At this point, the finance industry arguably has a pretty good handle on the implications of climate change.
That’s not to say it’s moving aggressively to fight it, but only that bankers and investors have a solid understanding of the sources of emissions in their portfolios, what their clients need to do to decarbonize and what government policies or financing support could accelerate that process.
However, when it comes to biodiversity — climate’s broader sister topic — bankers appear to be less certain. In private conversations, financiers from some of the biggest banks in Europe and the US (as well as a major Canadian lender) told Bloomberg Green they’re at a loss about what to do with biodiversity.
It’s not that they’re ignorant of the threat to human life and economic output posed by mass extinctions or breakdowns of natural systems. It’s just that they don’t understand how to measure its impact on their operations—or how to make money from it.
No one knows what to do, said a senior banker at a major US lender, who asked not to be identified for expressing opinions that may differ from those of their employer. As such, the bank’s work on nature has stalled, the banker said.
While quantifying climate-related risks and aligning portfolios accordingly has been a multi-year effort for everyone from standard setters to finance executives, biodiversity was adopted into sustainability teams’ remit on a much more accelerated timeline.
The launch of the Taskforce on Nature-Related Financial Disclosures in 2021, which asks companies to report their biodiversity footprint, was a key moment in elevating the nature agenda.
A year later, world leaders agreed to protect and restore 30% of the Earth’s land and oceans by 2030. The goal rallied investors around a new catchphrase called “nature positive,” which refers to the idea of stopping and eventually reversing biodiversity loss. It’s the new “net zero,” only for biodiversity.
Two years on, it’s become apparent to the bankers Bloomberg Green spoke to that nature is vastly more complex than climate. While climate impacts can be boiled down to a single metric that can be measured, priced and traded — greenhouse gas emissions — there’s no simple or comparable way to measure changes in biodiversity across different geographies and ecosystems.
In other words, it’s not clear how the market should value a swamp or a newly discovered frog species. And what does “nature-positive” finance even look like?
And more concerning for the bankers is a lack of clarity on how to cash in on nature.
Climate change, while a risk to their portfolios and clients, presents a vast commercial opportunity through funding deals in everything from renewables to low-carbon cement and retrofitting buildings. When it comes to biodiversity, the opportunity set appears more limited. Another banker who requested anonymity for discussing internal thinking at their company said nature feels more like a philanthropic topic than a profit center.
Still, even with these challenges, finance will be critical in supporting efforts to combat nature’s decline, said Loree Gourley, a partner at Deloitte in London who wrote a paper on the function of banks in creating a “nature-positive economy.”
“Banks will have a big role to play in plugging the global biodiversity funding gap,” she said. “They will need to move with pace, looking for innovative ways to raise capital.”
Boston Consulting Group estimates nature to be a more than $1.2 trillion opportunity, with the largest investments to be made in sectors including chemicals, power utilities, food and beverage and healthcare.
“It’s just a matter of time for nature to become a commercial opportunity for bankers,” said Lucyann Murray, a partner at BCG. “Companies are starting to act. I wouldn’t turn a blind eye to nature.”
No matter what happens, financiers are unlikely to be able to evade the topic, as nature is becoming more prominent in corporate and government agendas, said John Bromley, managing director of clean energy strategy and investments at Legal & General Group Plc.
Next week, world leaders will gather for the United Nations biodiversity summit, known as COP16, where participants will discuss progress made on targets they agreed to in 2022. And even with the challenges of monetizing nature, banks including JPMorgan Chase & Co. and Standard Chartered Plc are sending representatives in the hope that biodiversity can be a source of new deals.
Sustainable finance in brief
The European Central Bank has stepped up its efforts to prepare lenders for the fallout from climate change by warning they face even more fines if they don’t sufficiently address the risks ahead. A “small group of outliers” faces periodic penalty payments after the ECB found that they’re still missing “foundational elements for the adequate management of climate and nature-related risks,” said Frank Elderson, a member of ECB’s Executive Board. The ECB has steadily ramped up pressure on banks to ensure they can contend with losses resulting from extreme weather or carbon-intensive companies having difficulty paying back loans. While many banks say they’re working on the issue, the watchdog’s tough approach has been a key source of friction with the industry.
- Private markets are emerging as a major force in energy-transition investing, while much larger public markets are more receptive to fossil-fuel holdings, according to research from BloombergNEF.
- Investors need to adopt a new approach to the mining sector if the industry is to meet the growing demand for minerals and metals needed for the green transition.
- Billionaire Tom Steyer hired former US Secretary of State and top climate diplomat John Kerry to join his sustainable-investing firm.
