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Speech Olaf Sleijpen - Finance for Nature Virtual Global Series: "Indebted to Nature"
In his keynote address to the Finance for Nature Virtual Global Series today, Olaf Sleijpen said: “The loss of diversity in nature, just as climate change, poses a major threat to the financial sector, the economy, to prosperity and indeed to our daily lives. We cannot afford to ignore it.” He spoke about the DNB-PBL report ‘Indebted to nature’ and he emphasized the importance that financial firms identify, manage and report the exposure of their portfolios to biodiversity risks.
Datum: 20 juli 2020
Locatie: Webinar Finance for Nature
Spreker: Olaf Sleijpen
First of all a big thank you to the organization for inviting me to speak today at this wonderful seminar. As we are discussing biodiversity today, we are still in the midst of a devastating global health and economic crisis. While we are fighting the COVID-19 pandemic, we cannot lose sight of the threat that climate change and biodiversity loss continue to pose to our daily lives. In fact, the current crisis provides a unique opportunity to make decisive steps on the road to a carbon-neutral economy. The investments needed to kick-start the economy again, can be directed in such a way that they support the reduction of carbon emission and the recovery of biodiversity.
Over the past years, more and more central banks and financial regulators have recognized that climate change is a systemic risk threatening economies and financial systems around the world. They have joint forces in the Network for Greening the Financial System, the NGFS, with 66 members and 13 observers from all over the globe. Together they are working on identifying the climate and environmental risk and scaling up green finance. The focus so far has mostly been on the impact of climate change on the financial sector. But it has become clear that the loss of biodiversity has an impact on the economy as well.
Climate change and biodiversity loss are very much related. Climate change is one of the main causes of nature degradation. The reverse is also true – loss of biodiversity, for example through deforestation and resulting carbon emissions, can accelerate climate change. So you cannot fight climate change and ignore biodiversity loss.
That’s why earlier this year the Dutch Central Bank published a joint report with the Netherlands Environmental Assessment Agency on exactly this topic. It is called ‘Indebted to nature’ and it is a first quantitative study on the exposure of the Dutch financial sector to the risk of biodiversity loss. You can find the study on our website, together with a document that outlines in detail the methodology and data sources underlying the research.
We found that financial firms in the Netherlands are exposed in various ways. First of all, biodiversity loss threatens the availability of ecosystem services, such as wood, animal pollination and soil fertility. There are a lot of economic activities that depend on these services. As a result, banks, pension funds and insurers that finance these economic activities face, what we call, physical risk. Dutch financial institutions worldwide have 510 billion euro in exposure to companies with high or very high dependency on one or more ecosystem services. This comprises 36% of the portfolio we examined. An example of these ecosystem services is animal pollination. At a global level, the Dutch financial sector's exposure to products that depend on pollination amounts to 28 billion euro.
Next to physical risk, financial firms run reputation and transition risk when they fund companies that have a major negative impact on biodiversity. For example, Dutch financial institutions worldwide have contributed 97 billion euro in funding to companies involved in environmental controversies. Negative impact that can be traced back to a specific company results in reputational damage for the company itself as well as for the financial institutions funding it. Also, these companies may hit losses when government policy and consumer preference change suddenly. We saw an illustration of this in the Netherlands earlier this year. As a result of a ruling by the highest administrative court in the Netherlands, the government was forced to suspend new licensing for nitrogen-emitting activities with immediate effect. The construction sector was hit particularly hard because of this.
The numbers I mentioned, although quite significant, represent only the lower limit of the total exposure. Due to the limited availability of data, we were able to investigate only a limited number of biodiversity risks. So based on these results, we cannot conclude that other risks are less relevant. I therefore think it is important that financial firms identify, manage and report the exposure of their portfolios to biodiversity risks. Just as with climate-related risk, it’s simply a matter of sound risk management.
Then the next question is how to get the financial sector into action mode. Given that this is a new area for us in which there is still much to explore, we opted for an informal approach, instead of immediately setting regulatory requirements. We raised awareness with the publication of the report and by organizing a webinar for the financial sector. What was very helpful was that the sector itself had already established a working group that came with very useful recommendations on how to manage biodiversity-related risk. They even went a step further by promoting a role for the financial sector to maintain and restore biodiversity.
In the future the next step could be that we incorporate biodiversity risk in our annual review of the risk management of the firms that we regulate. And the intention is of course, and we expect this will happen, that firms that provide funding to companies that have a negative impact on the environmental, ask for transparency and engage into discussions on how these companies can reduce their footprint and impact. In that way, by applying sound risk management, the financial sector uses its leverage over corporates to stimulate them to become greener.
For this to work it is important to develop consistent and broadly applied standards for measuring and reporting on biodiversity risks. This will require the efforts of a number of parties. First, policymakers, civil society organizations and researchers need to develop an international framework with a number of indicators to measure biodiversity risks and impact. Second, policymakers and the business community
need to develop a reporting standard and ensure that companies report in accordance with this standard. Initiatives in the field of climate risks, such as the Task Force on Climate-Related Financial
Disclosure (TCFD), could serve as an example in this endeavour. Finally, supervisory authorities must ensure – for example through good practices – that financial institutions report in such a way that they produce a clear picture of their risk profile and resilience.
On a final note, I hope that other central banks and supervisors can further build on our approach and further improve it. Thus further exploring the exposures to biodiversity loss, and developing best practices for risk management and reporting. So that the financial sector becomes a catalyst for change. The loss of diversity in nature, just as climate change, poses a major threat to the financial sector, the economy, to prosperity and indeed to our daily lives. We cannot afford to ignore it.