It’s always gratifying to see important issues increasingly take the spotlight on the global stage. That is the case for biodiversity, a topic that deserves urgent attention, and is now gaining prominence alongside the weighty, interconnected complexities of climate change.
Momentum is building – with the United Nations (UN) marking International Day of Biological Diversity earlier this year – and we now see a raft of global and local initiatives designed to understand, value and strengthen biodiversity, alongside sustainable finance projects that can direct much-needed capital to initiatives that put our planet’s biodiversity front and centre.
Biodiversity matters
Biodiversity, or the variation of living species on our planet, certainly merits greater attention than it has previously garnered, in light of its ability to help solve other global challenges. As the UN notes, “Biodiversity remains the answer to several sustainable development challenges. From nature-based solutions to climate, health issues, food and water security, and sustainable livelihoods, biodiversity is the foundation upon which we can build back better.”1
Intuitively, we know that deep within our planet’s biodiversity, we can find ways to help humankind ease global warming as natural carbon sinks mitigate the impact of natural disasters and other physical climate impacts, cure disease and overcome hunger. And, purely from a financial perspective, biodiversity matters greatly, with more than half of the world’s economic output – that is US$44 trillion of economic value generation – being dependent on nature.2
To wrap our heads around the entire impact of biodiversity, the concept of ‘ecosystem services’ was created, to help account for all the direct and indirect contributions that ecosystems have on human well-being, from economic benefits, to natural effects that regulate our planet’s healthy state, to cultural, spiritual recreation aspects, that boost our quality of life. All told, it has been estimated that ecosystems provide $125 trillion in services per year.3
According to the UN, despite these calculations of the critical role of ecosystem services, and the multitude of benefits they provide to both people and our natural systems, they continue to be neglected through human activity and land exploitation, with approximately 75% of land and 66% of marine environments substantially altered by human activity4. It has been estimated that, amidst the steady degradation of our planet’s biodiversity, there is a financing gap of at least $700 billion per year by 2030 in terms of funds required to reverse the global biodiversity crisis. These funds must be directed to actions like prudent fiscal policy, natural infrastructure, sustainable supply chains, green financial products and carbon markets.5
So why has biodiversity been underappreciated until recently? The answer may rest in the fact that, traditionally, the world’s focus on ‘financial capital’ did not adequately take into account other forms of capital, including ‘natural capital’, which includes all the natural resources that humans use to provide a return.6 Although natural capital is critical for creating value, it was undervalued or its true value could not be reflected in our financial system as it was hard to calculate its financial benefit. And of course, since natural capital is a shared resource, overseen by national or local governments but often managed and utilized by the private sector and local communities, it has historically been unclear who is responsible for its stewardship and restoration.
Gaining focus and clarity
The good news is that biodiversity is now earning increased attention, from global governing bodies to private sector stakeholders who recognize the need to take action. In particular, the Convention on Biological Diversity, a treaty signed by 150 government leaders at the 1992 Rio Earth Summit, is now drafting the Post-2020 Global Biodiversity Framework, with high-level aspirations to stabilize the world’s biodiversity loss by 2030, recover natural ecosystems by 2040, and achieve net improvements in biodiversity to create greater human harmony with nature by 2050.7
With the Framework expected to be released and formalized in the coming year – along with 21 action-oriented targets for urgent attention by 2030 – it could be a major catalyst for national government commitments through their Nationally Determined Contribution plans, improved corporate reporting, and, ultimately, increased sustainable finance projects aligned with its goals. In fact, we have already seen select, leading jurisdictions like Uruguay introduce its own complementary National Biodiversity Strategies and Action Plans.
Of particular relevance to national and local organizations, the Taskforce on Nature-related Financial Disclosures (TNFD) is a global, market-led initiative to develop a risk management and disclosure framework for corporations and financial institutions to report and act on nature-related risks. The TNFD has the lofty goal of shifting global financial flows from nature-negative outcomes toward nature-positive outcomes.
In June 2022, the TNFD released its second iteration beta framework, including fundamental concepts and definitions to aid corporates and institutions in assessing and reporting nature-related risks and opportunities, to help inform corporate and capital allocation decisions.8 In particular, this version includes draft metrics and targets that will enable market participants to start pilot testing.
With the TNFD framework potentially becoming a widely accepted and practical roadmap for companies and the financial markets, the pace of bio-diversity-related sustainable finance projects could accelerate rapidly, ranging from green and blue bonds that fund important biodiversity projects, to sustainability-linked bonds with quantifying biodiversity performance targets. In fact, the UN Environment Programme Finance Initiative (UNEP FI) has been collaborating with four other leading international organizations to develop a market standard for blue bonds that will help direct debt financing to important marine diversity goals in a consistent and transparent manner.9
We are already seeing exciting examples of innovative programs that suggest the promise of concerted business, government and financial sector partnerships. To name a few, in March 2022, The World Bank priced a Wildlife Conservation Bond, a five-year $150 million sustainable development bond that aims to protect South African black rhinos while offering a potential performance payment. The “Rhino Bond” is the first-of-its-kind, outcome-based financial instrument that channels investments to achieve conservation outcomes, measured by an increase in the rhino population.10
Such initiatives are popping up across the globe, including the tiny Republic of Seychelles, when this Indian Ocean archipelagic island launched the worlds’ first sovereign blue bond in 2018, and raised US$15 million from international investors to support sustainable marine and fisheries projects. More recently, the Bahamas announced plans for a blue bond program in support of its blue economy and over 4,000 square kms of mangrove forests, seagrass beds and other ecosystems that both absorb and store notable quantities of carbon.
Examples are also found in the Americas, where for example in late 2021 The Nature Conservancy’s Blue Bonds for Ocean Conservancy program provided the Government of Belize with US$364 million in debt relief in exchange for commitments to protect 30 per cent of its ocean territory. Such creative approaches are evident in Canada too, where a national conservation organization, Carolinian Canada, is piloting the Deshkan Ziibi Conservation Impact Bond, to restore and protect endangered lands important to the region’s Indigenous Peoples.
Connecting clients with biodiversity
Although it may be early days in the journey to make biodiversity a prominent pillar in corporate Environmental, Social and Governance (ESG) programs and sustainability frameworks, we see growing interest among Scotiabank’s own clients. Particularly those companies in the natural resource sectors, and those striving to build trust and social license to operate with local communities, many now recognize the importance of acknowledging biodiversity risks, factoring it into their materiality matrices, and beginning to report on these issues.
“For clients that are ready to explore these areas, we encourage them to begin by mapping their biodiversity-related risks and setting targets for improvement. These targets naturally will evolve as global standards and guidelines like the TNFD are introduced, says Melissa Menzies, Associate Director, Sustainable Finance, Scotiabank. “Now is an excellent time to lay the groundwork, by performing company risk assessments and determining what aspects of biodiversity to tackle. This may open the door to projects, partnerships or pilot programs to mitigate risks, introduce business adaptation programs, possibly with the support of targeted sustainable finance instruments.”
Within our dedicated Sustainable Finance group at Scotiabank, we are increasingly helping clients identify eligible environmental projects, including those with biodiversity components, or providing financing solutions that help companies source carbon offsets aligned with their ESG and biodiversity goals.
If there is one thing our natural world has taught us, it is that ecosystems are a function of interconnected and interdependent relationships. Each of us, whether investing capital, advising our management teams, or simply making decisions in our personal lives, must play a purpose-driven and active role in protecting our ecosystems. Key action areas such as reducing our consumption of nature-depleting goods and services, building more sustainable food systems, advocating for green spaces in urban areas, and taking ambitious actions towards climate change will have direct and indirect impacts on achievement of global biodiversity goals that we all depend on.
Concludes Menzies, “Now that biodiversity is taking its rightful place alongside other important ESG themes, the world is recognizing its value, including the risks and opportunities. Through awareness events like International Day of Biological Diversity, and ambitious work by policymakers, business leaders, communities and the financial markets, we can make nature, naturally, top-of-mind, create sustainable economies, and help heal our planet.”
For more information, please contact:
Melissa Menzies
Associate Director, Sustainable Finance
Phone: 437-779-7845