3 answers to 3 questions: biodiversity

1. Why is the Association of German Banks interested in biodiversity?

At first glance, it might seem more like the province of nature conservation organisations. But it’s important to remember that conservation of our natural resources is a prerequisite for economic productivity.

Businesses require functioning ecosystems if they are to continue operating. Water, fertile soil, pollination and natural resources form the foundation of many, many business models. If these natural foundations are degraded, it can interrupt supply chains, increase costs or limit production. Conversely, businesses can negatively impact the environment, and damage the ecosystems that they ultimately rely on over the long-term. This is where the banks come in. Banks finance the economy. If businesses are exposed to evolving risks, banks have to understand these developments and take them into account in their risk management processes.

Here at the Association of German Banks, we facilitate dialogues between our members that are focused on biodiversity - a subject which is still evolving and changing for banks. We support our members as they discuss their experiences, navigate developments in nature-related risks and opportunities and discuss the practical challenges they face and potential approaches to solving them. We also share the banking sector’s expertise and opinions with governments, supervisory bodies, academia and the corporate sector.

2. How can banks contribute to the conservation and sustainable use of biodiversity?

Banks are an important, but not the only, driver on the path to developing a more environmentally friendly economy. As financiers, risk managers and strategic partners, banks can support companies as they walk this path.

There are three key roles here: 

• Banks finance investments used by businesses to improve sustainability and resilience in their production processes, supply chains or business models. 
• Banks are also increasingly considering biodiversity in risk management. They are developing processes to identify and assess nature-related risks, and then integrate them, step by step, into their risk management processes. 
• Banks can introduce nature-related issues into their client engagement in order to discuss potential risks, investment needs and financing solutions.

At the same time, companies themselves need to initiate the necessary investments and develop viable business models. Often, the first step is to identify which measures will have the most impact, and where investment is needed to fund those measures. Banks help to reveal risks, provide momentum and finance the relevant investments. Governments can incentivise investment with development schemes and support businesses as they make investment decisions by creating reliable and steady framework conditions.

3. How are banks addressing the topic of biodiversity today?

Banks are increasingly aware that this is a highly relevant subject. At the same time, many banks are still at an early stage in addressing biodiversity. Compared to climate change and climate risks, it is still considered quite a new area of focus for many institutions.

Banks are also increasingly addressing nature-related risks. In doing so, they develop risk-based approaches to identify particularly relevant sectors, dependencies and impacts while prioritising potential risk hot spots. Of course, banks are inherently interested in ensuring they are on top of these risks - after all, robust risk management is key for banking. In addition, supervisors expect institutions to integrate ESG risks into their risk management strategies, including nature-related risks where these are material. Some banks are already to including biodiversity in their strategic planning, and have defined financing objectives related to biodiversity. However, the degree of integration still varies widely across the sector. And there are still methodological challenges involved in, for example, quantifying nature-related risks.

Of course, we should not just focus on the risks. A more resilient, environmentally friendly economy will create new business opportunities and investment needs. We believe that the banks will have an important role to play here, providing financing and acting as a sparring partner in discussions. As yet, not many clients are raising the topic of biodiversity with their banks. Many businesses are strongly focused on addressing issues relating to climate change, while biodiversity often plays a subordinate role when it comes to investment and financing decisions. However, as time goes on, environmental factors are likely to gain importance in discussions with clients - for example when discussing risks and options for taking action and determining investment and financing needs. It is not just about reducing risks: businesses who understand their dependence and impact on nature can recognise opportunities for creating environmentally friendlier products and processes, as well as more resilient business models.