Nature and the services it provides, from clean water and crop pollination to recreation and climate regulation, underpins trillions of dollars of value to the global economy. Preserving and strengthening these ecosystem services is climbing the agenda for governments, companies and investors in the face of worsening biodiversity loss around the world, and as nature’s role in slowing climate change gains wider recognition. Delegates are gathering this week at the UN Biodiversity Conference, known as COP15, where they hope to agree on a landmark agreement to take government and business action to scale akin to the 2015 Paris Agreement on Climate Change.
But combatting land degradation and biodiversity loss is a big task, and there remains a huge financing gap between the money currently being spent on nature and what is needed. The 2021 State of Finance for Nature report by the UN Environment Programme, or UNEP, estimated that about $133 billion per year currently flows into nature-based solutions, and private finance accounts for only 14% of that sum. That figure needs to hit $536 billion annually if the world is to address biodiversity loss, UNEP wrote.
Financial institutions will need to ramp up private capital to help close the gap. Investor demand for financial products that address ecosystem services and biodiversity is already strong: an April 2022 study by the asset manager Robeco showed that more than half of investors plan to focus on biodiversity in their strategies over the next two years, with 66% interested in investments that contribute to biodiversity. Robeco’s study covered 300 investors with $23.7 trillion in combined assets under management.
Against this backdrop of growing demand and need for action, an analysis of data from the latest S&P Global Corporate Sustainability Assessment, or CSA, shows that the array of financial products themed around ecosystem services and biodiversity is underdeveloped compared with products focused on climate change or overall environmental, social and governance integration. In the 2022 CSA, companies in the Banks, Diversified Financial Services & Capital Markets and Insurance industries were asked to describe their sustainable finance offerings across four segments: asset management, wealth management, retail banking and corporate or investment banking. From a universe of 582 companies representing more than $17.7 trillion in market capitalization that answered the relevant CSA questions, there were only 36 products or services that described ecosystem services or biodiversity themes, compared with 991 products related to climate change and 196 products related to other themes, such as a religious-based or ethical focus.
Companies described a total of 2,116 sustainable finance offerings, 1,224 of which had a clear focus or theme. The other 892 responses described general ESG or ESG-integrated products without a particular focus, which were excluded from this analysis.
Respondents were able to describe sustainable finance products under whichever of the four segments offered them. For example, investment products could be categorized under asset management, wealth management or retail banking, depending on the respondent’s business model.
Across the four business segments, biodiversity or ecosystem services themes accounted for less than 5% of sustainable finance offerings. These products or services covered several of the main areas of ecosystem services in need of protection or conservation: biodiversity, water resources, forests (including support for reforestation and opposition to deforestation), sustainable natural resources and land use more broadly, as well as agriculture — an industry that relies heavily on ecosystem services.
In asset management, four products (3.1%) described water and renewable resources, sustainable agriculture, forestry or biodiversity. That compared with 78 products (60.5%) related to climate change. Similarly, in wealth management, three products (4.3%) described sustainable forestry management, water and protecting the natural environment, compared with 36 products (51.4%) directed at climate change.
Water funds were also described in the retail banking segment, alongside one product using keywords like “ecology” and others supporting sustainable agribusiness. One of the sustainable agribusiness products specifically described supporting sustainable feed production, the restoration of forests and preservation of land. Yet the vast majority (91.2%) of responses were geared toward climate change rather than particular ecosystem services.
In the corporate or investment banking segment, where companies can disclose products and services relating to credit lines, underwriting of fixed income, and infrastructure financing, there was a similar picture: 629 products (83.6%) were climate change oriented, and 23 products (3%) focused on biodiversity or ecosystem services. As with the other segments, these offerings predominantly addressed sustainable agriculture, land use and water conservation (including infrastructure for water treatment, desalination and distribution). One response specifically described loans for water pollution management.
Climate change has become one of the dominant themes for sustainability-related finance since the 2015 Paris Agreement, and several key factors allow financial institutions to build products that address it more directly than they can address biodiversity or ecosystem loss. There is already a developed system of measurement for greenhouse gas emissions, a key metric in combatting climate change. One tonne of carbon dioxide-equivalent greenhouse gas emitted anywhere in the world contributes to the global total of carbon in the atmosphere. Measuring a company’s impact on biodiversity or ecosystems in a comparably straightforward way is more complicated, because while damage to nature is intrinsically local — to specific species or ecosystems — it can also have knock-on effects far beyond the local region, as when deforestation disrupts broader weather patterns.
Having a basic unit of measurement for emissions has also facilitated the creation of carbon offsets, which allow companies to compensate for their own emissions by paying to remove carbon from the atmosphere elsewhere. A similar model for biodiversity may be gaining traction, with biodiversity credits, or biocredits, featuring as a key discussion topic at COP15. Biodiversity offsets also exist, but their purpose is to compensate for biodiversity loss. Biocredits, on the other hand, are a “purely positive investment in nature” that can function as a tradeable financial asset, becoming an important mechanism to channel financing into protecting nature, researchers from the International Institute for Environment and Development wrote in a December 2022 report.
In the CSA analysis, the largest portion of ecosystem services products, with 24 responses, was for financing activities: the provision of credit lines, infrastructure financing or fixed income underwriting. These offerings included financing for sustainable agribusiness, sustainable land use, and water infrastructure, among other projects. Financing products may lend themselves more easily to a biodiversity or ecosystem services focus than investing products because they typically build in specific sustainability performance metrics or indicators, and because they often fund projects at specific locations or sites where the local impact on nature can be assessed and mitigated.
Looking forward, there is evidence that demand for financial offerings tied to addressing biodiversity loss is rising among sustainability-minded investors and consumers. There are encouraging signs that the challenges related to measuring ecosystem impacts in a standardized way can be solved. The Taskforce on Nature-related Financial Disclosure, or TNFD, has worked throughout 2022 to develop a framework for how companies can disclose risks and opportunities related to nature and natural capital, as well as how they can measure their impacts on nature. One of the key tenets of the TNFD’s beta framework involves companies locating all their interactions with nature and evaluating how dependent they are on natural systems — steps that would make the connection between business activities and their impact on biodiversity and ecosystems even clearer. The TNFD is preparing a final draft version of its framework for release in March 2023, with final recommendations planned for publication in September 2023. S&P Global is a member of the TNFD.
At COP15, organizers are hoping to gain consensus among the nations and companies in attendance that biodiversity and ecosystem loss pose a systemic risk on the same level as climate change. To reverse that trend of losses, policymakers and the private sector alike will have to work together to redirect financial flows from development and business activity that destroys nature toward activities that protect and restore it.