Global | Agriculture, reforestation, risk assessment for financial institutions, applying the ESVD | Status: Finished, July 2022
The use of ecosystem services in four investment projects: an ASN Bank-FSD pilot
Ecosystems deliver a broad range of ecosystem services (ES) that underpin human well-being. The loss of biodiversity and degradation of ecosystems has an increasingly negative impact on society and businesses, including the financial sector. Through their investments, financial institutions can be heavily dependent on ecosystem services and deterioration of nature therefore causes risks for financial institutions: physical risks, transitional risks and reputational risks. Assessing the extent of the different risks requires insights in the impact of investments and loans on biodiversity as well as insights in the dependencies on nature, biodiversity and related ES.
To gain understanding of how monetary valuation data on ES can assist financial institutions in decision-making, we conducted rapid ES assessments with the ESVD, to analyze biodiversity-related risks of four so-called “positive impact” projects (in the Netherlands, Madagascar, Paraguay and Nicaragua) which were provided by ASN Bank. For each project we:
Used the ESVD to determine the impact of land cover changes on ecosystem services and their monetary value in the selected regions.
Explored the use of satellite data in biodiversity impact assessments to determine the extent of land cover change that took place in a given time period.
Explored how to combine satellite and ESVD data with existing methodologies such as Biodiversity Footprint for Financial Institutions (BFFI) and the LEAP framework of the Taskforce on Nature-related Financial Disclosures (TNFD).
Gained understanding of how to use this knowledge to assess biodiversity-related risks for financial investments.
Based on the available data and acknowledging the short time span of these desk studies, we found that in all four cases the planned interventions had a positive effect on the total bundle of ecosystem services provided, and thus on societal welfare.
Because our analysis uses both market values and shadow-prices, the monetary values found for the involved ecosystem services provide more complete insight in the benefits and risks for businesses and society at large. Conventional environmental assessments, which usually only account for ES traded in markets, miss important indirect non-market values of public services, such as effects on air-, water- and soil quality, natural pollinators, climate regulation, biodiversity protection and non-material benefits which also influence physical, transitional and reputational risks of financial institutions.
Another important benefit of the ES-approach is that it helps to identify the distribution of benefits and losses over the different ES categories, looking beyond sole market values, and thereby providing insight in which stakeholders are impacted and should be involved in the planning and decision-making of investment projects.
Finally, integrating the ES-approach in the newly released LEAP methodology of the TNFD (June 2022) helps to illustrate that a change in ecosystem services not only affects physical, transitional and reputational risks for a company and/or investors which are directly involved, but also for many other stakeholders surrounding the investment location.
Ultimately, the `true` value of ecosystems and their services should be structurally integrated in the economic and financing system if we want to stop the continuing loss and degradation of ecosystems and biodiversity. As was stated by Frans Timmermans (Vice President of the European Commission) in his speech introducing the new Nature Restoration Law on 22 June: “Investment into nature restoration adds €8 to €38 in economic value for every €1 spent, thanks to the ecosystem services that support food security, ecosystem and climate resilience and mitigation, and human health”.
Involved user groups and ESVD applications
In this project we aim to show the benefits of using the ecosystem services approach to take the 'full' value of grasslands and forests into account. We are specifically targeting the following user groups through the following ESVD applications:
The ESVD can assist financial institutions in risk assessments through providing data on the flow of ES of different land covers and by further implementation of the LEAP methodology.
We show that current environmental assessments, which usually only account for ES traded at markets, miss important non-market values which benefit societies and businesses, and which also influence physical, transitional, reputational and systemic risks of financial institutions.