Maurits van den Oever: The industry needs to get to work with biodiversity and regulation

September 10, 2024

^{This column was originally written in Dutch. This is an English translation.}

By Maurits van den Oever, Quantitative Consultant at Probability & Partners

Biodiversity is becoming an increasing point of discussion within financial organizations. Not only are several frightening figures about the health of the global ecosystem coming out, there are also more insights into how changes in biodiversity can impact the financial sector. The industry needs to get to work!

According to the ECB, some €40 trillion of global GDP depends on the health of nature[1]. When WWF indicates that wildlife populations have declined by about 70% over the last 50 years[2], it sends an urgent message that people need to get to work on this issue.

On top of that, other ESG indicators also affect biodiversity. These include greenhouse gas emissions, fossil fuel use, pollution, waste generation, water use, and the reuse or recycling of waste and chemicals.

 
What does the regulator say?

Regulators are also aware of the risks that come from biodiversity loss. There are several European initiatives that require companies to think more about this. A good example is the Corporate Sustainability Reporting Directive, or CSRD. These regulations focus on reporting environmental, social, and governance-related information. For the ecological part, there are some 530 required data points to report. On top of that, there are 150 voluntary data points. The topics covered include the organization's policy on sustainability, as well as all of the organization's own emissions, energy consumption, pollution, water consumption, and how the organization handles resources. There is also a section specifically on biodiversity. This includes 122 data points, 65 of which are voluntary.

The concept that makes CSRD regulations so comprehensive is the principle of “double materiality. Biodiversity impacts the organization. This can be through changes in regulations, reputational damage, or physical impact on the ecosystem, both on site and through investment. In turn, the organization itself impacts biodiversity. This can be through on-site activities, but also occurs through investments or financing activities. Because organizations must provide insight into both impacts, the CSRD arrives at those 530 mandatory data fields to be completed.

Other European regulations and initiatives that touch on biodiversity are:

• The EU Taxonomy: a classification system that identifies sustainable economic activities, including those that promote biodiversity.
• The Task Force on Nature-related Financial Disclosures: A voluntary framework (similar to the TCFD for climate) that helps financial institutions assess, report and manage biodiversity-related risks and opportunities.
• Sustainable Finance Disclosure Regulation: Requires financial institutions to disclose how they integrate sustainability risks, including biodiversity loss, into their investment decisions.
• The EU Biodiversity Strategy 2030: A broader initiative encouraging investment in biodiversity-friendly sectors and green finance.

 
Banks and insurers

On the biodiversity front, banks will face CRD VI, or the most recent revision of the Capital Requirements Directive, in 2026. Earlier versions of CRD did take climate risks into account, but CRD VI takes a broader approach, with additional focus on risks that come from biodiversity decline and environmental degradation. Organizations are required to conduct a scenario analysis on biodiversity.

For insurers, a revision of Solvency II is imminent. The new version will integrate various environmental risks. Loss of biodiversity will be considered under the broader category of sustainability risks. Insurers will have to assess how biodiversity-related risks may affect their financial stability.

Like banks, insurers will also have to engage in scenario analysis. These scenarios should include biodiversity-related risks to better understand how these factors may affect their portfolios, especially in sectors such as agriculture, forestry and real estate.

 
Conclusion

All in all, there is increasing attention to how biodiversity can affect an organization's business model. The regulator is imposing increasingly stringent requirements on organizations to identify and manage this risk. Some of these initiatives are still in the development stage, but the conclusion is clear: keep a close eye on biodiversity!