The reality is that the loss of natural habitats and species is just as critical an issue as climate change. Together, they present twin existential threats to the world, and one cannot be tackled without tackling the other.
Deservedly, enabling and encouraging countries to protect and restore natural ecosystems – from the Amazon rainforest to the mangroves of southeast Asia – as well as move towards more sustainable agriculture, forestry and land use, is a key focus of COP26.
As part of a series of interviews with the European Investment Bank on the big topics shaping the debate in Glasgow, Eva Mayerhofer, the bank’s principal adviser and lead environment and biodiversity specialist, shares her views on the economic importance of biodiversity loss, the actions being taken to prevent further degradation, and the role of the public and private sectors in saving nature.
GlobalCapital: Biodiversity loss seems now to be getting the focus and attention it deserves. Compared to climate change, has it been more difficult to get people and institutions to understand its importance?
Mayerhofer: Part of the challenge with biodiversity loss is that people just don’t feel or experience its impact as they do climate change. They experience that every day, which brings it close to home. The survival of polar bears, for instance, is more distant to people. What the pandemic has done, though, is enhance people’s awareness and need for nature, for health and wellbeing, which has really caused a shift in how we think about nature, about environmental degradation, and biodiversity loss. This has brought this area much closer to home and more tangible to everyone. It needed that. We needed a wake-up call.
GlobalCapital: What is important to understand is that biodiversity loss has real economic consequences. How do you view this and why does tackling biodiversity loss make economic sense?
Mayerhofer: About 44% of all economic sectors depend on biodiversity and ecosystems, or on natural resources in general. So that's a significant dependency, and global industry should not want to destroy our economic base. If that happens, the whole system collapses. As far back as the late seventies, Professor David Pearce [a pioneer of environmental economics] advised of the need to integrate the environmental externalities into cost benefit analysis. The problem is we haven't been doing that very well. And we have certainly never included externalities related to biodiversity or ecosystems into cost benefit analysis. This is changing, and especially under the momentum provided by the Dasgupta Review, which aided the realization that it does make good economic sense to internalize those costs and the socioeconomic benefits.
GlobalCapital: The economic consequences of inactivity on biodiversity loss are stark. Yet there are also financial risks that the public and private sector need to be aware of. Where are we in understanding those risks?
Mayerhofer: We are realizing that loss of biodiversity or ecosystem degradation is a financial risk to the public sector as well as to the private sector. Where we are now is trying to understand precisely what those financial risks are. For instance, some of the credit rating agencies – Moody's, Fitch, and S&P – are starting to think about how they incorporate biodiversity risk in their credit rating methodologies.
We have done the work on climate risk, looking at climate risk of our counterparties. But we, the EIB, are now looking at environmental risks, and specifically four we have identified: biodiversity and ecosystems; water; waste; pollution; and/or resource efficiency. What we are trying to understand there is the financial risks associated with each of them. So, for instance, what is the financial risk to a company if its resource base is being negatively impacted by biodiversity loss, an impact that may have its origins in its supply chain?
About 44% of all economic sectors depend on biodiversity and ecosystems, or on natural resources in general. So that's a significant dependency, and global industry should not want to destroy our economic base.
Companies and financial institutions are really at the beginning of understanding these risks, but progress is being made, helped by regulatory bodies. European banking regulators have come out with guidelines to help banks and financial institutions start thinking about this risk. How they do it, will take some time. But over the next couple of years, we will see this area really develop, and in similar way to how we came to understand and act on climate risk.
Importantly, and what helps, is that the biodiversity agenda has now been elevated to the same level as the climate agenda, and the importance of linkage between the two issues is more clearly understood. Indeed, if you want to address climate, you need to address biodiversity and vice-versa. This is fundamental and thankfully a central theme at COP26.
GlobalCapital: Thinking about the actions that are needed in this area, what are some of projects that the EIB are engaged in?
Mayerhofer: What’s been extremely positive is action to try to address the drivers of biodiversity loss. This has been much easier to finance, and we have had a lot more traction there than, for example, in trying to address biodiversity conservation projects. These projects are important, but they are small, often niche, and that can make it difficult for the private sector to finance them. By comparison, we have had a lot more success in trying to address the drivers of biodiversity loss.
One initiative that we are involved in, and are now looking at expanding, is the Clean Oceans Initiative, which is essentially seeking to reduce and remove the huge amount of plastic that's finding its way into our marine environment and ecosystems. That's one part of it, but it's also addressing the terrestrial pollution that is impacting the marine environment.
The EIB has committed €2 billion to this initiative together with Agence Française de Développement and KfW. Some of the projects are already being implemented, and in addition to those, we also have a project preparation facility in place for sub-Saharan Africa, which will have a positive impact on the marine environments in the region.
Together with this, is our work on the Great Green Wall Initiative, in which we have committed about €1 billion to support local livelihoods through projects that not only target water infrastructure, but also agroforestry, and especially sustainable agriculture. Part of this involves enhancing soil fertility to reduce land degradation, and other different types of measures to increase the resilience of ecosystems and their services.
Importantly, social issues and land issues are very much intertwined with the biodiversity agenda. So, making sure that indigenous and traditional communities are front and centre of those discussions around restoration activities is very important. It is big focus of multi-lateral development banks, including the EIB, to ensure that, in the name of conservation, we are not negatively impacting these communities.
The statistics show that the most effective conservation has happened when indigenous communities have worked with the lenders, and we have seen that success with the Okavango Capital Fund, which the EIB has invested in. The fund aims to channel investment to community conservancies to support the local livelihoods.
For large financial institutions like us, we tend to gravitate towards large infrastructure projects. But we are trying to channel more funding to smaller, community-based, conservation projects. It does require a change in thinking, but that is happening, and there is greater commitment from multi-lateral development banks, which will make a joint statement on this, on Nature, People and Planet at COP26. It’s then about operationalising that commitment.
GlobalCapital: Together with the what the public sector is doing, greater private sector involvement is critical. How do we get the private sector more involved in this area?
Mayerhofer: There are two key factors to this. The first is the type of projects we finance. So, when we are financing infrastructure projects, biodiversity and ecosystems need to be clearly integrated and also, where possible, nature-based solutions need to become more mainstream or systematic. We can only do that if we, as financial institutions, start including those externalities in our cost benefit analysis, because it is then that we will know exactly what the trade-offs are, and which ecosystem we need to protect and/or restore.
The second factor is on the corporate side. Large companies, for instance, have the resources and tools to be able to address these issues and put measures in place, but for the small, medium sized companies in Europe and other regions, they simply don’t have the same resources or tools to do so. It is on us financial institutions to help provide those tools and resources to help these companies make that transition.
GlobalCapital: Is there also a challenge with the implementing some of the rules and requirements around this area, because of complexity?
Mayerhofer: Yes, to an extent. The implementation of the Do No Significant Harm criteria under the First Delegated Act of the EU Taxonomy is, for instance, quite difficult for companies to understand what’s needed and how to implement it. Again, I think that’s where financial institutions like us have a responsibility to help translate those requirements and provide solutions to the corporate world. Its not simple, though. Helping to translate requirements, and showing companies how they can operationalise this, is one of the biggest challenges we face.
GlobalCapital: The public sector can also do more to tackle climate change and biodiversity loss. What are some of the key priorities for the public sector?
Mayerhofer: We only have a decade to address the issues we face. The public sector should be thinking more long-term – beyond the next election – it needs to start stepping up in taking ownership of initiatives to tackle these issues and incentivising companies to make the sort of significant change we need to see. One of the biggest topics for discussion is realigning subsidies. Some of the harmful subsidies that we have under the Common Agricultural Policy, for instance, need to be realigned to incentivise companies and farmers to make the required transformational change. Let’s incentivise farmers to move towards agroforestry, to organic farming practices. There are also fossil fuel energy subsidies that should be realigned. The reality is that we need to change the financial flows towards tackling climate change, biodiversity loss and protecting nature, and to such an extent that we see some materially positive impact in those areas over the next few years.
