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Biodiversity is a major challenge today. The rate of extinction of plant and animal species is unprecedented and is constantly increasing. According to the World Economic Forum's 2022 report, biodiversity loss ranks third on the list of risks that could have the most serious impact over the next decade. This loss of biodiversity and the degradation of ecosystems have significant social and societal consequences. They also generate economic risks and thus risks for the financial sector. So changes are needed to restore and protect biodiversity. The financial sector can and must play a role in this transition. The growing focus on this theme is also reflected in sustainable finance legislation, which increasingly integrates diversity considerations.
To shed light on this extremely important topic, we asked our Director Sustainable Finance, Tom Van den Berghe some questions.
In this case, we will look at how the loss of biodiversity is expressed in risks for financial institutions. When talking about biodiversity, one concept comes up repeatedly: the principle of dual materiality. This means looking at the impact of biodiversity loss on financial institutions that finance sectors that are highly dependent on biodiversity and at the impact of supporting and financing certain activities that have a negative or positive impact on biodiversity. The financial sector should take this dual materiality into account, in particular by including biodiversity in risk assessment and integrating it into overall credit and investment policies. This principle is also reflected in the new European regulations on sustainable finance.
The impact of the activities of financial institutions on biodiversity is mainly indirect. It means that they can influence biodiversity through their credit and investment policies. By being selective, they can support activities that have a positive impact on biodiversity and limit activities that have a negative impact. Whether or not sectors are financed is therefore an important lever. In other words, the financial sector can play an essential role in preserving biodiversity.
Yes absolutely. After climate change, biodiversity is the 'next big thing' in terms of ESG. Biodiversity is seen as a very important underlying factor in many areas, such as the fight against global warming, resistance to diseases, availability of raw materials, etc. The financial sector is central to the development of our economy and will therefore be an important factor in its investment - and financing activities demand more information about biodiversity. These are essential aspects for financial institutions, as they can have an impact on the companies they finance and, more broadly, on the economy as a whole.
The importance of protecting biodiversity is reflected in the new and future European regulations on sustainable finance. Let's look at the European taxonomy first. In order to focus investments on green activities, a classification was made of economic activities that have a positive effect on the environment. To be considered 'sustainable', an activity must contribute to at least one of the six objectives defined in the taxonomy. Protecting and restoring biodiversity and ecosystems is one of those objectives. In time, the taxonomy will be aimed at comparing the contribution of financial products and economic actors to the sustainable transition, so that investment decisions can be better guided.
Then there is also the SFDR (Sustainable Finance Disclosure Regulation), which requires financial actors to disclose the extent to which their investments have a negative effect on biodiversity.
Finally, the CSRD (Corporate Sustainable Reporting Directive) should also be mentioned. Once this directive (which is still at the proposal stage in the European Commission's legislative process) is adopted, all large companies will be required to publish information on ESG criteria, including 'biodiversity and ecosystems'. They are intended to report on how sustainability aspects affect their activities and the impact of their activities on sustainability. To help companies find their way, Febelfin has also compiled a special ESG dossier containing a great deal of useful information.
In short, we note that companies and financial actors must comply with an increasingly demanding framework for the conservation and restoration of biodiversity.
They have an important role to play because they can make a positive contribution.