“The guidelines for biodiversity are not a policy document but a risk-management tool for commercial banks; they should not have a negative effect on lending overall, but should help the banking sector manage its risks more successfully and in a way better suited to Latvia’s situation,” explains Edvards Kušners, adviser to the Council of Latvijas Banka and head of sustainability, in an interview with “Dienas Bizness”. He stresses that the guidelines give commercial banks the means to distinguish between and assess the activities of land managers and how well they align with biodiversity-friendly solutions suited to Latvia’s situation and grounded in science, rather than in abstract methodologies that do not match the real situation.
Who are the Guidelines for Identifying Economic Activities Unfavourable and Favourable to Biodiversity, developed by Latvijas Banka, intended for?
Biodiversity is regarded as one of the sources of financial risk within the financial system, and in the context of sustainability the biodiversity issue is, in terms of complexity, question number one. It has to be borne in mind that there is no uniform methodology for assessing biodiversity that could be used to identify problems in this segment, so essential to all living things. Of course, there are international methodologies, but they are highly descriptive and, at best, offer no more than a list of “bad” sectors. We had hoped that NGFS, the international network for greening the financial system (Network of Central Banks and Supervisors for Greening the Financial System), would provide methodological guidance. But it has become clear that nothing of the kind will emerge from the NGFS any time soon, while the European Central Bank has already included biodiversity issues in its strategy, and commercial banks are already facing a reporting obligation on the subject this year. So we started looking at what we could do in Latvia, so as to avoid a situation with an extremely broad, general view and a blanket label for entire sectors, and instead try to understand exactly where the problems arise.
With the help of scientists, the scope was narrowed down to a subset of nature-related risks, and indicative criteria were drawn up to identify where negative impacts arise. That is precisely why this is a bank risk-management issue: knowing the impacts and looking at existing loan portfolios (not just potential new loans to be issued in future) makes it possible to reflect them in banks’ reporting. The guidelines are intended for bank risk-management and sustainability specialists, to help them identify risks unfavourable to biodiversity and the impact caused by the activities in question. This does not mean the guidelines must be turned into lending conditions overnight, although they should be reflected in risk-management conclusions and, later, in the conclusions of commercial-bank supervision, since both the European Central Bank and Latvijas Banka are gradually starting to pay attention to this issue. Of course, the guidelines are only one of the possible methodological materials banks can use, since Latvijas Banka cannot require the use of these guidelines alone. That said, there are no other such science-based methods in Latvia, and developing them is also a very complex and time-consuming task internationally.
Are the same guidelines, with the same criteria for identifying economic activities unfavourable and favourable to biodiversity as those developed in Latvia, also in place in Estonia, Lithuania or Poland – countries whose businesses compete with those operating in Latvia?
Whether nature behaves the same way in all these countries is a question for specialists – experts – to answer, even though the Baltic states appear to share similar climatic conditions. At a recent Baltic banking conference on nature, the guidelines presented drew considerable interest from neighbouring countries. Banks with a presence in all three Baltic states asked whether the guidelines could be applied there too. They cannot be applied directly, however, since the metrics are tailored specifically to Latvia’s particular situation. The European Central Bank has also shown considerable interest in these guidelines.
At the same time, I hope this interest will also help refine the methodologies already in the European Central Bank’s arsenal, because the ENCORE assessment system developed in the Netherlands gives a very odd picture of nature-related risk in Latvia, placing enormous emphasis on the real-estate sector, which accounts for 60% of banks’ loan portfolios – and it is no accident that Latvia appears in it as country number one exposed to such risk, even though that is far from clear-cut and highly debatable. I hope that with these guidelines we will be able to lower that risk rating and so achieve a better assessment for Latvia. Specifically, going by the methodology developed in the Netherlands, banks currently operating in Latvia should, when it comes to nature-related risk, be most concerned about projects in the real-estate segment. Although there are cases of people trying to build something on dunes, most real-estate developers build in industrial zones, including degraded areas that have no connection with natural values.
It is precisely farmers and forest owners who are voicing the greatest concern about the potential impact of these guidelines on the availability of credit!
In the methodology currently in use – the one developed in the Netherlands – it is not only real estate but also intensive agriculture that is marked red in the biodiversity-risk assessment. At a meeting of the Cooperation Council of Agricultural Organisations, I explained both the current situation and the significance of the guidelines and their impact on credit resources and farming methods. If a given sector accounts for a significant share of a bank’s loan portfolio, that also creates a large risk exposure. If, on the other hand, a client is the bank’s first and only one in that sector, then from a risk-management standpoint it should not warrant particular attention, since that client’s exposure relative to the bank’s overall loan portfolio is likely to be negligible.
The picture changes once there are already many such clients.
A risk-management system weighs risks, and the guidelines provide the methodology for assessing the data, but it should be borne in mind that biodiversity risk is just one of a great many assessment factors, among which the evaluation of the business plan plays a huge role.
In any case, the key question will be how a particular bank manages the risks in question and what it can explain to its supervisors, especially since not every business and every sector can, or will, be a top performer – there will be lower marks too, just as at school. Latvia has farmers who are very biodiversity-friendly, and others who can by no means be considered so.
It is precisely those farmers who will most likely have to change over time, though not solely because of the guidelines under discussion. Banks now have the means to distinguish between and assess farmers’ activities and how well they align with biodiversity-friendly solutions, based on Latvia’s situation and grounded in science rather than in some abstract methodology that does not match the real situation. Of course, the large banks have their own policies and methodologies too, and, as far as I know, scientists and experts are working there as well to define, at the level of the whole banking group, the criteria and requirements that bank supervisors will assess during inspections.
Why do the guidelines set the biodiversity-friendly criterion at a minimum of 10% of agricultural land under small landscape features, even where the farmer concerned is subject to no restrictions or prohibitions on economic activity?
The guidelines require nothing of anyone, but when assessing biodiversity risk, its level, a bank’s loan portfolio and the share of agricultural loans within it, the bank will use these criteria to carry out its assessment, since there is no such thing as a risk-free loan. If a farmer wants to be a top performer – with minimal impact on biodiversity – a 10% share is, according to scientists’ findings, a good benchmark. It should also be noted that the volume of greenhouse-gas (CO₂) emissions is already an issue in its own right – meaning farming methods that could affect a given farmer’s operations much sooner, and this is already incorporated into banks’ risk-management and supervisory processes.
Why do the guidelines also treat clearing arable land of scrub as unfavourable to biodiversity?
In terms of biodiversity, scientists consider scrub to be better than arable land! There is another nuance here too: commercial banks have to reckon with European case law, which shows that nature protection is becoming primary, taking precedence over economic interests. Given this case law, where rulings in recent years have become very “green” (in contrast to the softening of the EU Green Deal), banks have to allow for a scenario in which they could end up on the losing side of such litigation – and that is where risk management comes in. So if European courts say biodiversity takes priority, and the explanation of impact in court is usually provided by scientists, commercial banks cannot ignore that. This kind of process is called sustainability transition risk, where the focus is not on the impact of nature loss on a business (so-called physical risk), but rather on the risk of potential litigation linked to the probability of harm and the resulting changes in state policy.
Sustainability transition risk has already materialised in Latvia too, in the form of a ruling by the Constitutional Court on the minimum felling diameter for trees, which resulted in the suspension of the performance of contracts already concluded. That does not mean forestry in Latvia is grinding to a halt, that large numbers of players are abandoning the sector en masse, or that banks are ceasing to lend to it. Even so, conclusions were drawn – it is a striking precedent. Since the European Court has given non-governmental organisations access to litigation on climate matters, it is plausible that similar rulings will follow on biodiversity.
If scientists identify a problem, then, even looking at it purely from the standpoint of potential litigation risk, banks have to take that into account in their risk-management systems, and businesses themselves should also assess not only existing risks but potential future ones, their sources and the possible scale of their impact. Of course, everyone will make their own decisions, but that does not change the risks or their future potential.
Why do the guidelines contain relatively many assessments concerning agriculture and forestry, but relatively few for the energy, building and engineering-structures sector?
That reflects a narrow, natural-science view of economic activities and their potential risks to biodiversity. Industrial agriculture and industrial forestry are clearly activities more unfavourable to nature. That is not Latvijas Banka’s assessment but that of scientists and experts. Yes, wind farms on agricultural land will have a lower negative impact on biodiversity than if they were located in forests. It seems that these biodiversity-risk guidelines will genuinely struggle to keep pace with the wind farms currently being developed. There are sectors that have grown used to extremely heavy regulation and perceive any material as a policy document – new requirements. I cannot cure that kind of trauma, but I can only explain that the guidelines are not a policy document but a risk-management tool for credit institutions. What is more, they were written in simplified language so that a non-specialist could easily grasp them.
First published in the “Dienas Bizness” magazine, issue of 30 June 2026