INSIGHT by Divya Narain
With projects increasingly being sited in frontier areas, infrastructure development is driving biodiversity loss worldwide. By choosing to fund projects in ecologically-fragile locations, infrastructure financiers indirectly drive this biodiversity loss. What proportion of infrastructure financiers globally require clients to apply biodiversity safeguards? To what extent are these safeguards aligned with each other and with international best practice? A new paper published in journal Conservation Biology explores these questions.
| Infrastructure financing as a driver of biodiversity loss
We are in the midst of a global biodiversity crisis. Whether it is species diversity, species populations or ecosystem condition – nature is taking a beating on all fronts. The current rate of anthropogenic species extinctions is estimated to be more than a thousand times higher than the natural extinction rate. The decline in species populations is equally severe – populations of vertebrates have dwindled by an average of 68% over the last 50 years, as per WWF’s Living Planet Index. The ecosystems that harbor these species are also increasingly fragmented, degraded and modified.
Infrastructure development has been identified as a key driver of this decline in nature. Construction and operation of large-scale economic infrastructure, such as roads, railways, mines, dams, power plants, and ports, drive a range of impacts on biodiversity. These impacts range from on-site ones such as roadkill and barriers to movement, to more widespread ones such as loss and fragmentation of habitats, and isolation of populations.
With upward of US$2.5 trillion in annual investment in infrastructure, the financial sector indirectly drives this biodiversity impact. At the same time, the impact mitigation measures that financiers require of project developers can help limit this damage. Dubbed as biodiversity safeguards, such mitigation requirements are often a pre-requisite to financing.
| Assessing biodiversity safeguards of development banks
The coverage of biodiversity safeguards among infrastructure financiers is an important indicator of the extent to which biodiversity impacts of infrastructure are likely to be mitigated. An equally important indicator of their effectiveness is the degree to which biodiversity safeguards of financiers are harmonized i.e., similar as that precludes shopping around by project developers for least onerous requirements. The effectiveness of biodiversity safeguards also lies in whether they truly represent international best practice in biodiversity impact mitigation. In our recent paper titled, ‘Global assessment of the biodiversity safeguards of development banks that finance infrastructure’, we evaluated biodiversity safeguards of infrastructure financiers for coverage, harmonization and alignment with best practice.
The focus of our analysis was development banks. These are banks with an exclusive mandate of investing in projects that contribute to economic development. Multilateral development banks (MDBs) such as the World Bank and its private-sector lending arm the International Finance Corporation (IFC) are considered the pioneers in environmental and social safeguard systems. In fact, a number of other banks have benchmarked their safeguards against IFC’s Performance Standards. Development banks are also seen as catalysts for safeguard adoption by private and other public financiers.
| Biodiversity safeguards of development banks: coverage, harmonization and alignment with international best practice
We examined 155 development banks that invest in infrastructure and have assets of more than US$500 million. We found that only 42% of the assessed development banks had biodiversity safeguards. More development banks with international operations had biodiversity safeguards than did banks with only national operations. We also found more development banks headquartered in Europe had biodiversity safeguards than those in any other continent. Our findings also corroborated those of a 2020 study which concluded that China Development Bank and China Export-Import Bank (China’s two national development banks that increasingly invest overseas and which are also two of the top three global development banks in terms of assets) had no biodiversity safeguards.
In terms of harmonization, we found that, of the existing safeguards, 86% were benchmarked against IFC’s Performance Standard 6 (IFC PS6) which specifies safeguard requirements on biodiversity impact mitigation. A handful of banks including prominent MDBs, such as African Development Bank, Asian Development Bank, Asian Infrastructure Investment Bank, and New Development Bank were divergent i.e., they had their own safeguard systems not benchmarked against IFC’s Performance Standards. Absence of harmonization is not always a bad thing (and may even help address context specificity) as long as the level of stringency of requirements across banks is equivalent.
We also found that IFC PS6 demonstrated a high degree of alignment with international best practice. At the heart of international best practice in biodiversity impact mitigation is a framework called the mitigation hierarchy which involves limiting the damage caused by a development project through sequential avoidance, minimization and offsetting of impacts. We used internationally-recognized policies such as that of the IUCN to identify 20 best-practice principles including strict adherence to and early application of the mitigation hierarchy, accounting for the full range of impacts, exploring all project alternatives, adoption of the precautionary, adaptive management and integrated planning approaches, and monitoring and evaluation of mitigation measures. The divergent banks only partially aligned with best practice, falling especially short on principles requiring robust biodiversity offsetting.
Our findings show that development finance, which constitutes about 18% of the global infrastructure financing, is not subject to adequate biodiversity impact mitigation requirements. This is despite the fact that development finance routed without effective safeguards costs US$800 billion every year in terms of damage to nature. While our findings cannot be directly extrapolated to the entire gamut of infrastructure financiers (which also include private and other public players), the fact that very few international safeguard standards are known to exist outside the development finance space (e.g., Equator Principles) points to much lower coverage of safeguards across the breadth of infrastructure financing.
Given their dual role in setting benchmarks and leveraging infrastructure financing from private banks and institutional investors, development banks need to adopt best-practice biodiversity safeguards if the tide of global biodiversity loss is to be stemmed. The IFC PS6, if strengthened, can act as a useful template for other financier to evolve their safeguards. The high degree of harmonization among safeguards is promising, pointing to a potential for diffusion of best practice.
| about
Divya Narain is a researcher working at the cusp of finance and the environment, exploring how financial investments drive environmental impact and how they can be redirected towards environmental protection and recovery. She is particularly interested in the role of development banks in setting benchmarks and diffusing best practice. Divya completed her PhD from the University of Queensland in 2022 and has recently started a postdoc at the University of Oxford.
| All opinions expressed are those of the author and/or quoted sources. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.
