Biodiversity loss has a certain impact on the economy and, therefore, also on the financial sector. This motivated DNB, the Dutch central bank, and PBL Netherlands Environmental Assessment Agency to jointly investigate the risks related to biodiversity loss for investments by Dutch financial institutions. Their subsequent recommendation is for the financial sector to present a clearer picture of these risks.
The first risk concerns the threat of biodiversity loss to the provision of ecosystem services that are related to the economy. Financial institutions who provide financing for economic activities that depend on those ecosystem services are therefore exposed to the physical risks of biodiversity loss.
Dutch banks, insurance companies and pension funds have around € 510 billion outstanding at companies around the world with a high or very high dependence on one or more ecosystem services. One example of such a service is the pollination of food crops — when certain insects disappear, this may cause problems in agriculture.
A second risk faced by financial institutions concerns the financing that they provide to companies who have a major negative impact on biodiversity. The Dutch financial sector has around € 97 billion outstanding, worldwide, at companies for whom environmental controversies are a factor. Negative publicity that can be traced back directly to a company causes reputational damage to both the company itself and any financial institutions involved.
Government policy or changing consumer preferences form a third risk, if these lead to changes in business operations so as to reduce damage to biodiversity. For example, the transition towards business models that are less nitrogen-intensive may cause risks to the € 81 billion in loans granted by the three major Dutch banks to Dutch sectors involved in nitrogen-emitting activities.
To respond adequately to such risks, financial institutions need to have access to all relevant information from the companies in their portfolios. This is why it is also important to have reporting standards that allow companies to be transparent about how global biodiversity loss may affect their particular business model.