Protecting shareholder and natural value: The role of the financial sector in the protection of biodiversity

21 March 2006 | Curitiba, Brazil

Overview

Recent years have seen increasing pressure on the finance sector to address environmental risks within their investment portfolios. Well-publicized cases such as the Three Gorges Dam and Asia Pulp and Paper have led to scrutiny of banking practices with respect to biodiversity issues. The launch of the Equator Principles in 2003 and the Collevecchio Declaration in 2003 have also raised the profile of environmental issues within the finance sector. A number of international banks now have specific policies addressing biodiversity impacts and within a few leading members of the mainstream finance sector, as well as a number of companies, biodiversity has been identified as one of a number of sustainable development issues that could impact on shareholder value. This session considered the current trends for evaluating biodiversity risk within the finance sector, and aimed to raise awareness amongst COP participants of the work currently being undertaken within the finance sector to evaluate investments with impacts on biodiversity. The session focused on a specific tool developed by Insight Investment and Fauna & Flora International to benchmark 36 companies within the extractive sector on their biodiversity impact and risk identification processes, and the tools they have in place to manage them. The session examined the impact of such a tool within the companies subjected to the benchmark and its potential uptake within the finance sector as a whole. This event acted as a precursor to a more in depth analysis of the finance sector’s role in managing biodiversity on 23rd and 24th March.

Session summary

  • The financial sector has adopted a more progressive approach to sustainable development over the last 10 years and interest in biodiversity and finance issues is now significant. Financial institutions such as ABN AMRO and Insight Investment have biodiversity-specific lending and investment practices that promote and reward biodiversity good practice within the industry.
  • It is no longer free to pollute or damage biodiversity. These externalities are gradually internalized as a result of improved and better-enforced regulation. Biodiversity risk management is therefore very important to the industry. From a financial sector perspective, the risks faced by their client companies translate into risk of loan default, collateral devaluation, shareholder risk and reputational risk.
  • On the opportunity side, financial institutions such as ABN AMRO, in partnership with development or environmental funds, are able to provide financing at advantageous rates to companies improving their environmental performance. New business models appear that have biodiversity or climate change mitigation as a core part of their value proposition.
  • The biodiversity benchmark developed by Insight Investment in partnership with Fauna & Flora International is a comprehensive framework that provides investors with appropriately framed information to consider biodiversity in their investment decisions and an objective and consistent basis for shareholder engagement.
  • The benchmark examines the comparative biodiversity risk exposure and management of companies within the extractive and utility sectors. Publicly available data is complemented with additional information provided by the companies on the main elements of governance structures; policy and strategy; management and implementation; assurance and reporting; and leadership.
  • Results of the 2005 benchmarking exercise suggest that even if significant areas of weakness remain, 2004 scores were improved in all sectors. Early feedback suggest that from a company perspective, the benchmark is indeed a powerful driver of improved biodiversity performance, strengthening the business case and providing a logical framework in both the development and audit of their biodiversity management processes.
  • Next steps could include the expansion of the benchmark to include companies listed in other markets including emerging markets, the inclusion of supply-chains, and the addition of on-the-ground audit information. Over the coming weeks FFI, Insight Investment and UNEP FI will be working on a proposal that will capitalize on the strengths of the benchmark and develop it further.

Documents and presentations

Resources

Contact

Julien Haarman
Email: biodiversity@unepfi.org

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