Five steps to get started with nature and biodiversity

Financial institutions cannot escape biodiversity

Blog
22 Jan 2024

Thijs IJsbrandij

Manager, PwC Netherlands

Taylor Caroll

Senior Associate, PwC Netherlands

As a key enabler of the global economy, the financial sector is strongly connected to the challenges around biodiversity loss. This article zooms in on the relevance of nature and biodiversity for the financial sector and builds on recent PwC experience and observations across the financial sector to lay out steps every financial institution should take now.

Nature and its importance

Nature is vital to society. It provides us with the air we breathe, the water we drink, and the resources we need to survive and thrive. Businesses too depend on these services provided by nature to be successful. Unfortunately, nature is under severe pressure. We change land and water systems, exhaust natural resources, pollute the environment and cause climate change. These activities cause widespread biodiversity loss, which reduces the resilience of natural systems.

In response, governments and businesses have launched policies, standards and initiatives that aim to halt and reverse biodiversity loss. Key developments from the past twelve months include:

Adoption of the Global Biodiversity Framework (GBF) (dubbed the Paris agreement for nature)
Inclusion of the topic in ESG reporting regulations like the Corporate Sustainability Reporting Directive (CSRD) and EU Taxonomy
Launch of Science-Based Targets for nature (SBTn) and the Taskforce for Nature-Related Financial Disclosures (TNFD)

Being a key enabler of the global economy, the financial sector is strongly connected to the challenges around biodiversity loss. The Dutch and European Central Bank have both released reports that underline the importance of biodiversity for thriving economies and now require banks to assess, manage and disclose a wider range of environmental risks along with climate-related risks.

Risks and opportunities for financial institutions

PwC analysis shows that 55 percent of the global economy depends moderately to highly on nature, placing over half of the world's GDP at risk from natural system change. The Central Bank of the Netherlands reaches similar conclusions and estimates that 510B euros of loans and investments by Dutch financial institutions have a high to very high dependency on ecosystem services. This dependency on nature can translate into risks for businesses that sit within the portfolios of the financial sector, including:

New regulation to protect ecosystems and increased enforcement of existing policies (e.g. Nature Restoration Law or Water Framework Directive)
Restructuring subsidies (e.g. related to the use of fossil fuels or the Common Agriculture Policy) and introduction of taxes or trading schemes to address environmental impacts (e.g. EU ETS)
Impact on company performance due to reduced availability and reliability of ecosystem services
Credibility loss and growing activism leading to reputational damage

While financial institutions are being pushed to monitor and manage such nature-related risks, they should also seek ways to take advantage of opportunities to play a role in the transition to a nature positive economy. Just like we are now seeing within the energy transition, this transition will result in numerous innovations that can result in new products or business segments (like precision fermentation or cultivated meat). Furthermore, many existing sectors will need to go through substantial change to bring their environmental impacts within ecological boundaries.

For financial institutions, these developments can become business opportunities if they:

Provide transition financing to existing clients by integrating biodiversity into products and services
Become a trusted advisor to clients and help them navigate the interconnections of biodiversity with other key ESG topics like climate
Expand into new sectors that are key to biodiversity or develop new business models
Engage the workforce and deploy the intrinsic drive of colleagues to make a contribution to sustainable development

Creating focus and purpose

To effectively manage risks and opportunities, it is crucial to understand the transition that clients need to undergo. Impacts and dependencies on nature differ strongly per sector, so understanding sector dynamics is key. To help prioritize efforts, a good starting place is to perform portfolio-wide heatmapping to identify sectors that hold the greatest risk or opportunity. To support that analysis, it is useful to consider typical impacts and dependencies per sector and compare these with wider market and regulatory developments. Higher risk might, for example, exist in sectors that face regulatory pressure to address their negative impacts on the environment. Note that there are numerous datasets and tools available to support sector-level analysis. Examples include ENCORE and the WWF Biodiversity & Water risk filters.

In parallel, it is crucial for a financial institution to develop a mission and vision around nature that creates a point of reference in which insights that result from such analyses can land. What level of impact is considered high? What characteristics should risks show before they warrant an intervention? Which aspects should be considered when prioritizing efforts towards specific sectors in the portfolio? A clear North Star helps to navigate the inherent uncertainties that will be encountered around such questions and can act as an anchor point in discussions around risk appetite, target setting and investments in product innovation.

When defining the North Star, the newly established Global Biodiveristy Framework (GBF) is a strong point of reference. Unlike reporting oriented frameworks like CSRD and TNFD, the GBF provides a vision for the future that, much like the Paris Agreement for climate, can be translated into business transition scenarios and objectives. This provides relevant context to which a financial institution can compare its portfolio and determine the kind of role it wants to play in the transition ahead.

Data crunch(ing): waiting for better data is not an option

A common next step is to perform a more thorough analysis of several focus sectors or clients with the objective of developing sector-specific policies and product offerings. More detailed data, on client level, is important at this stage but is often unavailable or of insufficient quality. Although data availability is expected to improve with the introduction of the CSRD and TNFD, such limitations will continue to exist for the coming years. Despite this challenge, waiting for better data before acting is not an option given the scale and urgency of the global challenges around nature.

Steps that can already help drive progress at this more detailed level are:

Deploying spatial (satellite imagery based) datasets that are increasingly linked to the operations of specific companies, especially ones with significant asset-level impacts like mines and large-scale manufacturing facilities.
Focusing client engagement and performance tracking on input-level metrics, for example on performing a company-specific impact analysis or the deployment of certain management practices.
Equipping sector specialists and client advisors with nature and biodiversity expertise and talking points to deepen the engagement they have with their clients. Subsequently leveraging the insights, they gain from this interaction to deepen the qualitative analysis on risks and opportunities within the portfolio.

Data-related challenges should not result in inaction. By combining a sharp vision and ambition with creativity around data, numerous meaningful steps can already be taken.