DFIs worldwide are endangering nature declares study

Development finance institutions (DFIs) worldwide are endangering nature worth an estimated US$1.1 trillion annually, and more than a quarter of their total US$11.2 trillion loan book is highly dependent on vulnerable ecosystems, found a study by Finance for Biodiversity (F4B), published on Wednesday.

Globally, there are more than 450 development finance institutions (DFIs), which invest about US$2 trillion annually. Almost all are accountable to one or several governments, and ultimately to their citizens, and their core purpose is to facilitate sustainable development.

Sustainable development is inextricably linked to nature, because of the benefits that nature provides for businesses, including sustaining the quantity and quality of air, water, and soils, regulating the climate, providing pollination and pest control, and reducing the impact of natural hazards such as storms and floods. Biodiversity is declining at an unprecedented rate, however, and the drivers of these losses are intensifying.

Wednesday’s report, “Aligning Development Finance with Nature’s Needs: Protecting Nature’s Development Dividend”, found that DFIs are endangering nature with an expected value of US$1.1 trillion annually.

DFIs potential impact on nature

This is the first analysis to date to place a monetary value on a financial institution’s potential impact on nature.
In addition, the report found that DFIs are exposing themselves to extraordinary risks by failing to account for their dependence on declining biodiversity, a “dependency risk” estimated at US$3.1 trillion.

These dependencies and nature impacts are two sides of the same coin – one firm’s damage to nature can lead to financial loss for another dependent on that nature.

This feedback loop shows why these biodiversity-related risks are important leading indicators of material financial risk, and why immediate action is needed to address the issue.

DFIs are holding their first-ever global conference on November 11-12, at the Finance in Commons Summit, convened by French President Emanuel Macron, in what should be a key moment to assess how the global DFI community is performing.

“The world’s government-owned banks are meant to be at the leading edge of development finance practice, a symbol of progressive lending practices for the world’s private investors,” said Simon Zadek, chair of F4B, which produced the report.

“But mostly their investments are dependent on precious, vulnerable biodiversity resources, and too often place these resources further at risk. F4B’s calculations point to the urgent need for DFIs to commit to lending practices that deliver positive nature gains.”

Wednesday’s report recommended that all DFIs commit, and undertake within the next year, to publish a balance sheet-wide stress test of nature-related financial risks and impacts, and so catalyse similar action by private financial institutions and generate wider sustainable development benefits.

Dependency risk refers to the extent that the financing activities of DFIs are highly dependent on nature which is already vulnerable.

Almost all businesses in some way depend upon benefits from nature. For example, fishers rely on healthy stocks of fish, and many farmers on wild pollinating insects. If these ecosystem services are already vulnerable and declining, businesses are more at risk.

The F4B report applied an assessment of nature dependency by economic sector, where agriculture and forestry score highly, for example.

It combined this with country risk scores, according to biodiversity abundance, the strength of local environmental laws, and national resource intensity, to calculate a dollar risk value.

DFIs are also putting nature at risk, for example by driving deforestation, and in doing so, are exposing themselves to tighter environmental laws, or to litigation and reputation harm.

To estimate the risk DFIs pose to nature, F4B estimated the land and water footprint associated with DFI financing, and valued the resulting expected damage to biodiversity and ecosystem services, if not effectively mitigated.

The report found that, by region, Asia had the highest dependency risk, reflecting the vulnerability of its remaining, high-value biodiversity, and the relatively larger DFI exposure to this region.

Asia also placed the most nature at risk, reflecting the large water footprint of lending in the region. Among sectors, the report found agriculture put most nature at risk, as a key driver of land-use change including deforestation, while energy and water utilities scored the highest dependency risk, reflecting their high reliance on reliable freshwater.

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