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2007 - Mulder - Assessing Exposure of Financial Institutions to Biodiversity Business Risks and Identifying Options for Business Opportunities

Title

Assessing Exposure of Financial Institutions to Biodiversity Business Risks and Identifying Options for Business Opportunities

Authors

Ivo Mulder

Date

2007

Abstract

Following the spur of climate change up the international business agenda, biodiversity possesses characteristics of becoming the next challenge for the financial sector. This study aimed at assessing 1) what types of biodiversity business risks (BBRs) financial institutions (FIs) can be exposed to; 2) what evidence there is on the business case for biodiversity for FIs from a risk perspective; 3) what possibilities FIs have to mitigate BBRs; and 4) what type of biodiversity business opportunities (BBOs) can be captured. Results from an interview survey among financial institutions (FIs) and other stakeholders revealed that 19 out of 26 respondents (> 70%) believed FIs are exposed to reputational risk. Additional types of risks that were identified, although to a lesser extent, include liability risk, social license to operate, credit risk and reduced shareholder value. Though it is difficult, at present, to link biodiversity business risks (BBR) to tangible financial metrics, such as default risk or shareholder value, a wide range of cases provide evidence of the business case. However, apart from a few banks, such as Rabobank, HSBC, ABN AMRO and Goldman Sachs, FIs have hardly integrated the issue in their daily operations. Also, as the interview survey revealed that a number of FIs are definitely interested in identifying how they can mitigate risks at an early stage, a general procedure is provides a systematic overview of tools that FIs can use to integrate biodiversity into their risk management procedures. Although BBRs are likely to be more financially significant, there are a number of BBOs already in use, such as growing markets for certified sustainably produced commodities, providing due diligence and advisory services to clients, and fully utilizing government-induced opportunities. Expected market sizes range widely, from US$35 million – 60 billion annually by 2010.