Sustainable Finance News from the Grantham Research Institute at LSE

Jay Owen Green Prosperity, Reforming Global Finance, Beyond GDP

April 2021

Exploring the links between biodiversity loss and financial stability


By Ma Jun, Network for Greening the Financial System (NGFS) and China Society for Finance and Banking, and Nick Robins, Grantham Research Institute

In this post for the Sustainable Finance Leadership series, Ma Jun and Nick Robins describe the need for a systematic approach by central banks and financial supervisors to biodiversity and outline the role for a new study group launched by the NGFS and INSPIRE.

2021 could well be a breakthrough year for sustainable finance. Last month the G20 relaunched its Sustainable Finance Study Group, co-chaired by China and the USA, and upgraded it to a Working Group. Financial policymakers and institutions are gearing up to the COP26 climate summit, focusing on how to expand investment for net-zero and climate resilience. Across the financial system, the wider degradation of nature is also gaining increased attention ahead of the UN Biodiversity Conference (CBD COP15), not least because of the realisation that ecosystem degradation is a key driver of zoonotic diseases such as COVID-19.

An underdeveloped agenda

It is an unwelcome fact that the finance and biodiversity agenda is relatively underdeveloped compared with climate change. A recent assessment by ShareAction of 75 of the world’s largest asset managers found that 86 per cent made no reference to ecosystem protection, natural capital or biodiversity in their policies.

However, this is beginning to change. The strategic case for protecting biodiversity and restoring nature is becoming clear. People rely on nature, not only as a source of sustenance and for finding meaning in life, but also for the ecosystem services provided by biodiversity. The major independent review on the Economics of Biodiversity by Professor Partha Dasgupta, published in February, states that the stock of natural capital per person has declined by nearly 40 per cent since 1992, the year the Convention on Biodiversity was signed. Many ecosystems have been degraded beyond repair or are at imminent risk of reaching ‘tipping points’, which could have “catastrophic consequences for our economies and well-being”, argues the report. For example, the soil beneath our feet contains air, water and minerals as well as organic matter with some of the greatest biodiversity on the planet. Dasgupta states that if this soil biodiversity were completely lost, “the land-based food system would cease to function.”

A host of market and institutional failures explain some of the continuing inability to value biodiversity in economic and financial decision-making. These include the lack of mechanisms to measure and price the negative externality of human activities – especially investment activities – on nature in general and on biodiversity in particular. There is a further lack of understanding of how the loss of biodiversity may impact economic sustainability and the safety of financial assets.

Failings such as these have clearly contributed to the degradation of our ecosystems, including large-scale deforestation. The required ambitious programme of policy reform will form a major part of the Post-2020 Global Biodiversity Framework, which will be agreed later this year. Core to this will be the transformation of systems that mediate our relationship with nature, and the global financial system should play a key role here.

Read more

‘The new UK Infrastructure Bank can drive the just transition: here’s how

Katarzyna Szwarc, Nick Robins and Sabrina Muller explain how the UK Infrastructure Bank could drive forward the creation of a net-zero economy that is fair for all workers and communities, across the country. Read more

State of Transition 2021

The 2021 State of Transition report from the Transition Pathway Initiative (TPI), reveals that 17% of high-emitting companies are now aligned with a pathway to keep temperature rises to 2 degrees or below by 2050. The report also shows that the number of companies committing to credible net zero targets has more than doubled in one year. Read more

‘Double materiality’: what is it and why does it matter?

The concept of double materiality brings environmental impacts into the focus of standard-setting in accounting. Different reasons for adopting this concept might lead to widely varying interpretations, yet the fitness of the financial system to facilitate a net-zero economy depends on how it is conceived. Matthias Täger explains. Read more

NGFS and INSPIRE launch joint research project on ‘Biodiversity and Financial Stability’

On 6th April the NGFS and the International Network for Sustainable Financial Policy Insights, Research, and Exchange (INSPIRE) announced the launch of a joint Study Group on ‘Biodiversity and Financial Stability’. The goal of the research initiative is to establish an evidence-based approach to how central banks and supervisory authorities could fulfil their mandates in the context of biodiversity loss, with a focus on land-use and deforestation. Read more

It takes two to dance: Institutional dynamics and climate-related financial policies

This paper studies how institutional dynamics might affect the implementation of climate-related financial policies and discusses the scenarios that might originate from the current institutional setting. Read more