of the importance of addressing financial risks related to nature. Urgent transformative changes to economic and financial systems are required to minimise the impacts of loss of biodiversity and nature risks (LSE, 2022). By addressing the link between nature and biodiversity and financial stability, the financial sector can contribute to a resilient and sustainable future. 

 Main body 

Climate change is the main driver of nature risks and loss of biodiversity and it poses significant threats to the financial sector (ECB, 2023). Extreme weather events cause significant economic losses (EEA, 2023). Financial organisations with investments in vulnerable industries or regions are dangerously exposed (ECB, 2021). As a result, loss of biodiversity and increasing risks to nature pose significant challenges to the ecological balance of the planet. As concerns about environmental sustainability grow, it is vital for the financial sector to also play its part in preventing risks to nature and biodiversity. It can assess, price and manage biodiversity-related financial risks, which are often mispriced and which can threaten the creditworthiness of companies that depend on natural assets and biodiversity (JRC, 2023; OECD, 2023). 

Let us start by considering the main threats to nature and biodiversity. 

• The impacts of climate change represent major threats to biodiversity. Rising temperatures, extreme weather events and rising sea levels can disrupt ecosystems, leading to loss of habitats and extinctions of species. 
• The expansion of agriculture, logging and urbanisation are contributing to large-scale deforestation and changes in land use. This results in the destruction of critical habitats and ecosystems. 
• Pollution from industrial activities, including chemical spills and plastic waste, poses a serious threat to aquatic and terrestrial ecosystems. Pollution harms biodiversity and disrupts the delicate balance of ecosystems. 
• Overexploitation of natural resources is depleting ecosystems, threatening many species and reducing biodiversity. 

Let us change the perspective and look at what the financial sector can do to avoid risks to nature and biodiversity. 

• Financial institutions can play a key role in preventing loss of biodiversity loss by adopting sustainable financing practices. These involve incorporating environmental, social and governance (ESG) criteria in investment decisions and directing capital to projects that promote conservation of biodiversity. 
• By integrating ESG metrics in risk assessment models, financial institutions can assess the potential environmental impacts of their investments. This proactive approach helps identify and avoid projects with negative impacts on biodiversity. 
• By supporting conservation initiatives and projects that focus on restoration of habitats, protection of species and sustainable resource management, financial institutions can make an active contribution to conservation of biodiversity. This can include partnerships with environmental organisations and participation in conservation finance. 
• Banks and financial institutions can promote responsible lending practices by considering the environmental impact of loans. Implementing policies that discourage lending to projects associated with deforestation, pollution or overexploitation can make a significant contribution to conservation of biodiversity. 
• By improving transparency and reporting, financial institutions should improve their disclosure practices to provide detailed information on the impacts on biodiversity of their activities. This will enable investors and stakeholders to make informed decisions and promote responsible investment. 

For a deeper understanding of real-world best practices, read this report.  

By adopting these sustainable practices, financial institutions can become catalysts for positive change. As we face a future marked by the challenges of climate change, a commitment by the financial sector to biodiversity and nature conservation is, and will continue to be, critical in promoting a sustainable and resilient planet. 

References 

• Assessing biodiversity-related financial risks: Navigating the landscape of existing approaches, OECD Environment Policy Papers, No. 36, OECD Publishing, Paris. (OECD, 2023). Retrieved from . 
• Beyond Climate: Addressing Financial Risks from Nature and Biodiversity Loss,” Grantham Research Institute on climate change and the environment. (LSE, 2022). Retrieved from.
• Climate-related risks to financial stability (ECB, 2021). Retrieved from.  
• Decrypting the financial risks of climate change and biodiversity loss. (JRC, 2023). Retrieved from.
• Economic losses from weather- and climate-related extremes in Europe (EEA, 2023). Retrieved from.
• Living Planet Report 2020 – Bending the curve of biodiversity loss. Almond, R.E.A., Grooten M. and Petersen, T. (Eds). (WWF, 2020). Retrieved from.
• Occasional paper series No 275. (ECB, 2023). Retrieved from. 

Recommended external sources 

• Biodiversity opportunities and risks for the financial sector. The Sustainable Finance Platform. Working Group Biodiversity (DNB, 2020). Retrieved from.
• Network for Greening the Financial Sector. Banque de France (NGFS, 2023). Retrieved from.
• Taskforce on Nature-related Financial Disclosures (TNFD, 2023). Retrieved from.