Biodiversity and the Financial Sector: Recent Regulatory Developments
Biodiversity – the diversity within species, between species, and within ecosystems – is declining at an unprecedented rate. Biodiversity loss is one of the top five risks for the next decade, according to the World Economic Forum’s 2020 Global Risk Report published last January. The current rate of extinction is tens to hundreds of times higher than the average over the past 10 million years and it is accelerating. This scenario, as pointed out by the Financial Times, is making companies and investors increasingly concerned about the financial risks resulting from biodiversity loss and the destruction of natural ecosystems. In addition, regulators are now starting to call upon financial market participants to join the fight against biodiversity loss.
The regulatory uptake of biodiversity issues by financial regulators at the international level started rather timidly after 2018 when the Central Banks and Supervisors Network for Greening the Financial System acknowledged that climate- and environment-related risks are a source of financial risks. The G7 in 2019 acknowledged that its commitments “will fully recognize the economic and non-economic value of biodiversity and its components”. However, 2020 has so far seen the topic of biodiversity gain attention. For example, in May, the European Union (EU) Commission, as part of its European Green Deal, released the EU Biodiversity Strategy for 2030 to step up the protection and restoration of nature in the EU. The EU Commission emphasized that industry and business have an impact on nature, but they also produce the important innovations, partnerships, and expertise that can help address biodiversity loss. It stressed that the EU would make sure that its funding supports biodiversity- friendly investments by using the criteria established under the EU Taxonomy Regulation. Moreover, last month, the Task Force for Nature-related Financial Disclosures (TNFD) was launched. The TNFD seeks to establish a global framework to measure and publicly report on the financial risks posed by the degradation of nature, biodiversity, and habitat.
The following sections outline recent regulatory developments that bridge the realms of biodiversity and finance:
Biodiversity loss is becoming a key element in global, regional, and national policy agendas. Recent regulatory developments on the international level include:
- OECD Guidelines for Multinational Enterprises: encourages business enterprises to make disclosures in areas where reporting standards are still evolving, and this is the case with biodiversity (chapter III on disclosure). The guidelines additionally state that business enterprises should explore and assess ways of improving the environmental performance of their operations over the long-term, for example by developing strategies on biodiversity (chapter VI on environment).
- Equator Principles: financial institutions adhering to the principles are expected to categorize their projects based on the magnitude of potential environmental and social risks and impacts, which also includes biodiversity.
- Task Force for Nature-related Financial Disclosures (TNFD): in 2015, the Financial Stability Board established the Task Force on Climate-related Financial Disclosures (TCFD) to help businesses disclose climate-related financial information. The recommendations of the TCFD, published in June 2017, are widely supported by financial institutions and continue to be a key standard in terms of climate-related disclosures. However, the financial risks related to the environment reach beyond the climate debate. For example, issues such as plastics in the oceanic food chain or loss of soil fertility would not fall within the scope of the TCFD yet pose significant challenges for the financial sector. To capture these risks, the TNFD was created in July 2020 through a partnership between the UN Development Programme, the UN Environment Programme Finance Initiative, and two NGOs, the World Wide Fund for Nature and Global Canopy. An Informal Working Group (IWG) was announced with the mandate to plan a two-year program of work for the TNFD. Ten financial institutions have already signed up to the IWG and the UK and Swiss governments are also part of it. The TNFD is modelled on the TCFD and will operate alongside this group.
Recent regulatory developments indicate that more concrete standards are in the process of being developed to measure and report on biodiversity-related financial risks:
- The TNFD is expected to provide standards for measuring and reporting on biodiversity-related financial risks. The TNFD’s scope, plan, and team will be announced in January 2021.
- This year marks the end of the 2011-2020 Strategic Plan for Biodiversity. The outcome of the 15th Meeting of the Conference of the Parties to the Convention on Biological Diversity (postponed to May 2021 due to COVID-19) will be important. Governments are expected to agree on a post-2020 global biodiversity framework.
- By the end of December 2021, the EU Commission aims to establish performance standards for biodiversity objectives under the EU Taxonomy Regulation, further supported by a renewed Sustainable Finance Strategy later 2020.
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