During the recent COP16 conference on biodiversity, Frank Elderson, a member of the ECB’s Executive Board, emphasised the importance of nature for the financial system, saying that "those who destroy nature also destroy the economy.“

According to the ECB, about 72% of companies in the Eurozone depend on functioning ecosystems, as do the banks that finance these companies. Therefore, nature-related risks must be prioritised in banks' risk management.

The COP16 conference, held in Cali, Colombia, continued with efforts to embed biodiversity protection more firmly in financial practices. Initiatives such as the „European Green Deal“ and the „Biodiversity Strategy 2030“ aim to ensure that the financial sector takes nature-related risks into account. The EU taxonomy and the Corporate Sustainability Reporting Directive (CSRD) require banks to disclose these risks. However, Heinz-Gerd Stickling, a partner at consultancy ZEB, notes that the Biodiversity Strategy 2030 has yet to gain much relevance for governance. While clear guidelines exist for climate protection, the practical handling of biodiversity often lacks specificity.

The financial sector has long focused on climate protection, and some solutions are well advanced. In contrast, nature and ecosystems are relatively new topics for the finance industry, and requirements for biodiversity and climate protection can differ significantly.

„Decarbonisation goals from the Green Deal and biodiversity are interdependent in many areas, but there are also conflicts“, explains Stickling. Financial institutions are now tasked with aligning their investment strategies with the Kunming-Montreal Global Biodiversity Framework (GBF), which calls for minimising dependencies and negative impacts on biodiversity. The agreement reached in Montreal in 2022 promotes a nature-positive approach, focusing on increasing species diversity through the protection of natural habitats.

A major obstacle in managing biodiversity risks is the lack of standardised data. Unlike CO2 emissions, there is no uniform measure for biodiversity. According to the German Savings Banks Association (DSGV), the sector is „still in the analysis phase“, and is closely monitoring regulatory requirements.

The German Insurance Association (GDV) highlights that „collecting biodiversity data is methodologically challenging, often localised, and not easily comparable.“ Overall, data issues present a significant challenge.

While the government-supported Taskforce on Nature-related Financial Disclosures (TNFD) is developing risk assessment indicators, the lack of standardisation hampers comprehensive integration into banking. However, despite the challenging data landscape, the World Bank estimates that biodiversity loss could reduce global GDP by 2.7 trillion dollars by 2030, underscoring the importance of reliable biodiversity data.

Considering biodiversity risks presents challenges for banks and savings institutions. Physical risks, such as the degradation of ecosystems, can diminish the value of assets and loans. The National Association of German Co-operative Banks (BVR) argues that biodiversity risks are not a standalone risk category for banks, but rather risk drivers. For example, the decline in biodiversity (such as bee population loss) can manifest as a physical risk (failure to pollinate apple trees,) or as a transformative risk (bans on glyphosate), affecting the economic activity of a bank's corporate clients. „This risk then presents itself in the form of credit, liquidity, market, or operational risks to the bank“, says the BVR. Therefore, biodiversity risk is already part of the ESG risk canon, and is looked at for regulatory reasons.

The financial sector undoubtedly faces a shift, where biodiversity risks must be integrated into risk management. The requirements of the CSRD, regulatory authority rules, and the Biodiversity Strategy 2030, indicate that nature-related risks will soon be as significant as climate risks.

For the DSGV, biodiversity is also becoming an increasingly important issue. „We are closely monitoring developments regarding biodiversity and sustainability", it notes. Biodiversity is an aspect that is examined in the context of materiality analysis.

Despite increasing regulatory requirements, practical implementation remains a challenge. „The biodiversity crisis does not manifest through hurricanes and wildfires, but rather quietly and insidiously – this makes it particularly dangerous“, notes Stickling. Nevertheless, initiatives like the Network for Greening the Financial System (NGFS) show that nature-related risks can increasingly be addressed scientifically and globally.

Alongside the risks, there are also opportunities. Banks could actively support nature-friendly projects. According to the Association of German Banks, institutions can provide capital for nature-based solutions, contributing to greater sustainability orientation.

„For instance, by investing in the preservation of forests and peatlands, which serve a dual role as CO2 sinks for climate and biodiversity protection“, adds ZEB partner Stickling.

By strategically engaging in biodiversity-friendly projects, banks can make a crucial contribution to positioning themselves sustainably, and even taking a leadership role in this area. By integrating nature-related opportunities and risks, the financial sector can help address the biodiversity crisis – working towards a future-ready and nature-conscious financial world.