Why Biodiversity Matters for Financial Inclusion

Portail FinDev: Biodiversity is still not well understood by the financial sector. Why is biodiversity relevant for financial inclusion?

Nausica Fiorelli (ADA/IFORD): In theory, biodiversity is relevant for everything as we are all part of one interconnected global ecosystem. Biodiversity regulates our life and our health. Think of the water we drink or the food we eat! Agricultural biodiversity provides a variety of crops and animal breeds, reducing dependence on a few species and decreasing the risk of famine.

Biodiversity is relevant specifically for financial inclusion because this sector serves vulnerable populations who are more dependent on biodiversity ecosystems and therefore more exposed to risk.  Rural populations, for example, depend on forests for retaining water. Without forests, rainwater flows more quickly into rivers, increasing the risk of flooding and thus ruining harvests and damaging the homes.

Mariella Llontop (BIB): Both impact investors and financial service providers (FSPs) can play an important role in protecting and conserving biodiversity by integrating nature-related risk assessments into their policies and lending practices.  FSPs, especially those with larger agricultural portfolios, should consider the potential impacts of biodiversity loss and environmental factors in their lending practices to avoid financing harmful agricultural practices. On the funding side, European-based impact investors are increasingly encouraged to assess the potential risks of biodiversity loss in their portfolios to comply with European non-financial disclosure requirements, such as the EU Sustainable Finance Disclosure Regulation (SFDR).

FinDev: What are the challenges in measuring and assessing biodiversity impact? How can they be addressed?

Chiara Pescatori (ADA/IFORD): This topic is quite complex, as nature is dynamic and always changing, making it hard to obtain accurate and up-to-date data. Open-source databases are often not user-friendly for non-experts, and we are still learning and building our expertise.

To tackle these challenges, we need innovative ideas to make the process more efficient and forward-thinking. Partnerships and collaborations are crucial. Asset managers, FSPs, technical assistance providers and experts such as universities and resource centers need to work together to build and share knowledge.

Mariella: Indeed, integrating nature-related risk assessments into lending and investment strategies is still at an early stage. It has been slow due to a lack of knowledge on both the impact investor and FSP side, specifically on 1) how to measure biodiversity dependencies and impacts within portfolios, 2) which tools are best to use, and 3) what kind of indicators should be measured and monitored.

There is no standardized common framework for determining material negative impacts on biodiversity of portfolios and no single indicator to measure it. What's needed is an assessment that combines quantitative (i.e., location of branches and financed activities) and qualitative data (i.e., assessment of sectors with the highest potential impact on biodiversity in portfolios and environmental strategies/policies and mitigation activities).

As Chiara said, we need collaboration to address these challenges. A good example is the Cerise+SPTF Social Investor Working Group on Biodiversity, where Bank im Bistum Essen (BIB) and ADA/IFORD, together with other social investors and a rating agency specialized in inclusive finance share experiences and approaches on how to assess and report on biodiversity impacts.

Both impact investors and financial service providers (FSPs) can play an important role in protecting and conserving biodiversity by integrating nature-related risk assessments into their policies and lending practices.

 

FinDev: How are asset managers and their investees adapting to regulation requirements to report biodiversity-related risks?

Chiara: At ADA/IFORD, we have developed our own internal method to better assess biodiversity risks and ensure compliance with the regulatory requirements.

Before each onsite due diligence, we assess the biodiversity impact within our FSP portfolio by measuring the extent of lending to the agricultural sector (i.e., farming, animal husbandry and fishery) per branch. If a branch dedicates more than 40% of its portfolio to agriculture, we flag it as a potential risk because the activities financed by the FSP might directly or indirectly affect biodiversity-sensitive areas. We then overlay the list of branches with Key Biodiversity Areas (KBA) to check for proximity to sensitive regions.

With this information, the investment manager visits the prospective FSP to assess whether the FSP is aware of these risks and has policies and procedures in place to ensure proper safeguards. By combining quantitative information (desk comparison of branch locations and KBA) with qualitative information (on-site verification during due diligence), we estimate the potential exposure of the portfolio and calculate an indicative measure of the adverse impact on biodiversity.

Mariella: At BIB, we use the Cerise+SPTF SPI online tool for the two microfinance funds we manage, allowing us to conduct a standardized social and environmental assessment of our investees during due diligence. The assessment involves the following steps:

1. The investee company identifies and maps the branches.
2. If branches are identified near biodiversity-sensitive areas, then a check is made to see if the branches finance activities in higher risk sectors that could potentially damage these areas. E.g. the presence of agriculture, livestock, forestry or fishing, and the percentage of these sectors in the gross loan portfolio.
3. Dialogue with the investee company to review the indicators in Dimension 7 of the SPI Online tool related to environmental performance management, for example, evaluating whether:
   • There is an environmental strategy and policy.
   • Climate risk assessments of client activities are incorporated into the lending process.
   • Mitigation measures are in place.

This assessment allows us not only to check our investees' knowledge and raise awareness of biodiversity risks, but also to assess and report on our portfolios' potential biodiversity risks as part of the annual SFDR reporting for BIB funds.

FinDev: Could you share some specific examples of successful biodiversity risk management strategies implemented by financial institutions?

Nausica: Inkunga Finance in Rwanda, with ADA’s support, has pioneered (agro)forestry loans that finance sustainable forest management and the transition to agroforestry. To date, 150 customers have received loans for agroforestry projects and 60 for sustainable forest management.

In 2024, the International Centre for Research in Agroforestry joined the project to provide technical expertise. As a result, the project now places a stronger focus on actively encouraging biodiversity while minimizing the negative impact - for example, by promoting the planting of native tree species. Currently, a formal monitoring and evaluation framework is being developed, including key indicators and targets to track the project’s impact on biodiversity, such as soil fertility.

Mariella: BIB has identified good practices from two of our MFI partners, Fondo de Desarrollo Local - FDL in Nicaragua and CreditAccess Philippines Financing Company Inc. – One Puhunanin the Philippines. In both countries, Key Biodiversity Areas cover an area equivalent to approximately 57% and 35% of the national territory respectively. Both countries/regions are included in the list of 34 defined biodiversity hotspots, which means that the country's high biodiversity and endemism are under high threat.

FDL in Nicaragua provides technical assistance to smallholders to transition to sustainable agricultural practices, integrates an exclusion list of environmental high-risk activities in its lending process and does not finance activities in protected areas, among other actions.

CreditAccess in the Philippines takes steps to assess any environmental risks, including the environmental vulnerability and potential adverse impacts of specific farming practices, enabling the company to adjust its lending strategies and mitigate exposure to high-risk activities.

Biodiversity conservation efforts often take time to show results and might not align with vulnerable population short-term needs. Therefore, it is essential for financial institutions to access dedicated funding and technical assistance programs to help support clients during these time mismatches. 

 

FinDev: How can financial institutions turn biodiversity risks into investment opportunities while ensuring positive environmental and social impacts?

Nausica: By leveraging impact investments. Impact investors eagerly seek out institutions that show a willingness to introduce activities to mitigate the risk of biodiversity loss as part of their strategy. Agriculture is one of the sectors with the highest potential for projects that can positively impact biodiversity. FSPs are not expected to be in an advanced state: a clear strategy accompanied by the commitment to making human and economic resources available can be sufficient to attract investments.

Biodiversity conservation efforts often take time to show results and might not align with vulnerable population short-term needs. Therefore, it is essential for financial institutions to access dedicated funding and technical assistance programs to help support clients during these time mismatches. 

To learn more about the examples shared in this interview, view the presentation.