We argue that financial risks related to biodiversity loss are more like those large obvious rhinos in plain sight. The science is clear that humanity’s impacts on our biodiversity has been dramatic over the past fifty years. We have lost 68% of vertebrate populations between 1970 and 2016, according to the Living Planet Index. But even more alarming is that this dangerous decline is destabilising our planet and can lead to sudden shifts or even complete collapse in systems.
The Amazon presents such a case. As the rainforest is thinned and cleared, its ability to produce its own rainfall is diminished, leading to a cycle of drying and more frequent fires. Over time, this will lead to a shift from rainforest to dry scrubland. This has not only devastating impacts on the region’s biodiversity but will disrupt weather patterns across large parts of South America, with significant impact on socio-economic activities. Even the Netherlands, which relies on vast imports of soy for animal feed from this region, would not be immune to this disruption.
Covid-19 is an example of biodiversity risks in plain sight. We have known for some years that continued deforestation, expansion of industrial agriculture and the trade in wild species, greatly increases our risk of outbreaks of zoonotic diseases such as the ebola and coronavirus. This risk has very suddenly over the course of the past year, manifested itself as one of the greatest social and economic disruptions of modern history
Biodiversity loss can be compared to playing a dangerous game of Jenga. We’re steadily removing the building blocks of biodiversity that will lead to sudden collapses in systems. These risks are in plain sight, we just don’t know exactly when they will be realised.
Biodiversity loss needs to be recognised as a fundamental driver of financial risks
Addressing biodiversity loss is now finally high up the agenda of many financial institutions. DNB, or the Dutch Central Bank, recently analysed the links between ecosystem services and risks to financial assets and financial institutions.
Although complex, the risks of biodiversity loss were found to be very real. The bank concluded its report Indebted to Nature that Dutch financial institutions have € 510 billion in exposure to companies with high or very high dependency on one or more ecosystem services. This comprises 36% of the portfolio examined. Interestingly, Dutch financial institutions have a € 28 billion exposure to pollination-dependent industries alone.
Reversing biodiversity loss provides an investment opportunity
An influential scientific paper we contributed to showed that it is possible to reverse global biodiversity loss while at the same time continue to feed a growing and more affluent human population. However, this would only be possible with a fundamental transformation of our food systems. This presents a huge opportunity to invest in local food production infrastructure that is climate resilient, preserves biodiversity, and promotes social equity.
Attracting capital investment at scale will, however, require innovating ideas that combine green and grey infrastructure. A practical example of this comes from the Netherlands, a low-lying country that faces significant risks from sea levels rise as a result of climate change. The traditional solution to these risks would be to simply raise the levels of existing barriers (or dykes) at a significant cost. However, alternative proposals have been made for a double dyke system with an intermediate buffer region that can be flooded. These areas provide both disaster protection, but also opportunities to improve biodiversity and to produce food differently. Blended green and grey infrastructure solutions have the scale to attract the investment capital needed to transform food production whilst benefiting our biodiversity.
Financial Institutions need to start acting now to reduce transition risks
Much work is still needed to develop consistent reporting, metrics and data needs for financial institutions to address biodiversity risks. The Task Force for Nature-Related Financial Disclosures (TNFD) has been set up to do just this. More than 73 institutions are now participating in the work of the TNFD.
But it would be strategically short sighted for financial institutions to wait until this work was concluded before acting. By starting to act now, institutions are able to dramatically reduce transitions risks. And there is no excuse to delay action.
