Cost of loss

SONG CHEN/CHINA DAILY

Biodiversity is closely linked with economic benefits and is the very foundation for the development of human society

President Xi Jinping announced at the 15th meeting of the Conference of Parties to the Convention of Biological Diversity, which he attended via video link, that China will invest 1.5 billion yuan ($233 million) to establish the Kunming Biodiversity Fund to support the protection of biodiversity in developing countries.

Biodiversity loss is emerging as one of the greatest global challenges.

The New Nature Economy Report issued by the World Economic Forum in 2020 indicates that $44 trillion of the world's economic value--over half of the then global GDP--was moderately or highly dependent on nature. The loss of biodiversity will therefore disrupt the stability of the global economy and the financial system.

The loss of biodiversity is an irreversible process. Therefore, it is necessary to identify and forestall the impacts on biodiversity in financial activities and set up standards of accountability for biodiversity-related investment. In addition, risk control is required for investment programs to protect biodiversity.

China is one of the countries with the most complete top-level blueprints for green finance. So far, biodiversity-related content has been incorporated into policies and documents such as a green credit guide, a green debt programs catalogue, and a green industries catalogue. At the same time, as the world's third most biodiverse country and a contracting party to the Convention on Biological Diversity, China has been actively participating in global cooperation on biodiversity conservation.

A 2020 Paulson Institute report says that in the next decade, the world will face a global biodiversity protection funding gap of anything from $598 billion to $824 billion.

To fill the gap, financial tools, such as green credit, green bonds, and blue funds, should be leveraged to pool financial resources and establish a sustainable financing mechanism to support nature-based solutions and conserve biological diversity. It is a new opportunity for the financial market.

Currently, as the concepts of green finance and environment, society and governance gain ever-increasing relevance, it is time to integrate biodiversity factors into financial risk management. However, China still lacks a biodiversity risks standard in its evaluation system for the environment, society and governance.

In this regard, some meaningful explorations have been carried out. For instance, Wind, a financial data provider, has launched its first green ESG bond issuance index that includes biodiversity indexes; Peking University's Shan Shui Conservation Center is working with other institutes to develop an evaluation system for biodiversity impact by enterprises.

Aside from the above-mentioned efforts, even some financial institutions are cooperating with environmental organizations specializing in biodiversity. For instance, Huatai Securities in October, 2021 launched an asset management product featuring ecological conservation. While providing financial support for green industries, the initiative will donate part of its revenues to fund biodiversity conservation and coastal wetland restoration, exploring a new path of sustainable fisheries along with local communities.

As biodiversity loss deepens, financial institutions will encounter increasing risks related to biodiversity. Thus regulators should encourage the financial sector to support the conservation of biodiversity.

Financial regulators should improve the policy framework for biodiversity financing based on the existing standards of sustainable finance. They should ameliorate motivation mechanisms and transparency requirements for biodiversity-related financial activities and ramp up financial support for biodiversity conservation in a top-down approach. It is imperative that financial regulators include detailed biodiversity-related content in policy standards and guidance, and require financial institutions to take biodiversity into consideration during policymaking.

As biodiversity conservation is closely linked with climate change and environmental governance, it is imperative to incorporate biodiversity protection programs into the span of green finance, and formulate biodiversity financing policies based on well-established standards for green finance. In the meantime, existing green financing tools could be used to fund biodiversity protection.

Besides, the government should ramp up the investment of public funds in biodiversity protection by establishing funds dedicated to biodiversity conservation to encourage financial institutions and social capital to follow suit.

Also, information is critical to identifying and evaluating the risks of biodiversity. Currently, the lack of such information impedes financial institutions from accurately assessing biodiversity impact. Financial regulators should work with environmental watchdogs to push enterprises to publish and share their information of biodiversity impact. For more effective and proactive biodiversity risk management, it is necessary to on the one hand strengthen biodiversity data integration and information sharing, and on the other hand encourage cross-sector cooperation for enterprises and financial institutes to collect, interpret and apply biodiversity data relating to their operations.

Wang Yao is the director-general of the International Institute of Green Finance of the Central University of Finance and Economics. Shi Xiangying is the executive director of Shan Shui Conservation Center. The authors contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn