Biodiversity and sustainable finance: current and future risks

The biodiversity is at the heart of sustainable finance and related risks. ESMA, the European Securities and Markets Authority, has published the Report on Trends, Risks and Vulnerabilities, No. 2, 2023 in which it highlights the increasing risk of greenwashing by including a section called "Biodiversity: the next frontier in ESG investing". The report raises the bar on financial instruments dedicated to the protection of natural resources and biodiversity, recognising the need for effective and transparent risk assessment reports.

The report by the ESMA highlights how biodiversity represents a kind of "new frontier" in ESG investments; it reports on the evolution of the ES investment structure and, a direct focus on climate issues and combating climate change. Continued growth towards biodiversity and factors influencing the protection of natural ecosystems. ESMA's TRV report refers to the findings of the 2022 report of the Network for Greening the Financial System (NGFS), which demonstrates that the rise of factors that threaten natural balances and, in particular, deplete biodiversity, represents an increasingly direct and significant risk to financial stability and financial sector firms.

Financial markets rebounded on the back of falling energy prices and expectations of a slowdown in monetary tightening. Indeed, the financial markets are adjusting to the new economic environment, characterised by a lasting rise in interest rates and inflation. Moreover, the collapse of several US regional banks rekindled concerns about the banking sector and triggered a brief episode of volatility. According to the'ESMA the overall risks have a very high level of danger. Volatility and inflation also increase short-term risks for consumers, in particular losses due to negative returns. In contrast, there is exponential growth in the EU market for ESG products and sustainable investments. The demand for funds with sustainable investment objectives is very strong.

The biodiversity represents a proactive approach to financial investments. Companies are prepared to assess risks and turn them into an opportunity for the environment and for investment. Such a mechanism is valid when companies are actually committed to achieving sustainable development goals, otherwise one runs the risk of greenwashing, i.e. deceptively promoting 'green' business practices that may not actually be sustainable. Indeed, biodiversity can be seen as an investment opportunity, but it is crucial to have shared and comparable data. In this respect, it is important to correlate the climate change forecasts and scenarios presented in the IPCC AR6 report.

The Intergovernmental Panel on Climate Change (IPCC) is an intergovernmental scientific body established in 1988 by the United Nations and the World Meteorological Organisation (WMO). The IPCC plays a crucial role in providing a comprehensive assessment on a sound scientific basis for understanding climate change and in helping to guide global actions to mitigate the effects of climate change and adapt to it. The main objectives of the IPCC, can be summarised in 5 categories: scientific assessment; providing objective and independent information; synthesis and communication; policy decision support; and promoting scientific research.

ESMA, as an independent EU authority, emphasises in the TRV report the importance of having tools to properly understand and assess risks. The first impact of risks related to biodiversity loss affects the global economy, the productivity of specific sectors and their increased exposure to other risks, such as vulnerability in supply chains. Such risks can be transmitted to the financial system, for example, through an impact on corporate profitability or a deterioration of assets. Another example highlighted is the decrease in the availability of fresh water, which affects the production processes of many sectors. The financial system risks associated with diversity loss are many, so a better understanding of biodiversity-related financial risks is needed to improve the assessment of the interconnections between financial stability and environmental risks.

The ESMA report refers to the role of the Kunming-Montreal Global Biodiversity Framework, adopted during the COP 15 after a four-year consultation and negotiation process. The Framework supports the achievement of the Sustainable Development Goals and outlines a pathway to create the necessary conditions to protect biodiversity and develop real harmony with nature by 2050. The implementation of the Biodiversity Framework envisages a package of measures including a monitoring framework, a planning mechanism, financial resources required for implementation, procedures and projects for capacity building, technical and scientific cooperation, as well as a major agreement on digital sequencing information of genetic resources. With this in mind 3Bee supports companies in the transition phases for the adoption and improvement of ESG objectives through a technological approach to regeneration.

The Biodiversity Framework supports the achievement of several Sustainable Development Goals (SDGs) set by the United Nations. The SDGs aim to promote sustainable development in various areas. Some of the SDGs closely related to biodiversity are specified in SDG 14 "Life Under Water" which aims to conserve and sustainably use the oceans, seas and marine resources for sustainable development; in SDG 15 "Life on Earth" which aims to protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse biodiversity loss. 3Bee is working on this sustainable development goal through projects such as the Oases of Biodiversity: urban and agroforestry habitats recreated in areas and lands with low biodiversity. Places where, thanks to technology, biodiversity is constantly monitored.

ESMA highlights how the financial sector is instrumental in helping to identify the resources needed to meet the objective of preserving and restoring biodiversity by 2030. The report points out that reliable performance can only be ensured when there is a concrete response to the demand for standards and benchmark KPIs so that every investor can correctly assess the risks and prospects for sustainable finance. This topic also indirectly affects sustainability reporting issues and the application of the Corporate Sustainability Reporting Directive (CSRD). The CSRD is a directive proposed by the EU that aims to improve the transparency and quality of information on environmental, social and governance issues (ESG criteria) provided by companies. The CSRD aims to strengthen and expand companies' sustainability reporting obligations.

The ESMA report shows that the size of the financial market, in terms of biodiversity, is still small with €870 million in assets under management as of June 2023. Although the demand for sustainable financial products has increased. In order to achieve the Sustainable Development Goals Agenda 2030, it is crucial to take action in the financial sector to find the resources needed to achieve the ESG criteria. ESMA highlights the need for proper risk assessment and outlook, sustainability reporting and the application of CSRD. In this context, a valuable support for companies is XNatura: the 3Bee biodiversity monitoring protocol, validated by an accredited third party and based on proprietary advanced technology. The objective? To ensure an approach to biodiversity protection based on scientific data for concrete actions in the field.

Article edited by Angelina Tortora