The financial services sector plays a key role in mitigating biodiversity loss

The global financial services industry has a key role to play in helping to mitigate biodiversity loss amid growing investor awareness of the major risks this loss poses to businesses.

Federated Hermes argues that there is a global biodiversity funding gap of US$800 million that the financial community, through capital, allocations and better management, can help bridge.

Speaking at Mercer’s Pacific Global Investment Forum in Melbourne last week, Federated Hermes’ head of impact investing, Ingrid Kukuljen, said “the negative impacts of biodiversity loss pose a systemic risk to global economy and we must stop taking the permanence of nature for granted”.

Kukuljen noted that if humans killed each other at the same rate they kill animals, we would be extinct in 17 years. Protecting biodiversity, she said, “provides essential mitigation against climate change”.

In March, the $640 billion Federated Hermes set up a biodiversity fund with $30 million under management, in conjunction with the UK’s National History Museum. The museum has created the “Biodiversity Trends Explorer” to allow users to compare the state of biodiversity of local ecosystems between countries as well as how different possible economic futures will affect nature in developed and developing countries over the of the next few decades.

The Hermes seed fund invests in companies including its biodiversity champions, including US timber alternatives supplier Trex and Australian pallet supplier Brambles.

The Nature-Related Financial Disclosures Task Force – a risk management and disclosure framework for companies to report and act on nature-related risks – will go some way to helping investors better assess the risks to biodiversity. It is currently seeking market feedback for a draft framework that borrows many similar concepts from the Task Force on Climate-Related Financial Disclosures.

loss avoidance

The conference heard from Nathan Garvey of EMM Consulting who supported the concept of biodiversity offsets, but stressed that the best solution is avoidance first.

This confirms the prevailing wisdom in the sector with the Federal Environmental Protection and Biodiversity Act 2020 report noting that “real change requires a paradigm shift in which environmental damages are part of project costs. and influence decisions about its viability”.

Transparency is important, but the concept of biodiversity credits worries some, in part because it would be better to stop the loss in the first place than to allow companies to circumvent the rules by buying credits. Planning permits could be issued on the condition that biodiversity projects compensate for any losses.

Project avoidance is a powerful tool to protect nature and mitigation must be factored into the cost of the project: thus, a $1 billion mine that causes $5 billion in biodiversity loss is actually a $6 billion project that dramatically changes the dynamics of returns.

The difficulty of combining offsets with carbon credits includes measurement, and Garvey noted that they may not be the most effective measurement. “It’s like riding a bike while you’re still designing it,” he said.

Measure natural loss

To overcome the measurement difficulty, Accounting for Nature managing director Adrian Ward has worked for more than a decade on establishing a framework to measure the loss of a particular breed of parrot or bandicoot and how it can be compensated.

It is a global campaign but, given the obvious difficulties in measuring the carbon content of soils, it is a step further than measuring the loss of fresh water in the marine environment.

A premium is already paid for carbon contracts which have the benefit of offsetting emissions and creating new habitat for rock wallabies for example, which means regular carbon credits sell for $26 a ton, but credits earned when wallaby habitat is restored are worth $56.

It’s an example of what Garvey called the “double dividend” of protecting biodiversity with good land management also helping to maintain plant and animal species.