UNEP Finance Initiative
The United Nations Environment Programme Finance Initiative (UNEP FI) is the largest public-private partnership between the UN and the global financial services sector. UNEP FI works with over 170 financial institutions worldwide to integrate sustainability into financial institutions’ core strategies and operations. It is THE platform for banks, insurers, asset managers, pension funds and other categories of financial institutions to work together to embed best sustainability practice in the financial sector and change the way capital markets manage environmental, social, and governance (ESG) risks and opportunities.

Global Scenario
In 2000, the UN initiated the Millennium Ecosystem Assessment (MA)¹ to examine the links between ecosystems and human well-being to provide a scientific basis for action. Its key finding was that ecosystem services are declining in most instances.

• Cultivated land now covers one quarter of the world’s land – this has resulted in massive loss of natural habitats such as forests and wetlands and many of their associated ecosystem services;
• Demand for food is projected to increase 70-80% by 2055, and a further 10-20% of grassland and forest is projected to be converted to agriculture between 2000 and 2050. This will result in significant additional release of green house gases (GHG);
• Coastal habitats are being destroyed at an unprecedented rate – 20% of the world’s coral reefs has been destroyed and a further 20% is significantly degraded resulting in the decline in availability of fish and coastal defences;
• More than a third of global mangrove forest was lost between 1990 and 2000; this, together with the loss of other coastal defences has reduced our protection against natural hazards such as hurricanes and tsunamis;
• Bees are in decline globally, linked to escalating levels of pollution and loss of habitat. Overall, 35% of the global food production from plants benefits from animal pollination. The value of all this ranges from USD 112 billion to USD 200 billion annually.

UNEP FI and Biodiversity & Ecosystem Services
Aware of the evolution of new markets for biodiversity and ecosystem services (BES), such as conservation banking, green fiscal funds, ecosecuritisation, and payments for ecosystem services to name a few, as well as a growing interest from progressive leaders in the financial services sector to make these markets work for the planet’s good as well as profit, UNEP FI started its BES work stream in early 2007. The development of this work stream also follows the explicit mandate given at the 8th Conference of Parties to the Convention on Biological Diversity in 2006 which states that parties “Invites businesses and relevant organisations and partnerships, such as the Finance Initiative of the United Nations Environment Programme, to develop and promote the business case for biodiversity…”

The work of this Group, driven by fourteen UNEP FI member institutions with ten leading environmental NGOs supporting in an advisory capacity, is based on the need to engage the global financial services sector in identifying and addressing the risks and opportunities associated with biodiversity loss, the degradation of ecosystem services and the sustainable use of ecosystems and the services associated with them (e.g. raw materials such as fish and timber, regulatory services such as climate or flood regulation). The lead institutions and civil society partners will explore regulatory frameworks, business operations and stakeholder concerns as the work stream unfolds.

During the scoping phase ahead of the launch of this work stream, at least three principal barriers to mainstreaming biodiversity and ecosystem services considerations in the financial services sector were identified:

• lack of awareness of the implications of degraded ecosystems on business and the lack of capacity to respond;
• an undeveloped business case for action; and
• insufficient policies aligning financial incentives with ecosystems stewardship.

The BES work stream produced a CEO Briefing² and report “Bloom or Bust³” in 2007. The publication, the first of its kind for the work stream, analyzes a wide array of financial linkages between banks and investors and various industry sectors by exploring the risks faced by financial institutions that as well as opportunities for financial products and services that support sustainable use of biodiversity and ecosystem services. The report also proposes actions required by the financial services sector and the policy-making community to make finance and capital markets work for – and not at the expense of – BES.

The Business Case
It is crucial for the financial sector to understand how the impacts of BES subsequently lead to challenges as well as opportunities. The financial services sector, in terms of lending, investing and insuring, is a key point of leverage in enabling BES loss and is also a mechanism for effecting better BES assessment and management.

The Natural Value Initiative
Practical next steps for the financial sector listed in this report include developing and promoting benchmarking of performance across the financial sector. UNEP FI is already addressing this issue through the Natural Value Initiative (NVI)⁵ – a benchmarking tool focused on the food, beverage, and tobacco sectors. This multi-stakeholder initiative is funded by VROM, the Dutch Ministry of Housing, Spatial Planning and Environment, led by UNEP FI, environmental NGO Fauna & Flora International (FFI), and Brazilian business school FGV, and supported by the UN Principles for Responsible Investment. The tool is based on an adapted version of a tried and tested methodology already employed within the asset management community and designed by Insight Investment to evaluate the extractive sector.

The objectives of the benchmark are to:

• build expertise in the finance sector for evaluating risk and opportunities associated with this issue;
• build awareness of the food, beverage and tobacco sector’s dependence on biodiversity and ecosystem services; and
• stimulate improved performance in the food, beverage and tobacco sectors.

The tool will focus on sustainable land management and agriculture, with a modular approach for different levels of value chain to identify current good practice / leadership. The NVI team has secured 6 financial institutions so far to pilot the tool – Insight Investment, F&C Asset Management, Morley Fund Management (UK asset managers), Pax World (US asset manager), VicSuper (Australian superannuation pension fund), and Banco Real (Brazil). The project will benchmark 31 companies and the sample of companies will be dictated by the pilot investment companies.

The tool will focus on 3 levels of supply chain: primary producers and commodity processors, manufacturers and retailers, and farm level performance, and will ask a series of targeted questions based on established risk management practice on governance, policy and strategy, management and implementation, reporting, and competitive advantage.

Key outcomes of this benchmark will include:

• a company specific analysis of strengths and weaknesses;
• a consolidated report outlining key findings from the analysis and ranking those companies benchmarked to show leading and lagging practice;
• a document outlining the business case for managing biodiversity and ecosystem services dependencies and impacts; and
• a biodiversity and ecosystem services dependency and impact benchmarking tool promoted to investors for uptake and repeat analysis.

The NVI ultimately hopes to achieve greater awareness within the finance sector of the business case for managing biodiversity and ecosystem services, the risks associated with mismanagement, and understanding of best practice and capacity to effectively manage biodiversity risk.

Is the Market Starting to Transform?
In the past few years, there has been a significant shift in the way the financial sector has addressed ESG issues. At the G8 environment meeting in Potsdam in March 2007, the environment ministers of the G8 countries together with their counterparts from Brazil, China, India, Mexico and South Africa agreed on a “Potsdam Initiative” to estimate the economic costs of global biodiversity loss. There was a clear message to the financial sector to “effectively integrate biodiversity into its decision making…” This is a strong indicator of potential policy change, which will help enable a common basis for action within the financial services sector.

The UN Principles for Responsible Investment, an investor initiative in partnership with UNEP FI and the UN Global Compact, launched in April 2006 by then UN Secretary-General Kofi Annan, is a clear signal that many investors are beginning to embed ESG issues into policy-making and decision-making. This initiative, with over 300 institutional investors from 30 countries representing USD 13 trillion in assets, is now also endorsed by the present UN Secretary-General Ban Ki-moon. Through its support of the NVI, the PRI is proving to be a significant entry point for many financial institutions into the biodiversity space. The PRI Engagement Clearinghouse is an example of investors stimulating collaboration and addressing problems that need collective action.

Indeed, the financial sector’s greatest environmental and social challenges – especially in these current turbulent times – are also its most promising opportunities.

Susan Steinhagen
Programme Manager, Biodiversity & Ecosystem Services

UNEP Finance Initiative