Capturing interest from financial institutions in biodiversity ... - ECNC

Capturing interest from financialinstitutions in biodiversityconservationIvo Mulderivo.mulder@gmail.comBiodiversity & Ecosystem Finance27 28 March 2008, New York

Understanding Capital MarketsCorporate FinanceInvestment BanksCredit LendingBanks (wholesale)CompanyPension FundsSectorPension FundsEmployeeBenefits(Pensions)Advice(e.g. M&A)Company XDebtCapitalProject FinancingLeasingPension fundsBanksLease companiesBanksInsuranceEquityCapitalPrivate EquityInstitutional investors (pension / insurance)Hedge fundsInsuranceReinsuranceStock ExchangeInstitutional investors (pension / insurance)Banks / Private investorsHedge funds27 - 28 March 2008Biodiversity & Ecosystem Finance 2

I ndex1. Biodiversity business risks & opportunities that financial institutions faceSummary from IUCN report Biodiversity, the Next Challenge for Financial Institutions?Project rationaleThe business case from a risk perspectivecurrent statusThe business case from an opportunity perspectiveThe bottom line2. Biodiversity Finance in practice: Practical initiatives from the DFNDForest Certificates FundGreen Fiscal PolicyFirm relocationRed-for-Green3. Other financial constructions one can think of ..27 - 28 March 2008Biodiversity & Ecosystem Finance 3

Part I1 . Project rationale140% increase in CSR reporting by FIs in theG250 over 3 years (KPMG, 2005)Business case for climate change well establishedBiodiversity has characteristics of becoming thenext climate changeLiabilitiesDisruption ofsupply chain /Increase in costsof inputsIncreasedinvestorexpectations /ShareholdervalueBiodiversity: 30% decline compared to 1970(WWF Living Planet Index)Several direct and indirect drivers leading todegradation & loss (Millennium EcosystemAssessment)RegulatoryconstraintsGrowing relevanceof biodiversity tobusinessesVulnerability ofassets to naturaldisastersFinancial institutions can become exposed tobiodiversity business risks themselvesPoor staff morale /ReducedproductivityShifting consumerpreferencesReputation risk27 - 28 March 2008Biodiversity & Ecosystem Finance 4

Part I2 . The business case from a risk perspectiveInterview survey: two-thirds believe FIs areexposed to reputational risksDifficult to link biodiversity risks to standardfinancial metrics in systematic way (assetvalue, credit risk)Some examples of the business case:Project finance: ING Bank andBotniaProject finance: WestLB and OCPpipelineInsurance: New EU liability directive(in effect as of April 2007)Regulation: Potsdam Initiative(March 2007)Shareholder value: ABP and portdevelopment near Southampton27 - 28 March 2008Biodiversity & Ecosystem Finance 5

Part ICurrent statusCredit (banking)Biodiversity described by different terms (e.g.tropical moist forest, critical natural habitat, highconservation value areas)GeneralSector-policiesRabobank, developed a CSR tool for all creditlending activities.HSBC and ABN AMRO also appear to be leaderswith respect to biodiversityEquity (investors)Biodiversity just starting to be addressedCompany nameCSR reportEnv. RiskStandardEP adoptionClimateSeafoodAgriculturePlantationsABN AMRO X X X X X X XBarclays X X XCitigroup X X X XOil & GasEnergyForestryMiningInfrastructureLeisureEnvironmental issues are hardly addressedGoldman Sachs uses a Biodiversity Benchmark fortheir investment decision-makingCalvert uses biodiversity in their (proxy) votingguidelinesInsuranceNew liability regimes as result extreme weathereventsDeutsche Bank X XGoldman Sachs X X XHSBC X X X X X X XJPMorgan Chase X X X XRabobank X X X X X X X X XRoyal Bank ofCanadaX X XWestLB X X XWestpac X X XNew liability directive for biodiversity in the EU as of30 April 07.27 - 28 March 2008Biodiversity & Ecosystem Finance 6

Part I3 . The business case from an opportunity perspectiveEarly risk assessment can help identify biodiversity-related business opportunities:1) Growing markets for certified sustainable produced commodities, such as for wild fish, aquaculture oragricultural products. Estimates suggest a potential market size of about US$60 billion annually by 2010.There are also market opportunities for biodiversity offsets, biocarbon, NTFPs, PES and biofuels amongothers. Estimates for potential market sizes range widely from US$ 35 million 10 billion annually by 20102) Due diligence or advisory services to clients that need assistance in biodiversity sensitive projects andtransactions.3) Biodiversity-related insurance cover. The case of the Panama Canal4) Government-induced opportunities. The Dutch government offer tax breaks private investors for investingin specific projects (adhere to sustainability criteria)5) Bolster corporate reputation by conserving land acquired as a result of default or debt work-out.Should a bank acquire a significant amount of biodiversity-sensitive land as a result of default or debt work-outsituations.27 - 28 March 2008Biodiversity & Ecosystem Finance 7

Part I4 . The bottom line .interest from financial institutionsin biodiversity conservation can be captured by showingwhat sort of biodiversity risks FIs can be exposed towhat sort of biodiversity opportunities FIs can captureThe full report & executive summary can bedownloaded fromwww.biodiversityeconomics.orgwww.iucn.org/themes/economics27 - 28 March 2008Biodiversity & Ecosystem Finance 8

Part I IPractical initiatives from the N etherlands - DFN DDutch Fund for Nature Development: Overview assets31-12-2007Balance (debit/credit): 1 billionLoans receivables: 580 millionof which fiscal green loans:Project account:133 millionSubsidies paid: 927 millionEquity: 31 million179 millionFinancial products with a focus on biodiversity1. Forest Certificates Fund2. Fiscal Green Regulation3. Firm relocation4. Red-for-GreenCritical conditionGovernment creates favorable conditions by 1) providing start-upcapital and/or 2) set new rules/regulations that triggers private sector interest27 - 28 March 2008Biodiversity & Ecosystem Finance 9

Part I I1 . Forest Certificates Fund CO 2- Companies- Government agencies- Consumers (not directly)CO 2 -creditsDutch Fund forNature DevelopmentStart-up capital by government(Eur 9.5 million)Independentverification4000/ha50 year CO 2 -creditsPlanting of new forests bylandownerMotive governmentStimulate afforestation at reasonable costsMotive seller CO2 creditsLand owner: Considerable financial compensationfor switching to forestryMotive buyer CO2 creditsCompanies: 1) reputation; 2) corporateresponsibility; 3) improve staff moraleMotive DFNDAttractive way to stimulate afforestation in the NetherlandsCreate revolving fundCurrent situation258 ha of new forests in 2007 (goal: 250 ha/yr)1770 ha of forests in portfolio 164 afforestation projects1st monitoring underway: measures sequestered CO2Independent verifier: SGSFocus on voluntary carbon marketIn the process of developing our product (VERs or futures )LegalFiscalDemand from the marketPotential value CO2-credits = EUR 11 mil (depending on sale price)27 - 28 March 2008Biodiversity & Ecosystem Finance 10

Part I I2 . Green Fiscal PolicyGoal: Stimulate private investment in biodiversity-friendly projectsPrivate investorXPrivate investorYMotive investorGovernment Moderate investment return is about 2%(equal to investment return government bonds)2.5% taxFiscal advantage = 2.5%advantageTotal investment return = 4.5%Stimulate projects that benefit natureconservationLow interest loan(e.g. 2 3%)GreenInvestmentFundNature projectY27 - 28 March 2008(a.o. by DFND)Fee -Managementof the fundGreen certificateBank /Asset ManagerMotive governmentStimulate investment in nature projects byprivate investors at low costs (reduction in taxrevenue)Motive bankFee for managing the green investment fundIncrease total assets under managementIncrease reputationBudgetTotal Eur 1.7 billionConservation projects: EUR 60 - 80 million(a.o. by DFND) Types of nature projectsLandscape restorationBird protection systemsFish regulation systems in damsBiodiversity & Ecosystem Finance City development (housing / nature) 11

Part I I3 . Firm relocationGovernment policy: relocation of intensive agricultural firms from vulnerable nature areas (e.g.National Ecological Network) to a farm development areaGovernment: subsidises break-down of farm on old location.Farm often needs a new loan to finance its business on the new locationA commercial bank + DFND (loans up to a maximum of 250.000): finance relocation of the farmto an Agriculture Development Area . DFND provides low interest loan.Example of firm relocation in the south of the NetherlandsMotive farmerPossibility to grow in the newlocationGovernment finances break-downof old farmPart of the loan has a low interestMotive commercial bankPart of the financial arrangement iscovered by DFND (risk sharing)Motive government / DFNDStimulate relocation of intensiveagricultural firms to relieve stresson nature area27 - 28 March 2008Biodiversity & Ecosystem Finance 12

Part I I4 . Red- for- Green ( Red = housing / Green = nature)Area X-e.g. 1000 ha farm landhousingconstruction-e.g. 7500 homesArea X-e.g. 425 ha farm land,400 ha housing, 175 ha natureRed has to pay for GreenMotive farmerGood price for the landMotive private partner (e.g. project developer)Increase chances of project development (i.e.access to land)Develop new niche market for green livingAdvantage governmentImprove quality/quantity of natureconservation (= policy goal)Support nature developmentmore quickly27 - 28 March 2008Increase quality of livingBiodiversity & Ecosystem Finance 13

Part I IOther interesting financial constructions to think of ..Combination of financial arrangements!!!.other financial mechanisms or products one can think ofBiodiversity offsets (conservation banking and wetland mitigation banking in theUS. Also in Brazil, the Netherlands, Germany, UK ..??)Eco-securities (sustainable forestry bonds securities that can be offered to thecapital market)Landscape funds (bundling public and private capital in a local fund to use fornature-related projects)27 - 28 March 2008Biodiversity & Ecosystem Finance 14

Emaili.mulder@nationaalgroenfonds.nlivo.mulder@gmail.com27 - 28 March 2008Biodiversity & Ecosystem Finance 15

Source: McKinsey 2007 - Assessing the impact of societal issues27 - 28 March 2008Biodiversity & Ecosystem Finance 16

The business case for biodiversity from the perspective of the financial sector27 - 28 March 2008Biodiversity & Ecosystem Finance 17

Tw o types of sectors pose a liability to financialinstitutions1. Sectors with high biodiversity2. Sectors with high dependencyfootprintsDirect impactOil & GasMiningConstructionForestryAgricultureon ecosystemsTourismAgricultureForestryFisheriesImpact through supply chainFood retail27 - 28 March 2008Biodiversity & Ecosystem Finance 18

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CHARLOTTE, N.C., March 6 /PRNewswire/ --Announces $20 Billion Environmental InitiativeBank of America Corporation announced today a $20 billion initiative to support the growth ofenvironmentally sustainable business activity to address global climate change. Bank of America's tenyearinitiative encourages development of environmentally sustainable business practices throughlending, investing, philanthropy and the creation of new products and services.Bank of America will commit $18 billion in lending, advice and market creation to help commercialclients finance the use and production of new products, services and technologies:Commercial Real Estate Banking:Corporate & Investment Banking:Carbon Emissions TradingEnvironmental Lending ConsiderationBank of America currently is developing a set of products for individuals who consider theenvironmental impact of their purchasing decisions and want to offset or minimize their carbon emissions. The bank willannounce the launch of the following new products in the next year:Eco-friendly Credit CardWorldPoints Rewards for the EnvironmentThe Green Mortgage ProgramEnvironmental Home Equity ProgramTimberland Investment SolutionsSource: http://newsroom.bankofamerica.com/index.php?s=press_releases&item=769727 - 28 March 2008Biodiversity & Ecosystem Finance 20

Old location: Farm was closely situatedto National Ecological NetworkNew location: The farm is able to growin size at the new location (about 20 kmnorth)27 - 28 March 2008Biodiversity & Ecosystem Finance 21