In 2019, the creators of PCAF formed the Partnership for Biodiversity Accounting Financials (PBAF) to provide financial institutions with a standard for measuring the impact of their loans and investments on biodiversity.
The PBAF initiative joins a series of new standards, such as the Taskforce on Nature-related Financial Disclosure (TNFD), to help companies measure businesses’ impact on nature, align with positive outcomes, and address the ongoing biodiversity crisis and the inherent risks and opportunities it amplifies.
With the creation of the Partnership for Carbon Accounting Financials (PCAF) in 2015, banks built a comprehensive industry-led methodology for calculating financed emissions (the emissions related to loans, investments, and financial services). Thus, ensuring they can measure and mitigate their impact on the climate.
The PBAF released an update this year called the “PBAF Standard v2022”. This version introduced three new documents to support financial institutions at different stages in their expertise in biodiversity action plans, including:
- A Q&A introduction to the biodiversity impact assessment used to measure financial institutions' impact on biodiversity, targeted at companies that are just starting on their biodiversity loss mitigation.
- An overview of approaches, which looks at the different biodiversity impact assessment approaches, targeted at financial institutions with limited or some knowledge and experience.
- A footprinting guide, which presents PBAF’s guidance on how to conduct biodiversity footprints with requirements and recommendations to comply with the needs of financial institutions, targeted at financial entities that experienced biodiversity impact assessments.
By utilizing these guidance documents, financial institutions can assess their biodiversity impact at the level of their institution's knowledge and experience and effectively manage and report their biodiversity risks and opportunities.
Why Should Investors Care?
Biodiversity is a key measurement for the health of nature and the services nature provides, such as carbon sequestration, fresh water, pollination, food, and natural resources like wood, fibers, and pharmaceuticals. These ecosystem services which underpin all global economic activity are now at risk due to biodiversity loss, ensuring that biodiversity loss is a financial risk for investors.
Specifically, biodiversity loss can result in physical, transitional, and systemic risks. An example of a physical risk would be the loss of crops due to a lack of pollinators; a transitional risk could include any future biodiversity regulations; and a systemic risk would be considered a mixture of the two, creating a profound effect on the global economic system. By mitigating their impacts on biodiversity loss today through their investment activities, financial institutions can reduce financial risks in their portfolio and maximize financial opportunities in the future.
What Drives Biodiversity Loss?
There are five primary drivers for biodiversity loss: habitat loss, pollution, climate change, the introduction of invasive species, and overexploitation (i.e., overhunting/fishing). Investments and loans can drive these triggers for biodiversity loss in a number of ways by supporting companies in the business of conventional agriculture, deforestation, fishing, mining, and more. Many of these investments have multi-faceted negative effects on the environment, which lead to further biodiversity loss.
Financial institutions must conduct a biodiversity impact assessment to assess their contribution to these drivers and understand how to build better strategies that mitigate biodiversity loss. After they have measured their biodiversity footprint, they can assess the risks and opportunities most pertinent to their portfolio.
How is a Biodiversity Footprint Measured by Investors and What Data is Needed?
A biodiversity impact assessment is how an investor can measure their biodiversity footprint. While biodiversity impact assessments can take different forms, such as a deforestation risk assessment or a GHG emissions inventory, a biodiversity footprint is measured with a single metric like the change or loss in species. For financial institutions, this is achieved through assessing which biodiversity loss drivers (e.g. deforestation, water use, climate change, pollution) their investments and loans are exposed to and attributing that driver to the financial institution proportional to their investment.
Biodiversity impact assessments can be done to varying degrees of granularity based on the ambitions, knowledge base, and resources a financial institution has. Each methodology requires different datasets and tools of measurement. A good starting point for any financial institution is to conduct an analysis of their portfolio to understand the high-impact risk sectors for biodiversity, such as forestry or oil and gas.
There are many methodologies to collect data for the various parts of the biodiversity impact assessment, all of which involve different tools. Some tools measure a life cycle analysis of a system or product, whereas others look at geographic information. It depends on how in-depth the assessment is, the types of questions it is trying to answer, and the number of resources a financial institution has available.
The collection of data is highly dependent on the question a financial entity is trying to answer. For example, a carbon footprint of a portfolio needs emissions data, while the deforestation linked to investment is measured by the square footage of deforestation. Typically, each level of data is collected or modeled in five steps, which eventually link an investment or loan to its biodiversity impact:
- Step 1: Investment --> Economic activities
- Step 2: Economic activities--> Environmental inputs and outputs
- Step 3: Environmental inputs and outputs --> Drivers of biodiversity loss
- Step 4: Characteristics impact location
- Step 5: Drivers of biodiversity loss + Location characteristics --> Impact on biodiversity
Of these steps, some data will be known or can be collected, whereas others will need to be modeled, such as in steps 3 and 4.
Is a Biodiversity Footprint Similar to a Carbon Footprint?
As one of the primary factors for biodiversity loss, climate change and biodiversity have many similarities in how they are measured and reported. However, biodiversity has several other drivers in addition to climate change that contributes to the overall picture. Plus, the effects of biodiversity are much more localized than climate change, which needs to be considered in the assessment, such as if the area is high in biodiversity (e.g., the Amazon rainforest).
The way some carbon footprints are measured is very similar to the life cycle analysis method of measuring biodiversity footprints, although biodiversity has four other factors, including habitat loss, pollution, climate change, invasive species, and overexploitation. There are also multiple co-benefits in measuring biodiversity, and carbon as biodiversity management can be used for climate change adaptation and mitigation, and the mitigation of climate change reduced biodiversity loss.
One interesting way in which biodiversity footprints are similar to carbon footprints is that they are both measured by Scope 1, 2, and 3. Scope 1 is the direct biodiversity impact of the company, scope 2 is the indirect impact of the energy that the company sources and Scope 3 is the indirect impact of the upstream and downstream activities across the company’s supply chain. And just like a carbon footprint, scope 3 of a biodiversity footprint is the category with the most impact and which needs the most attention.
Reporting on the results of both a biodiversity and carbon footprint with PBAF and PCAF also has similar outcomes for financial institutions. They both allow companies to mitigate risks and maximize opportunities, promote engagement and transparency with stakeholders, create effective strategies for mitigating climate change and biodiversity loss, and make better investment decisions.
PBAF is just one of the ways in which the PCAF team is expanding how financial institutions should measure and mitigate their negative effects on the environment, such as through insured emissions. To stay up to date with the latest on the PCAF and PBAF standards, subscribe to our newsletter, Climate Decoded.