By expanding investments in nature-related themes and solutions, financial institutions will play a pivotal role in creating a sustainable future, says Charlotte Gregory, Sustainability Research Analyst at the World Benchmarking Alliance.
To combat climate change and address environmental challenges, financial institutions have recognised the importance of directing funds towards sustainability. While financing climate solutions has gained traction, financing for nature remains relatively unexplored. Nevertheless, the long-awaited arrival of the Taskforce for Nature-related Financial Disclosures (TNFD) will provide financial institutions with a framework to disclose their nature-related opportunities.
Financing for nature includes directing capital towards the sustainable management of natural resources and processes. To tackle environmental challenges and global sustainability goals, financial flows directed towards nature must increase. On the issue of climate change alone, the Intergovernmental Panel on Climate Change (IPCC) reports that current investments in climate solutions are up to 29 times less than needed to stabilise the climate.
Currently, the biodiversity financing gap is US$700 billion per year. Research shows that directing finance towards nature-related themes and nature-based solutions could provide around a third of the climate mitigation needed to reach the goals set out in the Paris Agreement.
Yet, research by the World Benchmarking Alliance’s (WBA) Financial System Benchmark shows that only 5% of the world largest and most influential 400 financial institutions – 23 institutions overall – disclose financing towards nature-related topics. Forty-two percent of these 23 institutions are banks, 26% are development finance institutions, and 21% are pension funds, the remaining 11% being asset managers and insurance companies. 61% of them assign responsibility for sustainability to the board.
Leading financial institutions who prioritise sustainability understand that credible net zero strategies must include investments in nature. They are already entering the market of nature-related investments. Development finance institutions such as the Asian Development Bank and the European Investment Bank are spearheading these investments given their mandates. Large players in other sectors like the Bank of Montreal, ING, AXA and APG Group, are all moving towards the market of nature-related investments. The wider financial sector must follow their example.
Despite uncertainties surrounding investment in nature-related topics, successful case studies demonstrate that well-designed structures, diverse funding sources, and collaboration with peers can unlock the potential of these investments. For example, the Asian Development Bank (ADB) issued its first blue bond in 2021 channelling capital towards investments enhancing and protecting ocean health. ADB specifies that the blue bond focus on enhancing and protecting ocean health. It is a dual-tranche bond, with both tranches amounting to US$150 million. As of 2021 their total blue bonds outstanding were US$302 million.
Another example is the Plano Amazônia initiative, aiming to eliminate deforestation in cattle beef processor supply chains and promoting the cultivation of local crops. This is a collaboration between three Brazilian banks, Bradesco, Itaú Unibanco, and Santander Brasil. The financial institutions set a target to provide R$100 million in credit to cooperatives and agro-industries for the sustainable production of crops in the region. This incentivises farmers to produce more sustainably and is also a business opportunity for banks to expand their client base.
To bring an example beyond banking, Mexico Quintana Roo’s 100-mile stretch of the Mesoamerican Reef is the world’s first natural asset which is protected by an insurance policy. Swiss Re insured the reef based on its economic value to the region as it provides storm protection and tourism revenue. To put in place the insurance mechanism, the regional government developed a public-private partnership arrangement to de-risk private sector interests and optimise natural public assets.
Alongside looking for interesting new nature based financial solutions, financial institutions also need to take steps to mitigate negative impacts and manage dependencies. In fact, while 50% of the world’s GDP is dependent on nature, less than 5% of financial institutions have a process to identify the impact of their financing activities on nature.
A good starting point for investors interested in exploring these companies is WBA’s Nature Benchmark, assessing 1000 companies across 22 industries to track and measure the extent to which companies are reducing their negative impacts on nature and contributing to the protection and restoration of ecosystems. The benchmark also publishes an Investor Guidance document which financial institutions can use in their stewardship activities. For those looking for peers that are also committed to managing their biodiversity impact, the Finance for Biodiversity Pledge is the perfect platform. For institutions wanting help on how to engage on biodiversity related matters the Nature Action 100 initiative could be a good fit.
Institutions are starting to demonstrate that investors can address both climate change and nature-related challenges by investing in nature-related themes and nature-based solutions. The launch of the TNFD puts the final puzzle piece in place by providing a reporting framework for nature-related opportunities. With a business incentive to innovate these investments can be profitable and scalable, creating a positive impact on the environment, society and the finance system. Those that start now will have first-mover advantage, a win for investors and a win for people and planet.
The article was co-authored by Flora Rencz, former Research Analyst at the World Benchmarking Alliance