Smart finance

07 July 2010 | Article

Peter Carter of the European Investment Bank explains the role banks can play in safeguarding biodiversity.

The conservation and sustainable use of biodiversity is a challenge for the financial and business communities for several reasons. First, banks and companies generally have a poor understanding of biodiversity and why it is important. Second, they do not necessarily understand the reasons why biodiversity can be an opportunity as well as a source of risk. Third, the currency of finance and business is money but many biodiversity attributes are difficult to translate into a monetary value, let alone one that reflects the worth and opportunity of biodiversity to society as a whole. Biodiversity is at least partly a public good and therefore difficult to value accurately or to charge for its conservation and use. Fourth, the regulatory framework is often weak, and the incentives and a sufficient degree of certainty for long-term investment do not exist.

The European Investment Bank (EIB) is addressing biodiversity-related challenges using a number of approaches. As with climate change, biodiversity is treated as a cross-cutting issue and is mainstreamed into the Bank’s core operations. EIB, with its philosophy ‘to do no harm’, aims to apply the European Union (EU) Treaty principles of precaution and the ‘polluter pays’. All projects considered for Bank financing are screened for any possible negative effect on biodiversity. Where the effects are expected to be significant, the project promoter is required to take appropriate measures to avoid, minimize or mitigate such effects. Where negative effects remain, the promoter is encouraged to use biodiversity offsets, and the Bank supports the practical application of this approach in a number of developing countries where it finances projects.

Within the EU—the focus of Bank activity—the EIB gives particular importance to the protection of Natura 2000 sites, and aims to verify compliance with the EU Nature (Habitats and Birds) Directives. Where practical and feasible, the Bank also requires that the principles and standards that underpin EU biodiversity policy are applied to projects that it finances in the rest of the world. Sometimes, however, a project is unsupportable for biodiversity reasons. In particular, the EIB will not finance projects in critical habitats, defined with reference to the IUCN Red List of Threatened Species and EU law.

But it is not enough to act defensively, to simply safeguard what biodiversity remains. As recent EU policy statements have made clear, it is also important to restore degraded ecosystems and the biodiversity which underpins them—to ‘do some good’.

The EIB, in trying to identify and finance so-called biodiversity projects, has learnt a number of lessons. First, it is necessary to deploy ‘smart’ finance. Conventional debt and equity finance may not be enough. Concessional finance may be required and the Bank has experimented with interest rate subsidies, risk sharing and other financial ‘products’ to bring down the cost of capital to better reflect the ‘public good’ aspect of biodiversity.

Second, biodiversity gains may be generated on the back of more advanced initiatives in related fields, for instance by Reducing Emissions from Deforestation and forest Degradation (REDD), where biodiversity is expected to benefit from improved forest conservation and sustainable management. In fact, it should be possible to generate significant biodiversity benefits in any natural resource-based investment. Third, since the institutions associated with biodiversity are often weak, it may be necessary for banks to supply technical assistance for the promoter itself or more generally for capacity-building purposes, as well as financing. For instance, the European Commission in partnership with the EIB and others is providing technical assistance in several new EU Member States to help develop ‘bankable’ small- and medium-sized enterprises that have strong biodiversity attributes, such as eco-tourism, sustainable forestry and organic farming.

Since the key to environmental finance is the identification and ‘monetization’ of ecosystem services, the EIB welcomes the path-breaking study The Economics of Ecosystems and Biodiversity (TEEB) and is sponsoring related research in a number of European universities. The results will contribute to a better understanding of biodiversity as a business proposition. They will also help to design and deploy improved institutional and policy frameworks and market-based instruments that generate greater incentives for private sector participation in the protection and sustainable use of biodiversity.

Peter Carter is Head of EIB’s Environment and Social Office.

The European Investment Bank was created by the Treaty of Rome in 1958 as the long-term lending bank of the European Union

View of logging road in the Cameroon Forests