Biodiversity loss as a threat to the financial system

Por: Javier Aliaga Lordemann*

Biodiversity loss constitutes a considerable threat to the global financial system, with over 50% of world GDP (approximately 44 trillion US dollars) depending on nature (World Economic Forum, 2020). As ecosystems degrade, essential services such as pollination and climate regulation are compromised, leading to market volatility and instability, particularly in sectors that depend on natural resources.

Global Biodiversity Outlook 5 underscores that one million species are at risk of extinction (UNEP, 2020), a situation that threatens industries such as agricultural and fishing. For example, overfishing can cause economic losses in the fishing industry, estimated to be worth 362 billion US dollars globally (FAO, 2020). This being said, the financial institutions must recognize the fact that their investments are vulnerable to biodiversity loss.

It is crucial to understand the impacts of different sectors on biodiversity (see Figure 1). Industries such as agriculture and mining significantly affect ecosystems, with 80% of tropical deforestation attributable to expansion of the agricultural frontier (FAO, 2018). Unsustainable practices expose financial portfolios to environmental risks and regulatory changes.

Figure 1: How finance impacts and depends on nature

Source: UNEP FI (2023), Case Studies PRB Nature Target Setting Guidance

 

The concept of doble materiality is essential; financial institutions must consider both the financial impacts of biodiversity loss and their ecological effects. This dual perspective helps to align financial strategies with the goals of sustainability, as emphasized by the Task Force on Climate-related Financial Disclosures (TCFD, 2017).

Financing biodiversity is critical, but there is a yearly financing gap of 300 billion US dollars for the needs that exist to halt biodiversity loss (OECD, 2020). Needed are innovating financing mechanisms such as green bonds for mobilizing conservation resources.

The financial institutions indirectly also have an impact on biodiversity through investments in harmful industries. Financing deforestation or fossil fuel extraction can lead to reputation risks and greater regulatory scrutiny, as observed in the EU Regulation on sustainability-related disclosures in the financial services sector (EU, 2020).

The interaction between climate change and biodiversity loss complicates risk management. Climate change aggravates biodiversity reduction, while loss of biodiversity reduces the level of resilience to climate impacts (IPCC, 2019). A holistic approach is needed.

Financial institutions are increasingly including biodiversity metrics in their frameworks of environmental, social and governance (ESG); this allows them to align their investments with sustainability goals. Studies indicate that companies with robust sustainability practices often outdo their peers (Eccles et al., 2014).

Taking on the issue of biodiversity loss demands a change of paradigm in financial operations. In valuing natural capital, the financial sector can contribute towards conserving ecosystems while ensuring long-term viability. Here, the actors demand greater responsibility in terms of the impacts on biodiversity, forcing the institutions to adapt in order to avoid significant financial repercussions.

In Latin America, which is home to approximately 40% of the world’s biodiversity, deforestation and climate change threaten ecosystems and livelihoods. The Inter-American Development Bank (IDB) reports a loss of 1.5 million hectares of forest annually, mainly attributable to farming (IDB, 2020).

Key biodiversity challenges in Latin America:

• Deforestation: driven by farming, especially livestock breeding and soybean production
• Soil degradation: Intensive farming results in 25% of arable land being degraded (FAO, 2021).
• Loss of marine biodiversity: Overfishing and contamination threaten marine ecosystems.
• Impact of climate change: Alterations in weather patterns affect the distribution of species and aggravate biodiversity loss.

The financing gap in Latin America for the conservation of biodiversity is significant. The UNEP estimates that 300 billion US dollars are needed annually to halt biodiversity loss at the global level (UNEP, 2020).

Bolivia is a biodiverse country that faces severe challenges:

• Deforestation: high rates due to farming and illegal felling of trees
• Soil degradation: Unsustainable agricultural practices cause erosion and nutrient depletion.
• Depletion of water resources: Overexploitation threatens freshwater ecosystems.
• Loss of wildlife habitats: Urbanization causes habitat fragmentation.

Mobilizing resources for tackling biodiversity loss is critical (see Figure 2). Instruments such as green bonds and biodiversity loans provide the capital needed for conservation projects.

Figure 2: Estimated growth in financing resulting from scaling up the proposed mechanisms by 2030 (in billions of 2019 dollars per year)

Source: Deutz et. al., 2020, Financing Nature: Closing the global biodiversity financing gap

Key strategies for mobilizing resources:

• Developing biodiversity financing mechanisms
• Fostering public-private partnerships
• Integrating biodiversity in financial decision-making
• Improving regulatory frameworks that foster sustainable practices

Collaborative efforts are essential for preserving biodiversity in Bolivia and fostering sustainability in Latin America. This article aims to put the first elements on the discussion table; then we will delve into the ideas in future blogs.

References

• Eccles, R. G., Ioannou, I., & Serafeim, G. (2014). The impact of corporate sustainability on organizational processes and performance. Management Science, 60(11), 2835-2857.
• European Commission. (2020). Sustainable finance: The EU Taxonomy. Retrieved from https://ec.europa.eu
• (2018). The State of the World’s Forests 2018. Retrieved from http://www.fao.org
• (2020). The State of World Fisheries and Aquaculture 2020. Retrieved from http://www.fao.org
• (2021). The State of the World’s Forests 2021. Retrieved from http://www.fao.org
• (2020). Biodiversity in Latin America: Challenges and Opportunities. Retrieved from https://www.iadb.org
• (2019). Special Report on Climate Change and Land. Retrieved from https://www.ipcc.ch
• (2020). Biodiversity Finance: A Global Review. Retrieved from https://www.oecd.org
• (2017). Recommendations of the Task Force on Climate-related Financial Disclosures. Retrieved from https://www.fsb-tcfd.org
• (2020). Global Biodiversity Outlook 5. Retrieved from https://www.cbd.int
• World Economic Forum. (2020). Nature Risk Rising: Why Financial Institutions Need to Act. Retrieved from https://www.weforum.org

 

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* Investigador Senior Asociado de INESAD, jaliaga@inesad.edu.bo

Los puntos de vista expresados en el blog son de responsabilidad de los autores y no necesariamente reflejan la posición de sus instituciones o de INESAD.