Beyond climate: Charting a course for nature in global finance
CDP's Global Director, Requesting Authorities Capital Markets Claire Elsdon, and Senior Manager, Sustainable Finance, Manveer Gill, examine the current financial market and how a nature-positive mindset can help future-proof portfolios for investors.
The preservation and restoration of nature is not just important for the planet, it is essential to business strategy. By underestimating the importance, global financial institutions risk irrecoverable portfolio loss, existential devastation to their operations, and accelerating the breakdown of the global economy. From escalating heatwaves in Europe and wildfires across North America and Australia, to catastrophic floods in Africa and South Asia in the last half-decade alone, the world has witnessed an intensification of the impacts of the climate and nature crises. These events have caused a devastating loss of biodiversity and pose immeasurable threats to human lives, and the safety of communities. They also highlight the intricate link between climate change and nature degradation and spotlight the urgent need for the financial sector to centre nature in business strategies and decision-making.
The impact of upheavals caused by climate and nature crises extend beyond communities and our own borders, and ripple across the entire financial sector, fracturing industries, devaluing investments, and destabilising the global economy.
A nature-positive and net-zero future can still be a profitable one for the financial sector, indeed it is essential in future-proofing portfolios. Success will come from integrating nature-related considerations into financial decision-making and aligning governance structures, implementation strategies, and risk management, along with metrics and target setting, to support the preservation and restoration of nature.
However, significant gaps persist in these areas for financial institutions. CDP’s ‘Nature in Green Finance’ report analysed disclosures made by 550 financial institutions through CDP in 2022 and found that forest issues and water security influence business strategies or financial planning of less than a third of Financial Institutions (FIs). In comparison, climate change now factors for 95% of the FIs, and although this is positive, we know that climate and nature must be tackled together. FIs also lack the necessary governance mechanism and metrics to adequately integrate, oversee, and set and measure forests and water-related impact. Just 32% of FIs have board-level oversight of forests and/or water-related issues, compared to 91% for climate-related issues, while only 10% currently measure forests and water impact in their portfolios.
Understanding the risks faced by companies and clients is crucial for financial institutions, along with robust measurement of the environmental footprint of corporate supply chains.
Location-specific data and collective action
Complex global value chains pose a major obstacle to achieving a nature-positive future. Resulting nature loss, including climate change, deforestation and water insecurity, cause significant harm to all aspects of business operations – from workers and goods to services, natural systems, and critical infrastructure, leading to supply chain disruption and shortages, and increased financial loss locally and globally.
With over half of the world’s GDP highly dependent on nature and its services, the dramatic rise in environmental crises makes it crucial that financial institutions and companies have access to location-specific data which will allow them to better understand the localised impact and dependencies of their activity on nature. Leading corporations are making strides in mapping their supply chains for climate change, providing a blueprint that can be expanded to encompass a broader range of environmental issues, including nature.
Addressing the nature crisis and its risks to financial systems necessitates coordination from all stakeholders along with appropriate goals, guidance tools and metrics to measure progress toward nature-related goals. For example, the Taskforce for Nature-related Financial Disclosures’ (TNFD) LEAP framework is designed to help companies and financial institutions act on their nature-related risk and opportunity strategies, while The Science-Based Targets Network is leading efforts to develop credible methods to set science-based targets for the whole Earth system.
Ultimately, financial institutions bear the responsibility for accounting for material financial risks to businesses, assets, and investments. They must be catalysts for change, stepping up to meet incoming disclosure standards and regulations. Only those financial institutions taking steps to identify their risks, impacts, and dependencies will be well-positioned to get ahead of upcoming reporting requirements and benefit from the opportunities.
The Power of Credible Data
Comprehensive data enhances strategies, informs best practices, and drives innovative solutions, that strengthen resilience across financial systems. Financial institutions must be catalysts for change in an increasingly volatile environment and global economy. They must adapt financial planning and decision-making to integrate nature and climate into their strategies. They have a responsibility to demand credible and comprehensive data that guides financial activities and solutions, and drives systemic transformation.
It is time to embed nature across all layers of financial action. Financial institutions must chart a course toward a future where profitability and resilience thrive in harmony with nature, ensuring a prosperous future for people and the planet.
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