One of the key barriers for companies to minimise their environmental impacts has been the lack of adequate value conferred on the environment by the financial markets. Despite the dramatic findings from the Millennium Ecosystem Assessment, for instance, the valuation of biodiversity and ecosystem services is in its infancy.

It has been encouraging to see movement on this issue on a number of fronts. There has been a shift in political thinking that is beginning to assign tangible and material economic value to some of the ecosystem services which are derived from biodiversity. An example of this is the link recently drawn between annual global green house gas emissions and the destruction of the world’s tropical forests by the Stern report (1) which showed that some 20% of annual greenhouse gas emissions come from tropical forest destruction. The commitment made in March 2008 by the G8 environment ministers, together with environment ministers from five newly industrializing countries (Brazil, China, India, Mexico and South Africa), to estimate the economic costs of global biodiversity loss, once realized, is likely to provide further stimulus to the marketplace to internalize some of those costs which have traditionally been externalized.

Understanding the impacts on investment value
The increasing engagement of the finance sector on these issues, recently formalised through the UNEP Finance Initiative Biodiversity and ecosystem services workstream (2) is another exciting development. The first key deliverable from this workstream aims to tackle another fundamental barrier to encouraging greater private sector awareness, avoidance and minimisation of impacts on biodiversity, namely, a lack of understanding of how impacts on biodiversity can in turn impact on investment value. We are producing a briefing document aimed at the CEOs of financial institutions to address this issue. It is drafted in a language aimed at the financial world and sets out why declining biodiversity and the associated loss of vital ecosystem services (such as the ability to regulate carbon) pose both a business risk and an opportunity to financial organisations. It goes on to set out the current response of the sector and outline suggested future actions. In drafting the briefing, it has been a challenge to tease out examples where ecosystem services have been a true risk or opportunity for the finance sector, yet examples do exist and are creating a very real drive amongst companies within the sector to develop tools and approaches to evaluating the impacts of investments on biodiversity and their potential reliance on ecosystem services.

Risks and opportunities, of course, will vary depending on the financial service being offered, the industry sector in which the transaction is proposed and the location of proposed activities. What is interesting is that discussion has gone beyond consideration of these issues as a reputational risk, prompted by controversial lending or investments. Instead, the business case now being put forward hinges on concerns about lower and less secure investment returns as a result of declining collateral value of land for example, or disruption in the supply of goods and services dependent on some of the ecosystem services that flow from biodiversity and also on business opportunities. Wetlands, for example, are known to have a key role in the purification of water — the Ecosystem Marketplace (3) estimates the total market value of wetland credits at nearly USD 290m as of 30 April 2005.

Even more interesting is the potential for new markets to develop. Examples of this are the generation of carbon credits from avoided deforestation or payments for watershed services — both of which are reliant on having healthy, intact biodiversity in place — amongst other things. Public and private payments for watershed services alone are predicted to increase from a current estimate of USD 1.5bn a year to USD 3bn in 2010 and USD 30bn by 2050. Furthermore, in a crowded market place, making a clear stance on the need to conserve biodiversity purely from a moral stand point offers undeniable opportunities for market differentiation.

Responding to the challenge
Recent years have seen a rapid evolution of policies and practices within the industry and individual banks to understand and address biodiversity risk and opportunities. Some have pledged to avoid World Heritage Sites or other protected areas; others have developed specific policies that preclude investing in companies which undertake illegal logging activities. Those companies signed up to the Equator Principles are required to “protect and conserve biodiversity and promote the sustainable management and use of natural resources through the adoption of practices that integrate conservation needs and development priorities”.

The CEO briefing highlights such practices and policies and makes a series of recommendations for future action for the sector. Key amongst these are:

• On a sectoral level: collaboration on industry and geographic risk identification and input into global initiatives to properly value ecosystem services such as the one proposed by the G8 outlined above.

• On an institutional level: to gain a better understanding of portfolio risk exposure and emerging opportunities and develop appropriate policies, procedures and tools to assist this.

The workstream already has a head start on the second of these recommendations through another of its key deliverables — the development of a toolkit for financial organizations to better understand and evaluate biodiversity risks and opportunities.

A benchmark for biodiversity
The Natural Value Initiative — a multi-stakeholder initiative funded by VROM, the Dutch ministry of housing, spatial planning and environment and led by environmental NGO Fauna & Flora International, Brazilian business school FGV and UNEP Finance Initiative — is developing a tool for evaluating biodiversity related risks and opportunities within companies with an agricultural supply chain (4). This would feed into financial organisations’ investment decision making processes, thereby reducing investment risk and increasing returns. For the companies evaluated, this will provide a strategic framework against which issues based or commodities based initiatives can be placed to facilitate prioritisation and enable more effective communication with an increasingly engaged finance sector, thereby rewarding good practice in a way that is not currently achieved.

The tool will be based on an adapted version of a tried and tested methodology already employed within the asset management community and designed by Insight Investment to evaluate the extractive sector — ‘the biodiversity benchmark’ which was used to evaluate approaches to biodiversity management within the extractive sector. The team is currently undergoing a consultation period to determine the exact scope and nature of the tool, bringing together members of the finance sector and agricultural sector in two workshops — one in the UK and one in Brazil. The material from both meetings will be used to inform and revise the project strategy which will be set out at the Roundtable for Sustainable Finance at Melbourne in October (5).

Ultimately, of course, we hope that such tools will become redundant as consideration of environmental and social issues becomes integrated into mainstream economic valuation studies and into the financial markets as a whole. Until such time as that is achieved, they remain (as those who have undergone or used the benchmark state) an invaluable starting point to gain a better understanding of an unquantified risk and untapped opportunity for the finance sector — and indeed the conservation sector.

Annelisa Grigg is Director of Corporate Affairs, Fauna & Flora International. Richard Burrett is Head of Sustainability, ABN AMRO Bank N.V and is Chair, UNEP FI’s Biodiversity & Ecosystem Services Workstream.

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(1) http://www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_change/sternreview_index.cfm
(2) See Business.2010, 2 (2).
(3) http://www. ecosystemmarketplace.com, as quoted in Jessica Fox, 2006 , “The value of your eco-assets”. Electric Perspectives, Mar/Apr (http://findarticles.com/p/articles/mi_qa3650/is_200603/ai_n17183912)
(4) http://www.fauna-flora.org/newsnvi2.php
(5) See http://unepfi.net/Melbourne. Members of the finance sector and food and beverage/ tobacco sectors interested in learning more about this initiative or in contributing to/ piloting the methodology should contact Annelisa Grigg.