The financial sector risks inflicting significant damage on itself and companies across the world if it fails to use its “great power” to stop actions that harm the planet, a new report by EY, Microsoft and Earth Knowledge has said.
As a core part of global economies, banks, investment firms and insurers have a “great responsibility” to ensure they support activities that are “nature positive” and protect the air, land, water and animals in the Earth’s unique and delicate ecosystems.
Entitled “Waking up to Nature – the biodiversity imperative in financial services”, the report estimates that the world’s largest investment banks provided $2.6 trillion of loans and underwriting services linked to the destruction of nature in 2019 alone, and a failure to act at pace and scale to rectify this will create a “material financial risk for the financial services industry”. This will manifest in “market, credit, reputational, regulatory, supply chain, operational, employee engagement and underwriting risk”, the report states.
As much as half of global GDP ($44 trillion) is dependent on ecosystems and 13 of the 18 sectors that comprise the FTSE 100, representing $1.6 trillion in market capitalisation, are associated with production processes that have high or very high material dependence on nature. However, the report by EY, Microsoft and Earth Knowledge says the situation is far from a lost cause. It points to significant, untapped financial opportunities for the financial services sector around conservation, sustainability and biodiversity.
By supporting nature’s resiliency, productivity, and adaptability, the financial sector can take advantage of an estimated $800 billion-a-year biodiversity finance gap. This investment will need to triple in real terms by 2030 and increase four-fold by 2050 if the world is to meet its climate change, biodiversity and land degradation targets.
There is also an increasing range of nature-orientated products, such as natural capital funds and green bonds, aimed at biodiversity and sustainable land use.
Sandy Trust, who leads the UK Financial Services Sustainable Finance Consulting team at EY, said: “Our report lays bare the full scale of the challenge facing the financial sector today. Ecosystems across the world are on life support, driven to the brink of extinction by short-term decision-making and investments. But the banks, insurers and investment funds which have helped create this biodiversity crisis are also best placed to create a solution. They can ensure that their investments, capital allocation, loans and insurance support ‘nature positive’ activities by companies across the world.
“By starting this journey with the four steps that are clearly laid out in the report, financial companies can ensure that ecosystems return to full health so future generations can sustainably use the Earth’s land, air and water. It also brings a significant financial opportunity, too, with a biodiversity finance gap estimated at $800 billion – and growing every year.
“Now is the time for the financial services sector to understand its vital and unique role as a part of the natural world, and take action.”
The report urges financial companies to take four immediate actions to tackle biodiversity loss.
First, they must publicly commit to playing an active role in delivering nature positive outcomes and embed it into their strategies and governance alongside climate change.
They must also use their influence to engage with companies on priority biodiversity issues and leverage stewardship and engagement mechanisms established through efforts on climate change; understand the biodiversity risks in lending, insurance and investment portfolios and work with stakeholders to prioritize and overcome these; add new biodiversity expertise to existing best practices for carbon and climate change to accelerate execution; and use global biodiversity frameworks and targets to determine where red lines should be drawn if improvements cannot be evidenced.
They must collaborate and engage on biodiversity at the policy level to accelerate the evolution of regulation that protects ecosystems and design communication plans that feed information learned into the organisation.
Finally, they must measure, manage and report on their progress, while considering how to augment existing climate risk models with new biodiversity data sets, and new tools such as land mapping and planning tools.
This last action is an area Microsoft is particularly invested in, with the company announcing its intention to “put data and digital technology to work” to “enhance environmental decision-making”. The company is focused on the meaning, measurement and markets around Net Zero to provide customers with a clear and meaningful foundation on which to build their sustainability programmes.
Microsoft has also announced a Planetary Computer that provides access to trillions of data points collected by people and by machines in space, in the sky and on the ground. The company is also empowering customers to be more sustainable through its Azure cloud, IoT and intelligent edge tools, while using its voice to speak out on public policy issues that can advance the world’s efforts to protect and restore ecosystems.
Janet Jones, Head of Industry Strategy at Microsoft UK, said: “The report calls for aggressive changes to how the financial sector has traditionally operated, but that is what is required if we are to avoid a global biodiversity catastrophe. However, Microsoft knows that no single industry, government or company can tackle the world’s biggest sustainability challenges on their own. That’s why, as well as making our own commitments to be carbon negative by 2030 and removing from the environment all the carbon we have emitted either directly or by electrical consumption since we were founded in 1975 while committing to protecting more land than we use by 2025, we are creating the digital tools that help organisations measure, understand, and tackle their sustainability footprint.
“Only by creating a foundation of reliable and accurate data can companies and organisations form the right plans and take confident action. The financial sector uses reliable and accurate information every day to guide their investment decisions; it now needs to apply the same approach to help the planet.”
While climate change and biodiversity loss are interconnected, the report says companies typically address them as separate issues, and most lack a strategy to address the latter. A Share Action survey of 70 of the world’s largest global insurers revealed only 10% had publicly available industry-specific investment or engagement guidelines that integrate biodiversity considerations, and only a third engage with companies on biodiversity loss.
This separation creates a risk of incompletely identifying, understanding and dealing with the connections between the two. Financial companies should tackle climate change and biodiversity loss together, using peer-reviewed and science-based tools to accurately measure actions and align on solutions.
Using Microsoft’s Azure cloud platform, Earth Knowledge has created a digital twin of the Earth that uses hundreds of petabytes of data to apply different climate scenarios to the planet, bringing to life how ecosystems have changed over the past 125 years, as well as predicting what could happen up to 150 years into the future.
The digital twin allows Earth Knowledge to create more than 300 indicators that provide an in-depth understanding of our planet’s systems, and the risks and opportunities they provide. Financial firms can use these to understand how their investments or business may affect ecosystems and take action accordingly.
Julia Armstrong D’Agnese, CEO of Earth Knowledge, said: “We speak to companies across the world and the overwhelming feedback we get is that they understand they need to do more to help the planet but they don’t know where to start. Our digital tools, along with today’s research paper, creates a foundation on which those companies can start to build an effective response to some of the biggest challenges mankind has ever seen. Supported by Microsoft Azure, our platform has been developed in collaboration with scientists, analysts, technology firms, industry, non-governmental organisations and federal, regional and international government bodies. This creates an accurate, trusted and recognised tool for companies who are ready to accelerate their sustainability programmes.”
For more information on Microsoft’s sustainability commitments and help with assessing your environmental impact and transforming your business, click here.