Can the HCV Approach boost the financial world’s drive for biodiversity conservation?

In general, financial institutions cannot boast with a great record of environmental protection, as recent reports point out that top financial institutions have been funding industries driving mass extinctions and biodiversity losses, or have been unable to track whether the activities they finance are harming the natural world. One of the reasons invoked is banks and other financial actors are not well equipped to understand and therefore reduce the impact of their lending portfolios on biodiversity.

Global food production, mining, infrastructure, forestry, tourism and relocating goods and people are among the top activities fuelling the global biodiversity crisis, and most often these are backed up by financial institutions. Unsustainable practices from land use change alone are leading to an estimated loss of ecosystem services between $4 and $20 trillion USD annually, according to Portfolio Earth, a new initiative born out of rising concerns that the financial sector is not taking the environment seriously and is providing capital to activities that are harmful to biodiversity.

But using the HCV Approach to identify which High Conservation Values (HCVs) may be ultimately affected by development driven by loans and investments could help these stakeholders reduce their environmental liabilities and help them to actively contribute to global sustainability goals. Although HCV protection is already part of financing commitments and policies, many banks and other financial institutions are still short of the capacity and knowledge to implement the Approach.

Why should finance use the HCV Approach?

Increasing momentum for environmental action is starting to put financial institutions under pressure unless they focus their practices on providing benefits for nature and people.

In November 2020, as part of the Finance in Common Summit, 450 public development banks pledged to shift their strategies, investment patterns, activities and operations to help achieve the Sustainable Development Goals (SDGs) and the Paris Agreement targets. At the same time, increasing media coverage of banks responsible for financing projects leading to biodiversity loss and climate change across all industries and sectors is also creating reputational risks for finance.

But legislation is also pushing for a change. In March 2021, the EU enforced its “Sustainability-related disclosures in the financial services sector” regulation (SDFR), which compels investors and asset managers selling financial products or services on the EU market to disclose the environmental impacts of their investment portfolios and loans. By the end of this year, the EU’s Taxonomy regulation will also establish what activities can and cannot be labeled as “green”, where “green” means contributing significantly to climate change mitigation and adaptation, while avoiding harm to biodiversity and ecosystems.

Who uses the Approach?

To date, there are at least 14 financial institutions – investment banks, insurance companies, pension funds, asset management bodies, foundations and trusts and public development banks - mentioning HCV commitments or provisions. Most of them are related to agribusiness, in particular to forestry and palm oil, as well as to cocoa, coffee, tea, cotton, pulp and paper, rubber, soy, and sugarcane. Some of them will invest only if the entity seeking funding will have Forest Stewardship Council (FSC) and Roundtable for Sustainable Palm Oil (RSPO) membership and/or certification.

A handful of financial institutions across South-East Asia have specifically committed to not finance deforestation, according to Jonas Aechtner from WWF Germany, present at the HCV Summit finance panel, who says that the implementation of commitments is key and that conducting HCV assessments can be a helpful tool to act on those commitments on the ground.

At the same time, more and more financial institutions are starting to name and shame companies breaching investment provisions for environmental and social issues across supply chains. Yet, he notes, the institutions should also disclose their processes for monitoring client compliance and progress on time-bound action plans as well as the steps taken in case of non-compliance or failure to make satisfactory progress towards achieving these plans.

How can the Approach help?

When it comes to commodities that have a voluntary sustainability certification scheme that embeds HCV provisions, then mainstreaming the HCV Approach across the financial sector is easier, according to the finance panel at the HCV Summit. But when other commodities lack certifications, or when certifying is not the standard and they bring a big impact on forest and non-forest ecosystems, then adopting the HCV Approach can reduce this impact. According to Ivo Mulder, head of UNEP’s Climate Finance Unit, embedding the HCV Approach into the mainstream sustainability standards for those other commodities with a high impact on forests would be a way to tackle those issues.

A common barrier is that commercial banks and other financial institutions see applying environmental and social safeguards as a cost. Focus is also on exclusion of investees who may bring risks to investor portfolios. However, as conclusions from COP26 point out, this decade is crucial to protect remaining natural areas and restore degraded ones and the financial sector must play a pivotal role in motivating poor performers to adopt more responsible practices. Hardwiring the HCV Approach into proper risk management, and not just for project finance, could further boost action on conservation within the sector, according to Mulder.

For Charlotte Opal, Executive Director at the Forest Conservation Fund, social and cultural HCVs can help support the business case of leaving nature in place within projects and can help financiers focus on the value of avoiding risk rather than on the monetisation of nature services.

Financial bodies who want to lead by example can engage with the HCV Network Secretariat to get support on how to apply the HCV Approach.

For more information on how the HCV Approach can benefit the finance sector, get in touch with Paulina.