Declining biodiversity will have economic impact, expert says

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When the biodiversity crisis and the climate crisis intertwine, it will seriously threaten the stability of the ecosystem on which human beings depend, and thus seriously threaten the survival of humankind, according to Lan Hong, deputy director, professor and doctoral supervisor of the Center for Eco-Finance Studies at the Renmin University of China. In a recent article, she points out a synergy between biodiversity conservation and carbon reduction and why it makes strategic sense to combine them.

Funding gaps for biodiversity conservation

The crisis of declining biodiversity is not only an ecological problem but can also result in economic problems.

From a financial point of view, the potential crisis of a biodiversity collapse will affect many industries directly dependent on biodiversity, such as agriculture, forestry and fisheries. Some pharmaceutical industries derive their raw materials from nature, while other industries, such as tourism, depend on biodiversity. Therefore, the economic impact of biodiversity loss is bound to spill over into the economy.

At present, there is a huge financial demand for biodiversity conservation. According to Lan, the world currently needs $824 billion annually to maintain its biodiversity. However, the current yearly funding gap of about $700 billion represents a huge gap that’s expected to increase due to the aggravation of the ecological and environmental crisis.

Combine carbon reduction with biodiversity conservation

When Lan said biodiversity conservation and carbon emission reduction is a synergy, she meant the temperature increase from climate change will inevitably accelerate the loss of biodiversity. Moreover, an important part of biological diversity protection is to protect the habitats of endangered species, such as wetlands and forests, and the increase of these habitats actually also increases the total amount of carbon absorbed by nature. In other words, biodiversity conservation, in many cases, can synergistically increase carbon absorption capacity and reduce carbon emissions.

Internationally, many financial institutions support biodiversity conservation from the perspective of environmental and social risk management — an example of that is the social and environmental performance standards of the International Finance Corporation. One of the eight performance standards is biodiversity conservation and sustainable management of living natural resources.

Biodiversity conservation has also been included in China’s green finance standards, according to Lan. The two most important standards of green finance in China, the Green Industries Guidance Catalogue and the Green Bonds Endorsed Projects Catalogue, have both included biodiversity conservation into the scope of their support.

Green finance in China

At present, the financing balance of green finance in China has exceeded 14 trillion yuan ($2.1 trillion), 95 percent of which comes from commercial banks, which will also be the largest source of funds for China’s biodiversity financing. Lan points out that it’s crucial to carefully study the recognition of green finance standards and make good use of the green financial preferential policies of these banks.

The year 2016 marked the start of the rapid development of green finance in China. On Aug 31 that year, seven ministries including the People’s Bank of China (China’s central bank) jointly issued guiding opinions on the development of a green financial system, setting the framework of China’s green financial policy.

The development of China’s green bonds was very rapid during 2016 and 2017, ranking second in the world and accounting for about 22 percent of global green bond issuance. The country also introduced foreign capital through the issuance of green bonds internationally to support green projects in China.

New breakthroughs were made in the green credit system when the People’s Bank of China issued a notice on the establishment of a special statistical system for green loans in January 2018. The notice specified the statistical standards of green loans, which included biodiversity projects into the overall statistical projects of green credit. To a certain extent, the notice has incentivized banks to invest in biodiversity projects.

Biodiversity crisis can impact financial assets

After 2020, central banks around the world started to pay more attention to the impact of environmental risks on financial institutions, mainly climate and biodiversity risks.

The decline of biodiversity can affect financial assets, financial institutions and financial systems through different channels. The risks include not only risk to businesses, but also to households and the public sector, as well as sovereign debt risks, which may undermine the ability of countries to manage financial operations, long-term debt servicing, and the functioning of the monetary system. In other words, biodiversity risks could bring a systemic financial risk to the financial institutions of various countries.

Biodiversity conservation is a global issue. Due to the global nature of the ecosystem, China’s biodiversity financing will need to combine local green financial funds and international funds to form more common plans of action.