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Can financial markets make a difference to natural assets?


Lutfi Siddiqui And the Charmaine Tan He argues that a positive holistic lens of nature is the most effective means for private capital to help address climate change. Merging net zero initiatives with stewardship of natural assets should lead to better outcomes for the planet, businesses and communities.

the challenge

Three decades after the Rio Earth Summit, nearly two decades since the term ESG (Environmental, Social and Governance Issues) was coined, and seven years since the twin launch of the Paris Climate Agreement and the United Nations Sustainable Development Goals (SDGs), mainstream economic and financial systems can no longer Ignoring their dependence and impact on the planet’s ecosystems. Business models need to change to better account for the full range of costs and benefits they generate. The sheer scale of this change requires a pivotal role for private enterprise and private capital, complementing and multiplying public sector efforts at the national and international levels.

The challenge is implementation. How do we create and deepen markets for environmental solutions when the root of the problem lies in externalities and market failures? How do we create financial markets where previously unbanked projects can be converted into investable assets?

What have we learned from climate finance?

Until now, the focus on emissions of greenhouse gases (GHGs) has been at the forefront. The 2015 Paris Agreements reset the tone and direction of regulatory policy and expectations, with each site committing to producing Nationally Determined Contributions (NDCs) and strategies towards net zero.

The G20 Financial Stability Board has turned to action by creating a Working Group on Climate-Related Financial Disclosures (TCFD). Almost overnight, the zeitgeist changed for leaders in the private sector and their financiers. The task force presented a neat four-pillar model—governance, strategy, risk management, and metrics—that allowed companies to tell climate impact stories from different starting points, and improve their approach over time. Help develop a common language for internal change within organizations, and communicate with suppliers and investors.

Either on a voluntary or mandatory basis, adoption of Teamwork has accelerated worldwide. At the same time, we’ve seen a proliferation of green bonds and, to a lesser extent, other banking products linked to sustainability outcomes in recent years. As with all markets, an ecosystem of hard and soft infrastructure is starting to take hold.

Green Bond Principles issued by the International Capital Markets Association (ICMA)ICMA) allowed investors and investors to converge in this asset class. financial system greening network (NGFS) brings together central bankers as they chart their regulatory and analytical work on green finance. Despite recent criticism, the Glasgow Financial Alliance for Net Zero (jvansbrings together banks and asset managers in their roles as catalysts of decarbonisation. In terms of reporting, there is an increasing convergence of guidance and standards around sustainability-related accounting across industries and regions. There are still known challenges, of course.

The main among them are degrees Green wash, and the apparent lack of consistency or comparability in summary measures such as the ESG ratings. In recent months, the tragic war in Ukraine has also highlighted the trade-offs between sustainability and security that may arise in the absence of a comprehensive strategy.

Despite these challenges, the pursuit of net zero and the role of climate finance remain undirected.

From climate to nature as the meta-ecosystem

However, the atmosphere is only one of at least four worlds that make up our planetary system – land, fresh water, and the other three oceans. Greenhouse gas emissions are only one of several relevant indicators of planetary health.

To appreciate the range of natural assets as a system of systems, consider the role of the oceans. according to Modern report According to the World Economic Forum, the ocean covers 70% of the planet’s surface, transports 90% of global commodity trade, and supports the livelihoods of millions in both local communities and global industries. In addition, the ocean acts as a carbon sink, capturing nearly a quarter of the carbon dioxide emitted by humans2 emissions.

Ocean degradation, in terms of acidification or habitat extinction, is detrimental to their ability to provide economic and ecosystem services. However, in a classic tragedy of the commons, we take in too much from the ocean (overfishing), and put too much into the ocean (plastic waste). Without collaboration among stakeholders and effective governance mechanisms, business and private capital cannot be mobilized toward ocean restoration, conservation, and responsible use. In an effort to address the coordination failures that have caused the market to fail, the G20 has just launched the platform between the public and private sectors, Ocean 20.

Riding on the coattails of TCFD, Nature Related Financial Disclosure Task Force (TNFD) A framework for companies to identify and evaluate their dependencies and impacts on nature.

It asks the same four questions:

  • What are your governance processes?
  • How have you incorporated nature into your business strategy?
  • How do you manage risks related to nature?
  • What metrics and KPIs do you use?

The first step for any organization is to identify its interfaces with nature. For example, biodiversity financing (F4B) into two distinct categories in which the balance sheets of development finance institutions (DFIs) are related in nature.

dependency risks Refers to the range of investee companies He depends in nature for their core business. For example, almond farming relies on bee pollination services. On the other hand, nature hazards back to harm to nature, due to commercial activities. For example, converting rainforests to farmland for the production of traded goods reduces the supply of ecosystem services.

In the case of development finance institutions, F4B estimates that its combined loan books harm nature to the tune of US$1.1 trillion annually and that more than a quarter of its total US$11.2 trillion in loans relies heavily on vulnerable ecosystems. Quantifying and accounting for both impact groups can provide a dollar basis for positive investments in nature. They can help assess the physical importance of specific interfaces with nature and inform transmission strategies.

Take advantage of the start of TCFD

Conceptual alignment between the two working groups (on financial disclosures related to climate and nature) should ensure that nature reporting is not something entirely new – it benefits from the organizational muscle memory the TCFD has built up in recent years. In fact, the two should be combined as soon as possible.

A closer look at which companies Transfer Under the TCFD it appears that most are comfortable listing the risks they take on, and publishing metrics about current and historical emissions. However, a few of them discuss how climate change will affect their business strategy and the potential opportunities in future scenarios. It is precisely in these areas that climate and nature stories must be developed jointly and interdependently, to resolve both the net outcomes and the positive outcomes of nature.

Given that many sources of carbon offsets are found in nature – mangrovesforest expanses, African forest elephant For example – it makes sense to consider the company’s impact on the entire ecosystem. There may be projects or investments that jointly address atmospheric health and biodiversity.

A multidimensional approach may also guard against selective reporting of a narrow set of outcomes (eg, emissions) without addressing the impact of materials on critical issues (eg, water use or plastic waste) that directly affect the natural domain.

Two main levers of financial markets

Now, the reporting model by itself does not turn nature positive initiatives into investable projects. For principal funding to make a significant contribution, there are two areas that require further development: a) data innovation and b) deal structuring.

Data innovation

to me Nature FundingMore than half (55%) of biodiversity solutions fintechs are powered by blockchain. The combination of immutable ledgers, smart contracts, and credit tokenization has the potential to revolutionize the capture, verification, and monetization of nature-related data. This, in turn, has the potential to inject integrity and confidence into nature-related investments.

For example, Earth Observation data on biodiversity (EO) can facilitate tracking of activities linked to the funded asset value chain. This data can be combined with ESG analysis tools to manage risk, or to enable validation of impact bonds. Information about biodiversity footprint or offsets, using satellite imagery combined with artificial intelligence, can enhance token creation, marketplaces, and payments in ways not previously possible. Finally, ESG data providers can use actual impact data when it comes to record companies, rather than relying on selective reporting by other companies and agents. the Biodiversity Finance Initiative (2022) Several approaches to measuring biodiversity that promise to be particularly useful to financial institutions.

Deal structuring

With principles similar to those of green bonds, the IFC Blue Financing Guidelines Help translate ocean economy projects into financial products. These guidelines are likely to be required for other natural subsystems. However, even with improvements in the “three Ps” of definitions, data, and disclosures, some projects may simply not offer the combination of risk and return required to attract mainstream institutional investors. He says it now, as well pointed out By Standard Chartered, every dollar funded from multilateral development banks mobilizes just one dollar of financing from the private sector. For blended finance to be effective, the amount of private capital must be multiples of non-commercial capital.

To achieve this result, the capital structure of positive investments may have to be divided into different tranches, each serving a different provider of capital. For example, the $20 million “first loss” piece could be assumed by philanthropic, public sector, or other mission-oriented investors. This layer of protection and de-risking could, in turn, mobilize $80 million in private sector funds, bringing the total investment to $100 million.

Of course, there must be safeguards against abuse, but conceptually, approaching this like a securitized derivative could yield effective results.

Figure 1

way forward

The Fifteenth Conference of the Parties (COP15) to the United Nations Convention on Biological Diversity (CBD) in December 2022 to formalize a new global framework for biodiversity with targets to protect marine and terrestrial habitats, and to address critical dimensions such as the reduction of pesticides, plastic waste, etc. Transformations will require private capital. It is important that companies and investors do not treat this as a cognitive load.

Instead, they should harness the head start provided by climate initiatives and processes such as the TCFD to map broader natural systems. There is now enough knowledge of TCFD to extend its model beyond emissions. At the same time, its integration into corporate strategy or scenario analytics is still at a nascent stage so that its integration with TNFD is mostly unbroken.

Sustainability is a classic “evil problem” in a complex emerging system with huge challenges of sequencing and velocity. There are also knowledge gaps that require collaboration across sectors (including academia) and domains. Most of all, it requires leadership of the highest caliber: leaders who can watch over the prize even as they navigate the twists and turns, drive through iterative change without causing motion sickness, and collaborate across traditional boundaries with creativity and compassion.


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