LONDON (Reuters) – The world’s development finance institutions (DFIs) are exposed to potential nature-related losses across more than a quarter of their investments and should carry out regular stress tests to better understand the risks, a report said on Friday.
Of the $11.2 trillion invested by the world’s 450 DFIs at the end of 2019, $3.1 trillion was financing projects highly dependent on vulnerable ecosystems, the report by the Finance for Biodiversity Initiative said.
F4B is a think-tank backed by the MAVA Foundation, a philanthropic body focused on conserving biodiversity.
The projects in which the DFIs invested were collectively responsible for risking around $1.1 trillion in damage to the natural world every year, despite many of the groups having a mandate to finance sustainable development, it added.
DFIs, often owned by governments, are responsible for helping finance infrastructure, agriculture and other projects across the world, many of which are in resource-intensive developing markets with weak environmental laws.
The report, shared exclusively with Reuters, comes ahead of the first-ever global meeting of DFIs next week at the Finance in Common Summit in France, which will focus on galvanising their response to climate change and sustainable development.
“The world’s government-owned banks are meant to be at the leading edge of development finance practice, a symbol of progressive lending practices for the world’s private investors,” said Simon Zadek, chair of F4B.
“But mostly their investments are dependent on precious, vulnerable biodiversity resources, and too often place these resources at risk.”
The report assessed the degree of nature “dependency risk” DFIs were exposed to by assessing the investments of the largest DFIs based on the economic sector being financed and the country in which the project was based to create a dollar-at-risk value.
To estimate the risk DFIs pose to nature, which could see them hit by tougher laws, litigation or reputational harm, it assessed land and water usage by sector and valued the potential damage to biodiversity and eco-system services.
While F4B’s high-level calculations were a leading indicator of the material financial risks faced by the DFIs, there was an urgent need for each to work that out in detail and put in place mitigation plans, the group said.
“Such a commitment has to be backed up by on-going nature stress testing of their entire balance sheets, and the publication of the results, a practice that we have urged all financial institutions to adopt worldwide,” said Zadek.
(Reporting by Simon Jessop; editing by David Evans)