Public development banks have an opportunity – and responsibility – to lead on nature

Insight / 2 Dec 2020

The recent joint pledge from global development banks to apply their sizable resources towards sustainable development and climate solutions is a step towards tackling nature-related financial risks

Earlier this month, the world’s 450 public development banks put out a joint declaration, committing to apply their sizable resources towards sustainable development and climate solutions. The development banks, which collectively account for 10 percent of global investments, said they would shift strategies and investments to contribute to achieving the Sustainable Development Goals and the Paris Agreement on climate change.

Stepping up efforts to tackle nature loss is part of this commitment. The development banks declared they will ‘develop or reinforce strategies and funding’ on biodiversity, oceans and nature. They said policies should be strengthened for all key biodiversity areas, including forests, oceans, wetlands and watersheds.

Alongside the collective declaration, a group of 26 development banks that make up the International Development Finance Club put out a position paper on biodiversity.

Measuring nature-related risk exposure

The declaration from the world’s development banks is a welcome step in tackling nature-related financial risks. It comes on the back of new estimates that their portfolios are exposed to significant nature-related risks. Of the $11.2 trillion invested by public development banks at the end of 2019, $3.1 trillion was financing activities that are highly dependent on ecosystems that are already vulnerable, according to the Finance for Biodiversity Initiative (F4B). In addition to this dependency risk, $1.1 trillion of financing is having a negative impact on nature.

This overall estimate should be a prod for individual development banks to urgently measure their specific exposures to nature-related risks. The Finance for Biodiversity Initiative calls for this to happen in the next year.

In their new declaration, the development banks said they will strive to account for and manage risks across climate, biodiversity, environmental and social issues. This is a promising intention, but the banks now need to follow up more specifically on how and when they plan to deliver on this intention in practice.

Development banks seeking guidance can look to other public sector financial institutions that have already measured their nature-related risk exposure. Earlier this year, the Dutch Central Bank (DNB) became the first central bank globally to assess nature-related risks. Using the ENCORE tool, DNB estimated that Dutch financial institutions alone have EUR 510 billion of exposure to biodiversity risks. The assets at risk represent as much as 36 percent of the assets the central bank assessed.

Using the TNFD as a platform for collaboration

As the example of the Dutch Central Bank illustrates, different types of public financial institutions can learn from each other as they seek to tackle nature-related risks. The new declaration includes a commitment to improve collaboration on nature between development banks around the globe, as well as with other public and private actors.

The initiative to bring together a Taskforce on Nature-related Financial Disclosures (TNFD) provides a platform for exactly this kind of broad finance sector collaboration for nature. The Informal Working Group, which started work in September this year, includes over 60 members from across five continents with more joining.

The development banks refer directly to the TNFD in their declaration, stating they will be ‘inspired’ by this initiative when looking to measure and manage nature-related risks. The will to tap into existing international initiatives is great to see – but development banks can go one step further and commit to playing an active role in the TNFD process. Some already are. The Informal Working Group that’s bringing together a TNFD already encompasses several development banks, including CAF: Latin America Development Bank, the European Bank for Reconstruction and Development (EBRD), the International Finance Corporation (IFC) and the World Bank. Speaking at the summit where the development banks announced their new declaration, Jennifer Morris, CEO of the Nature Conservancy, asked for more development banks to participate in the TNFD.

Delivering ambitious post-2020 goals for nature

Concrete targets for nature are notably absent from the development banks’ declaration. This is unsurprising, given that global policy goals for nature have not yet been agreed. On climate, they are not setting their own targets, but declaring their alignment with the existing Paris Agreement. A post-2020 global biodiversity agreement is due for negotiation next spring at the UN Convention on Biological Diversity summit.

The good news is that the development banks say they ‘stand ready’ to help align financial flows with the post-2020 Global Biodiversity Framework. During the summit of development banks, Elizabeth Maruma Mrema, Executive Secretary for the Convention on Biological Diversity, said that the Convention will increase its work with public development banks, who they are “really counting on”.

While global targets for nature are being agreed, development banks can follow leading players in the private sector in committing to setting targets aligned with science by a specific deadline. In September, 26 financial institutions signed the Finance for Biodiversity Pledge, which includes a commitment to set science-aligned biodiversity targets by 2024 at the latest and report publicly on performance against those targets.

The world’s public development banks have an opportunity – and responsibility – to lead on nature. By following through with measuring their nature-related risks, engaging with the TNFD on metrics and data, and committing to setting clear targets, development banks can be transformative. The new declaration is a promising step forward.

Originally published on BusinessGreen

Image: Michael Reyes, Unsplash

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