The 15th Conference of the Parties (COP 15) of the Nations Convention on Biological Diversity （CBD）that will be held in Kunming in 2021 brought the issue of biodiversity conservation to the forefront of society.
In the same year, the 13th National People's Congress indicated the importance of "high-quality development" and set "ensuring harmony between humanity and nature " as one of the main objectives during the 14th Five-Year (2021-2025). A deputy to the National People's Congress also pointed out the importance and urgency of "establishing awareness of protecting Ecological red line areas" in green development.
The 14th Five-Year Plan sets out specific quantitative and binding targets for environmental protection and maps out the main ways in which China will implement biodiversity conservation during the 14th Five-Year Plan period: establishing a system of nature reserves, designating key ecological zones, developing diversified policies, and introducing market-based mechanisms and resources.
As the important role in resource allocation and capital flows, financial institutions, especially the banking sector, are currently facing the risks and opportunities brought by biodiversity-related policies for investment and financing activities.
Although the evolving top-level design of ecological civilization construction in recent years has provided a guidance for green development to green finance and mainstream banks are developing green-credit policies, banks should continue to develop practitioners’ biodiversity conservation awareness, risk perception and create risk-control tools to take their responsibility in environmental protection and control biodiversity risks.
To offer solutions to challenges faced by banks, the Partnering Finance and Biodiversity (PFB) Project Team of G:Hub collaborates with Global Environmental Institute (GEI), with the support provided by the UK Foreign, Commonwealth and Development Office (UK FCDO) and the generous advice and insightful guidance provided by external reviewers, published Pathway to Kunming and Beyond A Guide for China’s Banks to Identify and Manage Biodiversity Risks (the Guide for short) on April 22, 2021.
The Guide support Chinese banks to manage biodiversity risks by investigating international biodiversity-related principles, relevant studies authored by professional environmental organizations, as well as policies and practices implemented by various international and domestic financial institutions.
Study shows that a high percentage of global development finance institutions' loans are highly correlated to vulnerable natural resources. And banks are indirectly linked to ecosystem biodiversity through their client companies. Therefore, neglecting biodiversity issues in decision-making procedure can expose banks to higher reputational risk and systemic risk when investing in industries that highly rely on natural resources, and cause financial losses. In this case, understanding and managing biodiversity risks can reduce banks’ bad debt risks and make their operations more sustainable.
As biodiversity challenges become more acute, the financial industry is increasingly focused on improving its ability to address global and regional biodiversity risks. The relevant practices of international development financial institutions and commercial financial institutions have evolved and improved, demonstrating the following three main trends:
>> Incorporate biodiversity risk into existing Environmental and Social Management Systems (ESMS): Incorporate biodiversity risk into existing ESMS as an independent or cross-cutting factor, restrict and regulate all kinds of investment and financing activities that have significant negative impacts on biodiversity, and avoid investment and financing activities that have irreversible impacts on biodiversity.
>> Follow the mitigation hierarchy: Follow the four steps of the mitigation hierarchy (i.e. avoid, minimize, restore, and offset) to screen projects, regulate and guide client companies’ behaviours, and evaluate the implementation of mitigation measures.
>> Multi-party cooperation and communication: Maintain smooth communication with stakeholders and create effective accountability mechanisms in order to understand and respond to stakeholders' complaints efficiently, avoid biodiversity risks and related social risks, and cooperate with third parties, including international banks and environmental organizations, to promote biodiversity issues.
The Guide also introduces steps and policy tools that can increase the effectiveness of banks' biodiversity risk management frameworks in the context of international cases.
The biodiversity risk management steps include:
>> Due diligence: investigate the client company’s awareness of biodiversity risk and the ability to manage the risks with reference to the exclusion list in the project approval stage. The high-risk projects should be screened out in this step. Meanwhile, preliminarily check the potential ecological and environmental influence of the investment to understand the accompanying social and financial risks.
>> Environmental impact assessment (EIA): EIA is an important tool for identifying and assessing the potential environmental impacts of a project. To manage biodiversity risks systematically, scientifically and risk-proportionately, financial institutions should develop specific framework to standardize the client company’s EIA process and require them to design applicable mitigation measures accordingly when a project has high-level of biodiversity risks.
>> Stakeholder communication: Communication allows stakeholders (e.g. NGOs and communities) to fully understand the impacts of a project. This helps prevent social controversies arising from biodiversity issues. Also, local communities and environmental organizations may have unique knowledge and understanding of local ecosystems, which can help banks identify biodiversity risks more accurately. In addition, creating an effective Accountability Mechanism, aiming at collecting complaints, resolving disputes, and providing redress, can improve the communication efficiency.
>> Information disclosure: Disclosing its potential biodiversity risks in accordance with the information disclosure framework allows the public to better understand the ESG (Environmental, Social, and Corporate Governance) responsibilities undertaken by financial institutions. Thereby the decision-making process in the capital market can be changed from the bottom up. This will further influence companies’ behaviors and enhance competition in the industry. Disclosures usually include the required physical distances between client companies and biodiversity conservation areas and the specific impacts of client companies’ operations on biodiversity and endangered species.
The Guide also describes four important policy tools that can regulate the above steps:
>> Long-term strategies and targets: Incorporate biodiversity conservation targets, such as "no net loss" targets (i.e., applying mitigation hierarchy to balance the negative impacts of projects on biodiversity), into institutional strategies, investment and financing strategies, and ESG policies.
>> Exclusion list: Help banks screen out projects, including those would irreversibly harm biodiversity, and companies that hold or operate projects with ecological adverse impacts.
>> No-go policy: Establish a clear no-go policy to avoid investing projects located in areas protected by international conventions or national laws, important habitats for endangered species, and significant areas for biological migration and evolution. The policy should also consider other ecological sensitive areas that are internationally recognized or have significant sociocultural value.
>> Industrial policy: Regulate the investment to industries with high biodiversity risk, including industries with high ecosystem impacts (e.g., oil and gas extraction, infrastructure, construction materials, and mining) and industries highly dependent on ecosystem services (e.g., fisheries, forestry, and agriculture).
In addition, the Guide provides a detailed introduction and interpretation for mitigation hierarchy, which is the internationally recognized biodiversity impact solution, from a full project cycle perspective:
- In conjunction with the exclusion list to carry out due diligence, project screening and classification in order to identify projects’ potential biodiversity negative impacts and assess the client company’s willingness and ability to mitigate these impacts, thereby avoiding investing projects with irreversible negative impacts on biodiversity.
- For projects with high biodiversity risk, require clients to conduct a biodiversity baseline survey to investigate and analyze the status of ecosystems, species and habitats on project sites and their vicinity.
- Ensure that clients have planned effective biodiversity impact mitigation measures to avoid or minimize biodiversity risks by evaluating their EIA, environmental impact management plan, information disclosure plan, and other documents.
- During project implementation, monitor the actual biodiversity impacts of a project. If the project in fact causes biodiversity decline, banks should supervise the client company to plan and implement restoration.
- Once the project is completed, banks should comprehensively assess the project’s biodiversity impact and provide off-site compensation for residual impacts that are not eliminated in the early stages.
Last but not the least, the Guide provides suggestions to help banks andgovernment regulatory authorities to promote biodiversity risk management:
>> Incorporate biodiversity conservation into banks’ overall strategies, set a "no net loss" commitment for biodiversity at the institutional level, and design a clear phased plan and roadmap.
>> Incorporate biodiversity into banks’ environmental and social risk management mechanisms, identify operations with higher biodiversity risks based on their business and client portfolio, and develop the exclusion list, the no-go policy, and the industrial policy
>> Set up Environmental Risk Management Department to assess and manage project biodiversity risks, executing due diligence, reviewing project EIA plans, and regularly assessing the biodiversity impacts of projects. The department should also give training to other departments to strengthen their awareness and understanding of biodiversity risks.
>> Require clients to identify and mitigate the potential impacts of a project on biodiversity based on mitigation hierarchy, review the environmental impact assessment and stakeholder communication and information disclosure plan submitted by clients, and require them to disclose information about the project's biodiversity impacts.
>> Build and improve the accountability mechanism that is accessible to all stakeholders, and actively receiving and responding to biodiversity-related complaints.
>> Strengthen multiparty cooperation with regulatory authorities, international organizations, international biodiversity initiatives, research institutions, and environmental organizations to promote biodiversity issues.
>> Incorporate biodiversity conservation into long-term strategies for CSR and project risk management, gradually reduce investment and financing associated with industries and activities that have high negative impacts on biodiversity, and establish a timeline for target implementation.
>> Issue a commitment proposing that the bank will reduce or avoid investing in ecologically important areas such as protected areas, national parks, World Heritage sites, wetlands under the Wetlands Convention, habitats of endangered species, and other important ecological areas.
>> Increase the importance of biodiversity risks in banks' existing project screening, due diligence, approval, and evaluation processes. The Risk Management Department will conduct due diligence, environmental impact assessment and other processes, supervise clients to mitigate the biodiversity impacts brought about by their projects in a scientific and systematic manner through loan contracts and regular monitoring, and disclose relevant information on a regular basis.
>> Further enhance the biodiversity management system through multi-party cooperation with development financial institutions, international organizations, international biodiversity initiatives, research institutions, and environmental protection agencies to improve the quality and standard of institutional risk management.
Government regulatory authorities:
>> Comprehensively strengthen the regulation of biodiversity impact mitigation measures in laws and regulations, requiring EIA plan is made based on the mitigation hierarchy and adopt measures to avoid, minimize and, where possible, offset and compensate for negative impacts, based on mitigation hierarchy programs.
>> Financial industry regulators should continue to build and improve the stakeholder communication mechanism and accountability mechanism, introduce relevant policies and guidelines, and create information platforms for dealing with investment and financing complaints.
Greenovation Hub has launched the “Partnering Finance and Biodiversity (PFB)” Project, which aims at promoting an active role of the financial sector to protect biodiversity through assuming the responsibilities of the Convention on Biological Diversity and innovative finance. The PFB program includes a series of online training, the guidebook on biodiversity risks management and more to come. All partners are welcome to join! For more information, please tune into our Wechat account or website (www.ghub.org/en/).