Abstract: Climate change responses and ecosystem and biodiversity protection could be mutually reinforced but it may not always be the case. Green finance needs to support both carbon reduction and ecological protection. Despite the numerous studies and practices in carbon accounting, there is still a need for further development on indicators for and approaches to measuring biodiversity. The next step is to build a scientific and proper national system for the accounting of ecological products.
The climate system, ecosystems, and human activities are all interactive parts of an organic whole. Climate change responses and ecosystem and biodiversity protection could be mutually reinforced but sometimes contradict each other. Based on its green financial system in support of carbon emission cut and ecological protection, China could improve the effectiveness of financial support and reduce risks, taking into consideration the respective characteristics and interrelationships of these two fields as well as the grand environment and climate system.
Ⅰ. Standard of Green Finance
The concept of green finance is rather broad that includes financial support for energy conservation, carbon reduction, and other environmental goals. Following the introduction of the "30-60" goal, financing carbon emission cuts have taken on greater importance. Energy conservation, biodiversity preservation, and carbon emission reduction projects should be better differentiated and defined so that relevant financial activities can be tracked and evaluated, and proper incentives and constraints provided. For example, the production and use of clean coal does not lower carbon emissions but is beneficial to ecological and environmental conservation.
Ⅱ. Accounting and Information Disclosure
Despite the numerous studies and practices on carbon accounting by carbon-intensive industries, large enterprises and financial institutions, there is still a need for further development on indicators and techniques for measuring biodiversity. In some regions, for example, the ecological products are overvalued by the gross ecosystem product (GEP) accounting standard, which reduces market acceptance to the point that banks are unwilling to conduct credit business based on GEP accounting value. In the next step, we should build a scientific and proper national system for ecological product accounting.
Currently, global climate and environmental information disclosures are more concentrated on climate-related issues, we need more specific and abundant information on biodiversity, water resources, and other environmental issues.
Ⅲ. Coordination for More Financial Support for Carbon Emission Reduction and Ecological Protection
One thing is that we need to fully recognize the intricate relationship between carbon emission cuts and ecological protection when prioritizing projects for financial support. Many nature-based ecosystem improvements could help to not only preserve biodiversity and but also increase carbon sinks – which is conducive to addressing climate change. For example, diversified agricultural planting, agroforestry management, and ecological agriculture can boost biodiversity, farmland carbon storage, and forest carbon storage, while lowering greenhouse gas emissions. Such projects should be prioritized in green finance.
Some climate change solutions, however, are incompatible with the preservation of ecosystems and biodiversity. For example, the development of renewable energy necessitates the exploitation of key minerals such as rare earth, which, in the absence of clean disposal and reuse, may have a huge negative impact on the environment; onshore and offshore wind farms, dams and other renewable energy infrastructure may interfere with migratory species; the construction of solar power plants may destroy the natural habitats of some species. For another example, large-scale planting of a single type of biomass energy crops and afforestation can help alleviate climate change, but it can also be damaging to biodiversity. And the fertilizers and pesticides used in planting will affect the ecosystem’s function and biodiversity. Such projects require deliberation on the impacts of carbon reduction and ecosystem preservation. Before launching such a project, a plan should be in place to avoid environmental deterioration.
We also need to clarify the ownership of ecological products and improve their accounting to increase financial support in realizing their value. It primarily entails learning from Costa Rica’s systems of payments for ecosystem services and the United States’ wetland mitigation banking model; promoting the orderly trade of ecological product rights and interests such as energy use rights, pollution rights, and ecological resource use rights; developing ecological product-backed mortgage and bond securities, improving the risk-sharing mechanism through ecological guarantee funds and insurance product innovation, and exploring monetary policy tools to aid in realizing the value of ecological products.
Ⅳ. Assess the Biodiversity-Related Financial Risks as Early as Possible
There has been much discussion about the financial risks associated with climate change, but research into the financial risks caused by biodiversity loss has just begun. According to the preliminary results of World Wildlife Fund’s assessment of over 40 countries, 41% of banking regulators and 38% of central banks have developed strategies or will introduce measures to combat climate and environmental risks, but 36% of banking regulators and 31% of central banks are solely focused on climate risks.
So the next steps could include:
First, the examination of biodiversity risks – which include physical risks and transition risks – could refer to the framework for analyzing climate-related financial risks, performing sensitivity analyses and pressure tests on biodiversity risks in financial institutions and, more broadly, the economic and financial system. We can start with the industries and regions where biodiversity is most threatened, such as agriculture, food and beverage, and construction, and examine the extent to which industries and firms are affected by biodiversity damage, as well as the risk exposure of financial institutions.
Second, climate risks and biodiversity risks should be investigated alongside climate-change-related risks, because climate change will take a toll on biodiversity, and biodiversity loss will impair the carbon storage capability of ecosystems, aggravating climate change. Separated risk evaluations might cause underestimation.
This is the speech made by the author at the 3rd Bund Summit on October 23rd, 2021. The views expressed herein are the author’s own and do not represent those of CF40 or other organizations. It is translated by CF40 and has not been reviewed by the author himself.
