Previous international agreements to halt the loss of biodiversity draw to an end in 2020, with most targets not being met. This Earth Day, we take a deep dive into the issue - the current situation, what's being done and the implications for businesses and financial systems.
Biodiversity is in the spotlight this year, as previous international agreements expire, making 2020 a year of assessment and target-setting for politicians, legislators and businesses. For that reason, we’re marking this year’s Earth Day by taking a deep dive into biodiversity – the current situation, what’s being done and how it affects businesses and financial systems.
Biodiversity refers to the variety of plant and animal life in the world or a specific habitat, and is vital to the functioning of our ecosystems and society. It confers a wealth of benefits, from protecting water resources and improving soil fertility to absorbing carbon emissions and ensuring climate stability. Businesses are directly or indirectly dependent on these ecosystem services, for example, for the production of raw materials and their supply chains.
Preserving biodiversity is especially important in the Nordic region, particularly in Finland and Sweden, given the countries’ large forestry and paper industry. Companies in this sector are favorably exposed to the transition to a greener economy as we look to them for wood-based substitutes in order to reduce society’s plastic footprint, according to Jacob Michaelsen, Head of Sustainable Finance Advisory at Nordea.
“It is key for companies in the Nordic forestry industry to adapt their production to cater to the increased need for replacing plastic products where possible, but at the same time take biodiversity preservation into consideration,” he says.
The Convention on Biological Diversity (CBD) is an international, legally-binding treaty with three main goals:
- Conservation of biodiversity
- Sustainable use of its components
- Fair and equitable sharing of the benefits arising from the use of genetic resources
Only 4 member states of the United Nations are not parties to the CBD, namely: Andorra, South Sudan, US and the Vatican state.
The Aichi Biodiversity targets were established at the tenth meeting of the Conference of the Parties (COP 10) in 2010 when signatories gathered in Nagoya, Aichi Prefecture, Japan, and agreed on 20 ambitious conservation goals to safeguard global biodiversity. The goals were intended to be met by 2020.
Biodiversity – the current situation
The Convention on Biological Diversity (CBD) was the first international treaty on biodiversity, established at the Earth Summit held in Rio de Janeiro in 1992. This was the first global convention aimed at conserving the diversity of life on earth at all levels, including species’ genetic variation, populations and the diversity of their habitats. In 2010, a supplemental agreement to the Convention on Biological Diversity was formed, called the Nagoya Protocol which includes 20 time-bound, measurable targets to be met by the year 2020, also known as the Aichi Biodiversity Targets.
A new global plan for biodiversity was scheduled to be adopted in October 2020 at the fifteenth Conference of the Parties to the UN Convention on Biological Diversity (COP 15) in Kunming, China. However, given the global corona crisis, COP 15 has been postponed to 2021.
The targets set to halt the biodiversity loss by 2020 will not be met, according to a recent assessment by IPBES (Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services). Countries have been unable to identify the main drivers behind biodiversity loss, implement adequate legislation or gather the necessary financial resources to stop the exploitation of species, the report concludes. The IPBES report paints a worrying picture, with more species than ever before threatened by extinction and many ecosystems changing rapidly. Calculations show that approximately 1 million of the world’s 8 million species are at risk of extinction within a few decades unless powerful measures are put in place to stop the negative development.
Understanding the carbon cycle
The carbon cycle is the process by which carbon travels from the atmosphere into the earth and its organisms, and then back into the atmosphere. Trees play a key role in this process, as they release oxygen and store CO2 in the form of wood, as part of photosynthesis. This carbon is released back into the atmosphere when the tree decomposes. Young forests (i.e. younger than 120-140 years) tend to achieve the best rate of carbon capture, as do actively managed forests that use sustainable practices and yield sustained harvests (as opposed to, for example, an old unmanaged forest). This fits well with the profile of commercial Nordic forests, which tend to be young and follow sustainable management practices.
Nordic forests: ideal for carbon capture
In Europe, Finland and Sweden have the most extensive forest cover, around 70% of territory.
The forest stock in Sweden has more than doubled over the past 90 years, buoyed by significantly improved yields, as agricultural land has given way to reforestation. A similar development has occurred in Finland, according to Statistics Finland. This has resulted in a significant contribution to the countries’ net emission balance, with 60-65% of gross annual national emissions in both countries being absorbed by their forests, based on data from Naturvårdverket and Statistics Finland. (See the accompanying fact box, which explains the carbon cycle process).
Forests’ biodiversity is crucial to maintain the ecosystem services societies depend on. In addition, forests’ ability to adapt to the effects of climate change is essentially dependent on the richness of their biodiversity.
Biodiversity in Finland
Over the past 150 years, Finland’s economy and culture have been more closely tied to forests than any other European country, giving rise to a world-class forest industry.
However, in a national report last year, Finland acknowledged that, despite rigorous work to halt the decline in biodiversity, the changes in practices throughout society have not been sufficient. As a result, Finland will not reach its target of halting biodiversity loss in Finland by 2020.
“One important thing we have learned is that we could have made our National Biodiversity Strategy and Action Plan 2011-2020 more specific and easier to measure for implementing the Aichi biodiversity targets 2020, for instance, through more prioritized SMART actions,” says Senior Ministerial Adviser Marina von Weissenberg from Finland’s Ministry of the Environment, referring to the SMART goal-setting methodology.
She says it is important to engage stakeholders and take a society-wide approach to target setting for the post-2020 biodiversity framework. For forestry in Finland, that means focusing on sustainable forest management, ecological restoration and preserving forests in Finland as well as outside its borders where Finnish companies operate.
“New issues like green infrastructure, circular economy and innovations, which all relate to the forest industry and product innovations will be an interesting avenue – using less for more,” adds Von Weissenberg.
The war on plastic
The societal pressure to shift from plastic to fibre-based products has raised the profile of forests and could increase the strain on their biodiversity.
The vast majority of all plastic produced goes straight to landfill. Despite this, the prevalence of primary, non-recycled plastic around the world is staggering. Research by Roland Geyer and others suggests that out of the 8.3 billion tonnes of primary plastic produced between 1950 and 2015, only 6% has at some point been recycled. Though approximately a third of all plastic produced is still in use, the vast majority has only been used once and discarded through incineration, landfill or as waste found in nature.
The plastic-replacement trend started several years ago, but a number of companies point to 2019 as the year when demand for fibre-based products changed gear. Estimates by Material Economics indicate that 25% of plastic packaging could be replaced with paper products, and Europe is expected to lead this trend due to regulation and consumer demand.
One of the main barriers to replacing plastic is the highly versatile nature of its physical properties, being lightweight and transparent while at the same time strong and resistant to liquids. These characteristics are hard to recreate with other materials. Material Economics estimates that 25% of current plastics used in packaging could be replaced, without significantly affecting functionality.
Companies are under growing pressure to reduce their footprint of primary, fossil-fuel based plastics. In Europe, a directive from 2019 (the EU Single-Use Plastic Directive) will ban several single-use plastics from 2021, setting ambitious targets for plastic recycling. Action is growing across the world, with several examples of countries banning or taxing plastic bags.
This raises an obvious question: Is there enough wood in Europe to meet the increased demand for plastic replacement? The short answer in our view is yes, but we estimate this would mean having to harvest a large part of European forests’ yearly growth, compared to around 70% currently, according to Michaelsen. While Nordic and European forests are growing every year at present, a shift to paper or wood would slow the growth down or even bring it to a halt, he says.
“It is important to keep stressing the need for both top-down and bottom-up approaches to halt biodiversity loss. Political will, legislative implementation and effective management are crucial,” says Michaelsen.
How to fund biodiversity?
In a world of capped budgets and slow economic growth, the already limited public financing for biodiversity could be difficult to sustain, let alone expand. Building on public-private partnerships can help transform biodiversity conservation into an engine of growth.
Stakeholders in the private sector are coming to appreciate the value of ecosystems and the role they play in accelerating economic growth. The private sector invests in biodiversity conservation to create value, protect supply chains and improve their business models. Governments and SSAs (sovereigns, supranationals and agencies) invest in biodiversity conservation because it is part of national wealth and economic activity. Financial institutions and banks are also ramping up to provide financing knowledge and long-term funding for biodiversity conservation.
In March this year, UPM, a Finnish forest industry company, signed a EUR 750 million revolving credit facility with a margin tied to long-term biodiversity and climate targets. The funding mechanism focuses on the achievement of a net positive impact on biodiversity in the company’s own forests in Finland and a 65% reduction of CO2 emissions from fuels and purchased electricity by 2030, from 2015 levels, in line with UPM’s commitment to UN Business Ambition for 1.5°C.
“Connecting UPM’s sustainability performance to our financing demonstrates the importance of responsible business practices to our long-term value creation. UPM is committed to achieving a net positive impact on biodiversity,” says Tapio Korpeinen, CFO, UPM.
“We are noticing an increased appetite for debt financing solutions that are linked to green actions from both investors and financing recipients,” says Nordea’s Michaelsen. “Essentially, the financing solution works as a motivation for the company, given that if green targets are met they will receive favourable economic terms on their financing. It’s a win-win situation, where the biggest winner is the ecosystem,” he adds.
Von Weissenberg of Finland’s Ministry of the Environment welcomes the concept of forestry companies using long-term private financing to achieve biodiversity targets, provided it’s evaluated with experts in the biodiversity field. While companies’ performance on ESG metrics is increasingly going hand-in-hand with their financials, there’s room for improvement when it comes to biodiversity.
“The ESG framework has become a new norm within Finnish industries, but biodiversity has not been recognized as high as it should be on this agenda,” she says, adding, “Companies need to measure biodiversity outcomes, make use of indicators and commit to the post-2020 biodiversity framework by having their own action plans and relate this to reporting and follow-up. Together we can and we need to continue to implement actions and commitments and to step up communication and building awareness.”
The information provided within this website is intended for background information only. The views and other information provided herein are the current views of Nordea Bank Abp as of the date of publication and are subject to change without notice. The information provided within this website is not an exhaustive description of the described product or the risks related to it, and it should not be relied on as such, nor is it a substitute for the judgement of the recipient.
The information provided within this website is not intended to constitute and does not constitute investment advice nor is the information intended as an offer or solicitation for the purchase or sale of any financial instrument. The information provided within this website has no regard to the specific investment objectives, the financial situation or particular needs of any particular recipient. Relevant and specific professional advice should always be obtained before making any investment or credit decision. It is important to note that past performance is not indicative of future results.
Nordea Bank Abp is not and does not purport to be an adviser as to legal, taxation, accounting or regulatory matters in any jurisdiction.
The information provided within this website may not be reproduced, distributed or published for any purpose without the prior written consent from Nordea Bank Abp.