Environmental Economics

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.

By: Lykke E. Andersen*

One of my favourite Christmas presents this season was a book recommendation: Inheritors of the Earth: How Nature Is Thriving in an Age of Extinction written by British biologist and ecologist Chris D. Thomas.

As the gift-giver very well knows, I don’t particularly sympathise with ecologists, conservationists, and conservatives, as I find them irrational in their fixation on an imagined perfect world 50 to 150 years ago, which they cling on to at all costs, ignoring billions of years of evolution, and thinking they know better which species (and people) ought to be where and when.

The author of the book, Chris D. Thomas, is labelled “shockingly contrarian” because, in contrast to the popular perception of humans being in the process of causing the 6^th mass extinction on this planet, he argues that biodiversity has increased in almost every country, county or island as a direct consequence of human activity.

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By: Lykke E. Andersen*

Max Roser, who created and maintains Our World In Data at the University of Oxford, complains that we never see such a headline in the newspapers, although, on average, this would have been an accurate title every single day during the last 25 years.

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By: Lykke E. Andersen*

To celebrate Earth Day 2017, which is tomorrow, I would like to highlight the important findings of a paper by Campbell et al. published earlier this month in Nature (1). The paper documents, through the analysis of air trapped in ice from Antarctica, that the growth of global terrestrial gross primary production (GPP) –the amount of carbon dioxide that is ‘fixed’ into organic material through photosynthesis– is larger now than it has been at any time during the last 54,000 years. This basically means that the planet is greener and nature is thriving more now than at any time during human history, despite all the havoc we humans are wreaking everywhere.

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By Lykke E. Andersen

Like many people, I hate insects, especially the ones that sting or bite; and spiders simply for being spiders. Still, like many people, I regularly worry about the collapse of the honey bee population, since, apart from producing honey and wax, they are clearly very important for fertilizing a large proportion of our crops and wild plants. These regular worries are caused by alarming news articles such as:

• “Beepocalypse Redux: Honeybees Are Still Dying — and We Still Don’t Know Why” (Time Magazine, May 2013);
• “A world without bees: The price we will pay if we don’t figure out what is killing the honey bee” (Time Magazine, August 2013);
• “Why Honey Bee Extinction Would Mean the End of Humanity” (ScienceABC, 2015);
• “Honey Bee Extinction Will Change Life As We Know It” (Motherboard, June 2016);
• “Honey Bee extinction: What does that mean for us?” (SustainableCollectiveCities, July 2016).

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By: Lykke E. Andersen*

The World’s most famous equation is undoubtedly Einstein’s E=mc², and while it stipulates that the total amount of energy in the Universe is constant and cannot be created nor destroyed, only transformed, I will argue that the harnessing of energy for human purposes is what has made the exponential growth of our civilization possible. Read More »

By Anna Sophia Doyle*

I was browsing through one of my favorite environmental news and commentary sites (favorite as it’s both intelligent but also hilarious when reporting on very serious issues such as climate, food, energy, etc.) and came across a great article on whether eating meat could be eco-friendly.

Having wrestled with the subject myself and in honor of it being Meatless Monday, I thought I’d share some if the article’s insights with the Development Roast readers as well as a few other thoughts and related links. Read More »

By: Lykke E. Andersen*

During this week’s Climate Change Conference in La Paz, several participants expressed concern about Bolivia’s plans for oil drilling in National Parks following the recent Supreme Decree 2366 of 20 May 2015, which explicitly permits oil drilling in some protected areas in Bolivia in the name of poverty reduction and integral development for the people living in these areas.

In the conference session on Climate Change and Ecosystems, the panelists were asked if it was not contradictory to allow oil exploitation in national parks, and if anybody knew of any examples anywhere in the World where it had been done successfully. One of the panelists, Stanley Arguedas, Co-President of the Commission on Environmental Management of the International Union of Nature Conservation (CGE-IUCN) from Costa Rica, admitted that he did not personally know of any successful examples, but that, in theory, oil exploitation could be done in protected areas without compromising the objectives of the national park.

This tiny theoretical opening, coming from a top conservationist, is what I would like to explore in this blog.

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By: Lykke E. Andersen*

Bernard Francou, a famous glaciologist from the IRD in France, today made a very interesting presentation in La Paz about the loss of tropical glaciers around the World. It was only one of many interesting presentations made at the Climate Change Conference that is taking place these days, but it was so interesting indeed, that it inspired me to write my second blog in one day.

Francou documented the decrease in tropical glacier mass starting roughly in 1976 for the glaciers in the Andes and the Rocky Mountains and about a decade later for most other tropical glaciers in the World. Although tropical glaciers contain only a tiny part of all the ice on the planet, their melting currently contributes to about 26% of global sea level rise.

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By: Lykke E. Andersen*

There is little doubt that human greenhouse gas emissions, mainly arising from the burning of fossil fuels and forests, are warming the planet. The physical properties of CO₂ in the atmosphere imply that a doubling of CO₂ concentrations from the current 400 parts per million (ppm) to 800 ppm would directly cause an increase in the average global temperature of about 1°C, and with that increase in temperatures we would also experience an increase in global precipitation. That much we know with a high degree of certainty.

Anything beyond that, however, is highly uncertain. While most climate models incorporate positive feedback effects that amplify the initial direct warming effect several times, historical data suggests that there are important negative feedbacks that help stabilize global temperatures. Most importantly, Earth’s temperature has oscillated within a relatively narrow band for hundreds of millions of years despite much higher and much lower CO₂ concentrations in the past (see Figures 1 and 2). In addition, during the last couple of decades, global temperatures have not increased nearly as much as suggested by the models with strong positive feedbacks. Thus, we should have only low confidence in our knowledge about feedback effects and temperature increases beyond 1°C.

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