The financial necessity of biodiversity

Published August 23, 2021
The degradation of natural capital impairs the valuable ecosystem services that people and businesses depend on for health and prosperity. — Reuters/File
The degradation of natural capital impairs the valuable ecosystem services that people and businesses depend on for health and prosperity. — Reuters/File

Awareness of our interconnectedness with other species grew rapidly in 2020 as it became clear that unsustainable development increases the risk of disease pandemics such as Covid-19. In 2021, efforts to halt nature loss are set to accelerate further — with a key role to be played by investors.

While the entire financial world is going through a movement giving environment, social, governance (ESG), its due importance, likewise devising regulations and policies to curb the social and environmental impacts of business activity, Pakistan still seems to be struggling to understand what ESG means.

Biodiversity describes the variety of life and is the living component of what can be thought of as natural capital stocks. It plays an important role in the provision of the services we receive from nature. The terms “capital” and “stocks” are used as metaphors to help describe the role of nature within the economy.

Whilst the world has started moving towards nation-wide, investments-wide and corporate-wide net-zero strategies to attain zero carbon emission strategies as per the Paris Climate Agreement scenarios, speaking to people within the Ministry of Climate Change or Finance reveals absolute obliviousness of such developments.

The European Union Sustainability Taxonomy, central banks around the world, and SFDR (Sustainable Finance Disclosure Regulations) are ensuring financial institutions are at the helm of combating the challenges of climate change and work within a triple bottom line operating model ie as opposed to the single bottom line: profits; the two additional bottom lines added to organisations being people and planet.

The mere possibility that banks can be pushed in a direction where they account for environmental risks and opportunities, rather than solely focusing on maximising returns for stakeholders, is laughable in Pakistan

The financial sector is key to driving change since, in essence, banks, insurers, asset managers, and investment advisors steer the way the entire corporate world operates, globally the focus has been on embedding ESG within the financial sector and in doing so achieving targets across all sectors and industries.

Yet, we in Pakistan remain oblivious to what ESG means, while within financial services the approach has been to laugh out the mere possibility that banks or investments can be pushed in a direction where they account for social and environmental risks and opportunities, rather than solely focusing on maximising returns for stakeholders.

The society and the biosphere the economy operates in is completely neglected, and not staying abreast of global developments within the ESG domain is bound to keep Pakistan in the shadows, always catching up to global developments.

Besides heightened awareness of the risk and regulatory implications, investors have one more reason to take note: protecting habitats is essential to combat climate change and meet global sustainability goals.

The degradation of natural capital impairs the valuable ecosystem services that people and businesses depend on for health and prosperity.

The World Economic Forum has estimated that more than half of the world’s gross domestic product — $44 trillion — is moderately or highly dependent on these ecosystem services.

For investors and governments, biodiversity loss has significant economic consequences that should be recognised in national accounting systems and corporate bookkeeping. Companies face a direct threat from biodiversity loss as a result of physical, transition, regulatory and systemic risks.

More than half of the world’s habitable land area and 70 per cent of freshwater is already used for agriculture, which is also the single biggest greenhouse gas emitter. The effects of climate change, species overexploitation, pollution and invasive species all deplete Earth’s natural diversity. By another estimate, the value of the stock of natural capital has declined by nearly 40pc since 1992, while global production has surged, and human capital only increased about 13pc.

Biodiversity loss and environmental changes are accelerating rapidly. As a result, considerable risks arise for companies due to their impacts and dependencies on nature. These risks may in turn also affect the financial institutions that invest in these companies.

At the same time, considerable nature-related opportunities can emerge for financial institutions. Therefore, including nature in investment decision-making processes is an urgent need, for Pakistan as well as for financial institutions within the country.

The integration of environmental concerns is a recent enterprise for financial institutions. However, the financial sector, policymakers as well as other stakeholders can benefit from the progress that has already been achieved in the climate context globally. While it may not be optimal to replicate the methodologies, tools, metrics, and policy measures designed in the rest of the world, the Government of Pakistan can provide valuable foundations for the inclusion of nature-related aspects.

As an immediate first step, the Ministry of Finance and State Bank of Pakistan should reflect on nature-related issues that can affect them, where are the opportunities related to nature protection — and potential methods to identify both.

They should also actively expand their knowledge about the possibilities for aligning their portfolios with ecological limits. As things stand, it is about time to require financial institutions to report their integration efforts for nature-related risks as the necessary data is not yet available.

Government has a key role to play in bridging this data gap and enabling financial institutions to obtain information about the locations as well as the nature-related impacts and dependencies of assets and activities of the companies they invest in. In addition, governments are central actors for scaling up investments in nature-related opportunities.

They should create incentives for financial institutions to develop an investment strategy oriented towards positive impacts on nature, for instance through tax incentives, the creation of labels, and private-public financing solutions.

Finally, for financial institutions to take nature-related risks and opportunities into account and ultimately align their portfolios with environmental boundaries, concrete and measurable targets need to be formulated.

While there is some progress seen in the way Environmental Risk Management and Green Banking Guidelines are being devised by the State Bank of Pakistan, and a few corporates taking initiatives on their own accord, without clear direction on part of the government and public policy that advocates for ESG being at the forefront of business transformation, Pakistan is losing out on an opportunity that is most pivotal in the changing working world today.

Published in Dawn, The Business and Finance Weekly, August 23rd, 2021



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