Climate change and biodiversity are inextricably linked and will drive financial flows for decades to come

The Kunming-Montreal Agreement on biodiversity expands the expectations on financial institutions’ responsibilities towards the natural world. Islamic market financial sector stakeholders should take a cue from the Paris Agreement and build their capabilities to show what they are doing with regard to biodiversity. Doing so would complement their efforts on climate risk and open up new opportunities for investors pursuing ‘nature positive’ objectives in coming years.

  • The COP15 (Kunming-Montreal) agreement is being called the ‘Paris Agreement’ for biodiversity and will directly impact allocation of billions of dollars to tackle natural capital destruction
  • There is an even wider gap between countries with economic resources and biodiversity resources than on climate issues and it is challenging to coordinate financial flows in a way that will be supportive of a ‘nature positive’ future
  • Financial institutions in Islamic markets will need to prepare by extending their climate-focused efforts to find biodiversity co-benefits that will increase their ability to access investors’ likely combined focus on climate and natural capital in the future.

The COP15 Summit related to biodiversity concluded this week with an agreement that has been referred to as the biodiversity equivalent to the Paris Climate Agreement from 2015. One topic that the 150 financial sector stakeholders convened by UNEP FI had called for was an agreement to align financial flows with the broader biodiversity objectives as a critical way to bring the financial sector into the picture as a way to protect existing biodiversity and eventually expand ‘nature positive’ investments.

Within the text agreed upon by COP15’s resource mobilization workstream, the output was split into three categories of ‘new and additional’ resources, phasing out and eliminating financing that causes harm to biodiversity, and efforts to increase the efficiency of existing resources, including the expansion of risk assessment and disclosure of nature-related risks, especially by international financial institutions, multilateral banks and businesses.

The Paris Agreement represented the beginning of widespread concern by financial institutions, investors, regulators and other stakeholders on climate change. It is expected that the agreement coming out of the biodiversity COP (the “Kunming-Montreal global biodiversity framework”) will create a similar degree of momentum that becomes entrenched in regulation and risk surveillance by financial sector participants. Some of these efforts are already more mature following the Kunming-Montreal Agreement than were the climate analogous initiatives.

There is a good reason for this because not only do some of the financial sector responses (e.g., Task Force on Climate-related Financial Disclosures and Task Force on Nature-related Financial Disclosures) borrow from one another, the underlying subjects are overlapping. Mafalda Duarte, CEO of Climate Investment Funds (CIF), explained that:

“Too often, climate change and biodiversity loss are framed as distinct challenges, when the reality is that they are inextricably linked. We’re seeing in real time the very real impacts of rising temperatures on animal species and the natural habitats they call home […] Conversely, the precious environments they inhabit — the forests, lands, and waters that make Earth so biologically diverse — also play a role in mitigating the worst effects of climate change.”

However, just as the efforts to integrate the financial sector into the process of mitigating the damage to biodiversity is lagging behind the same process for climate change, the challenges to achieve the goal are more complicated. As COP15 was beginning, WWF released a report showing the concentration of biodiversity. We commented on how much more concentrated the biodiversity assets of the world are within ‘megadiverse’ countries, many of which control a small share of global GDP. These emerging markets and developing economies that are home to much of the wealth of biodiversity are often at the beginning of supply chains for the world as a whole, over which they have limited influence on the factors influencing production & consumption patterns that harm nature.

Reconciling the divergence between where economic resources have become concentrated and where natural capital is found was one of the most challenging elements for negotiators in COP15. It contributed to some of the greatest tension as the summit was concluding because while the issue of preserving biodiversity is widely shared, the allocation of costs is much more challenging.

The Kunming-Montreal Agreement does include an increase in international resources, including a Global Biodiversity Framework (GBF) Fund set up within the Global Environmental Fund, as well as a commitment by developed countries to provide $20 billion per year by 2025 and $30 billion annually through 2030. Countries party to the agreement also committed to mobilize $200 billion by 2030 from domestic and international sources and to phase out or reform subsidies worth $500 billion per year that contribute to biodiversity loss.

These are significant resources coming towards biodiversity but like the similarly large nominal amounts being directed towards climate change, they are still dwarfed by the amount needed, which for biodiversity is about $700 billion annually. There is also a gap between the resources available in developed countries and for developing countries, which is an even more acute issue than climate because of the disparity of ‘megadiverse’ countries that are home to substantial biodiversity that lack the resources of countries whose economies depend on these resources.

The path forward from the Kunming-Montreal Agreement for financial institutions in Islamic markets, which include some of the ‘megadiverse’ countries, does carry with it a disproportionate burden. There remain substantial risks from climate change and biodiversity that will be intertwined. As climate risk is integrated by financial institutions within Islamic markets, there should be a consideration for nature-related risks as well as well as opportunities for achievable changes to promote biodiversity co-benefits from existing efforts.

As much as Islamic market financial institutions can do to embed climate and biodiversity considerations into their decision-making they should do so on their own initiative with support from regulators and other stakeholders. However, there is a lot that will still depend on financial and other resources from developed countries. To the extent that the Paris Agreement is a useful reference point, the Kunming-Montreal Agreement will lead investors to expand their interest in investments that have ‘nature positive’ characteristics. This provides an opportunity for financial sector stakeholders in Islamic markets to make modest investments today to extend climate-focused data collection to include nature-related issues and to significantly increase their access to investors in the future.

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Promoting adoption of responsible finance in Islamic markets & Islamic finance. CEO @RFIFoundation.

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Blake Goud

Promoting adoption of responsible finance in Islamic markets & Islamic finance. CEO @RFIFoundation.