Thank you Chair,
Vice Minister Zhao Yingming, Vice Governor Zong Guoying, Vice President Liu Liange, distinguished experts from Academia and representatives of international organizations and development partners, ladies and gentlemen,
It’s an honor to participate in the Ecological Civilization Forum today and I would like to thank the China Banking Association and the Ministry of Ecology and Environment for hosting this event.
In the face of the combined challenges of the global pandemic, accelerating climate change and the rapid depletion of the world’s natural capital, I would like to begin my brief remarks by affirming that a green, resilient and inclusive recovery will be impossible without the conservation and sustainable use of biodiversity and ecosystem services. The loss of nature is a development issue, and one that often has the greatest impacts on the poorest countries.
According to the World Economic Forum, more than half of global GDP is generated in industries that are highly or moderately dependent on the services that nature provides. Our recent report, The Economic Case for Nature finds that the potential collapse of select key ecosystem services– such as those from tropical forests, pollination, and marine fisheries – could cut real GDP growth for low and lower middle-income countries by as much as 31 and 20 percent, respectively, by 2030, impairing global efforts to reduce poverty and to reignite a sustained economic recovery.
The good news is that nature-smart policies, such as the expansion of payment for ecosystem services to reward nature-based solutions, investing in research and development in agriculture and repurposing perverse subsidies, can support both biodiversity and economic growth. To be effective, the global response to the biodiversity crisis must entail a whole-of-economy approach.
There is growing recognition that public funds are insufficient to reverse biodiversity loss. For this reason, the private sector and financial institutions have a critical role to play. There are two complementary approaches to mobilizing private finance for biodiversity. The first is the identification of opportunities for ‘financing green’, that is, the sustainable financing of projects that contribute to the conservation, restoration, and sustainable use of biodiversity and ecosystem services. Second, is ‘greening finance’, which consist of directing financial flows away from projects with a negative impact on biodiversity and ecosystems.
In order to scale up investments in ‘financing green’, the ability of projects to generate cash flows needs to be improved and new business models need to be established. Blending commercial and concessional finance can create new investment opportunities. One approach to better monetizing cashflows from biodiversity involves ‘stacking’, that is, realizing the value of the multiple ecosystem services that natural assets, such forests can provide, such as carbon sequestration, sustainably harvested timber, and eco-tourism services. China is already spending significant resources on eco-system compensation. More could be done to link public payments to performance and use them to leverage commercial funding for sustainable agriculture, reforestation or eco-tourism.
For the second approach, ‘greening finance’, the key is improved biodiversity risk management. Regulators, supervisors, and standard setters can encourage this, as demonstrated for example by the Dutch Central Bank (DNB). Its recent report ‘Indebted to Nature,’ represents the first attempt to quantify the potential risk of biodiversity loss to a country’s financial sector. This echoes work on climate risks by other central banks, including importantly the PBOC.
My colleagues at the World Bank recently conducted the first nature risk assessment for the banking sector in Brazil The results suggest that forty-six percent of Brazilian banks’ corporate loan portfolio is concentrated in sectors highly or very highly dependent on one or more ecosystem services. Output losses associated with the collapse in ecosystem services could translate into a cumulative long-term increase in corporate nonperforming loans of 9 percentage points. In other words, biodiversity related risks are real and portfolio reallocation will be needed to protect balance sheets from either rapid policy changes or ecosystems collapse. We are currently working on a similar exercise with Bank Negara, the central bank of Malaysia and are refining our modeling methodology.
Disclosure of nature risks is an important step in the process of greening finance. Reporting and disclosure standards are powerful tools for changing behavior, and can help direct capital to the projects, companies and countries where it is most needed to meet the global community’s environmental objectives. The recently created Task Force on Nature Related Disclosure, building on a similar climate related effort, is an important step in this direction, but as Mark Carney has mentioned – it could be more broadly adopted and disclosure made mandatory.
Finally, innovative financial instruments can help channel impact investment towards biodiversity goals. These include bonds where the rate of return is linked to social, climate and environmental outcomes. This market is growing: sales of sustainability-linked bonds stood at $34bn during the first half of 2021, up from $16bn and $9bn in 2020 and 2019, respectively. Meanwhile, World Bank teams are looking at whether a sovereign equivalent could be issued with performance indicators rewarding policies such as reforestation. Tying nature-based solutions (such as those used in the sponge cities program in China) to capital market solutions such as municipal bonds could also help significantly scale up private capital allocation to conservation investments.
Ladies and gentlemen, the multiple crises facing the global community are an opportunity to galvanize decisive action. Regulators are discussing ways to make the financial system more resilient to nature-related risks. Financial institutions need to be proactive in risk-proofing their portfolios. Investors and consumers are increasingly demanding more transparency. We are rapidly developing the diagnostic and financial tools needed to support this transformation. I am convinced that together we can confront the challenges of our age.
Thank you very much for your attention.