02 February 2021
Public and private financial flows are "critical" to supporting a "more sustainable engagement with nature," according to a landmark UK government-initiated report that calls on better disclosure of nature-related financial risks and tying asset manager fiduciary duty to biodiversity impact.
The 600-page Dasgupta Review on the economics of biodiversity said there is an "impact inequality" caused by our excess demands on nature compared to what nature can supply and restore, with estimates suggesting that we would need 1.6 earths to maintain current global living standards. The report said that between 1992 and 2014, produced capital per person has doubled – but natural capital per person has declined by two-fifths over the same time period.
The crucial role that finance can have in rebalancing that "impact inequality" was highlighted. The financial system is currently skewed towards supporting biodiversity-harming activities over those that support nature, however.
"Financial flows devoted to enhancing our natural assets are small and are dwarfed by subsidies and other financial flows that harm these assets," the report said. It said between $6.6 billion and $13.6 billion per year in private finance is channelled towards biodiversity investment, but more than $2.6 trillion in investment and financing has been provided to sectors which have been named as key drivers of biodiversity loss – such as the food, forestry, mining and fossil fuels sectors.
"We need a financial system that channels financial investments – public and private – towards economic activities that enhance our stock of natural assets and encourage sustainable consumption and production activities. Governments, central banks, international financial institutions and private financial institutions all have a role to play."
Private and public financial institutions can help manage and mitigate this risk, the report said, by "accounting for dependencies and impacts on nature in their activities" and by measuring and disclosing nature-related financial risks alongside climate-related financial risks. The report said that, in particular, there is an argument that the fiduciary duty of asset managers should incorporate their impact on natural capital.
"Central banks and financial regulators can support increased understanding by assessing the systemic extent of Nature-related financial risks," the report continued. "What is ultimately required is a set of global standards underpinned by credible, decision-grade data, which businesses and financial institutions can use to fully integrate nature-related considerations into their decision-making, and assess and disclose their use of, and impact on, nature."
The independent review by University of Cambridge economist Partha Dasgupta has been likened to the UK review of the economics of climate change undertaken by Nicholas Stern in 2005, which was also initiated by the UK Treasury.
The Dasgupta Review was warmly received by financial firms.
Triodos Bank chief executive Peter Blom said the Dasgupta Review was "unequivocal" in its call for the finance sector to take a "proactive approach to understanding and changing the impacts of investment decisions on nature and the vital ecosystems services that underpin all life on our planet".
"The decisions that the financial sector continue to make do not reflect today's reality, let alone the future we face," Blom added. "For too long we have taken from our natural assets, threatened biodiversity and destabilised environments and communities. If we do not act on the recommendations of the Dasgupta Review, we risk bankrupting our greatest asset."
HSBC chief executive Noel Quinn said the review made it clear that the "world cannot tackle climate change and build long-term economic resilience without protecting and enhancing nature – our most important asset".
"The financial system has a crucial role to play in encouraging investment in nature and factoring nature-related risks into financial decision-making. HSBC is strongly committed to growing the world's natural capital, and ready to support the development of common standards and frameworks to encourage more sustainable investment in this precious resource," he added.
Philipp Rickenbacher – the chief executive of private bank Julius Baer – commended the report for "identifying and dissecting the diverse revenue streams nature brings to our economies". Rickenbacher added that Julius Baer sees a "compelling business case" for the bank to "evaluate investment opportunities in nature to protect our valuable ecosystems in perpetuity".
BNP Paribas chief executive Jean-Laurent Bonnafé said the French lender "continues to integrate nature into its risk assessment and decision making".
"Understanding the impacts of our clients and the companies in which we invest – as well as our dependencies – is essential in this endeavour," he added. "No one can do it alone. We all need to work together to shift the paradigm of our treatment of nature for a more sustainable future."
There has been rising interest in the role of finance in supporting biodiversity and natural capital. In 2020, several initiatives were setup to try to replicate the climate success in the sector – including the Task Force on Nature-related Financial Disclosures (TNFD) and Partnership for Biodiversity Accounting Financials (PBAF), following the Task Force on Climate-related Financial Disclosures (TCFD) and Partnership for Climate Accounting Financials (PCAF). The World Bank has also proposed a Nature Action 100 investor initiative to build on the work of the Climate Action 100+ initiative.
Environmental Finance's second Natural Capital Investment Conference will take place on 4 March 2021. To find out more, see our events page.