“What is Biodiversity Finance?” Webinar - Key points (part 3)

In this third part of our blog series on the webinar “What is Biodiversity Finance?” hosted by the Institute of Bankers (IOB), we continue to explore the critical discussions from the event. With over 550 participants, the webinar featured leading experts from the BIOFIN-EU consortium, focusing on the intersection of biodiversity and finance, including innovative solutions like Nature-based Solutions (NbS). In this post, we dive deeper into Dr. John Garvey’s (University of Limerick) presentation, which explained the relationship between biodiversity loss and the financial system.

The alarming decline in global biodiversity has exposed banks to new financial risks due to their role in financing activities that contribute to ecosystem degradation. Approximately 75% of corporate loan exposures in the Euro area are linked to at least one ecosystem service. However, financial institutions have been slow to integrate biodiversity into their capital allocation strategies and lending policies, posing risks for their portfolios and the ecosystems they rely on. BIOFIN-EU is developing tools to help financial institutions assess biodiversity-related risks and reduce transaction costs. These tools aim to enable more sustainable capital allocation and lending decisions by incorporating nature-positive considerations into financial processes.

Awareness of Biodiversity Risks in Finance

To understand how biodiversity risks are perceived within the finance sector, we asked the participants:

Are there any particular ways in which biodiversity risks are important in your professional life?

Responses varied widely. Out of 122 valid responses, 14.75% of participating banking professionals were unaware of any biodiversity risks. Meanwhile, 58.20% of participants indicated that they were aware of biodiversity risks and how these risks impact functions such as lending policies. Lastly, while 27.05% did not currently see direct relevance, they expressed possible future considerations. These observations highlight both the significant knowledge gaps and the growing recognition of biodiversity’s importance within financial institutions.

How Can Capital Allocation Strategies and Lending Models Impact Biodiversity?

We also explored how different capital allocation strategies and lending models could positively impact biodiversity by asking participants:

Which of the following examples is likely to have the greatest positive impact on biodiversity?

The four scenarios presented in which a farmer was looking to borrow money were:

Choice 1: Buying more fuel-efficient equipment, which offers a moderate, immediate reduction in emissions and energy use without fundamentally altering current business practices.
Choice 2: Building technologies that improve nutrient circularity, helping to reduce waste and improve resource efficiency within existing production models.
Choice 3: Reducing herd size and investing in a new, more sustainable production model, representing a significant shift in business practices with long-term biodiversity benefits.
Choice 4: Restoring degraded land to produce food, which not only supports biodiversity but also enhances ecosystem services like improving air quality, water purification and carbon sequestration.

While the approach used in the webinar was not scientifically rigourous, it provides some indication that banking professionals currently find it difficult to distinguish between alternative loan scenarios and their potential impact on biodiversity. The results suggest that incremental approaches are seen as more feasible and compatible with existing business models. This preference for incremental changes may be influenced by the complexity and unpredictability of natural processes, which can create a bias toward less disruptive, more familiar actions. The challenges in fully understanding long-term biodiversity impacts might lead financial institutions to prioritise actions that are perceived as safer and more immediately manageable, even if they offer less long-term biodiversity benefits.

Final Thoughts

While financial institutions have a growing awareness of the materiality of biodiversity loss to their loan portfolio, this has yet to be reflected in operational decisions. There is a significant knowledge gap around understanding the set of actions that can play either an incremental and transformative role in supporting the recovery of biodiversity and how these actions can be promoted in lending and capital allocation decisions. BIOFIN-EU is working to develop tools that enable banks to mainstream nature in their lending protocols and mitigate transaction and disclosure costs.

In conclusion, the “What is Biodiversity Finance?” webinar series, hosted by the Institute of Bankers (IOB) in collaboration with BIOFIN-EU, has highlighted the critical link between biodiversity and finance. Experts emphasized the urgent need to protect biodiversity for healthy ecosystems and human wellbeing while advocating for financial institutions to support nature-positive initiatives.