Is biodiversity being forgotten in sustainable corporate finance?
EXCLUSIVE: The issuance of sustainability bonds and sustainability-linked loans in the private sector is gathering pace, but are businesses using them to help avert the nature crisis?
That is what edie asked WWF International’s global finance practice leader Margaret Kuhlow, following her recent appearance at the eighth annual World Ocean Summit Week.
Organisations including BloombergNEF and Moody’s tracked record issuance of green and sustainability bonds in 2020. Amid the backdrop of Covid-19’s economic and social fallout, analysts concluded, organisations including corporates faced increasing pressure to build-in resilience against future economic, social and environmental shocks while dealing with current challenges.
Yet the organisations providing these bespoke financial offerings – despite recent moves to align their broader portfolios with the Paris Agreement – continue to be accused of investing heavily in businesses linked to deforestation and pollution, without requesting that they clean up their act.
Moreover, despite the uptick of corporate commitments on nature conservation and restoration, most corporate frameworks for allocating green bond funding centre around the low-carbon transition. Apple this week revealed that adding new renewable electricity generation capacity has received a significant share of its $4.7bn green bond proceeds, for example.
Decarbonisation has, understandably, been front-of-mind for many following the Intergovernmental Panel on Climate Change's (IPCC) landmark report on warming of 1.5C vs 2C. But climate scientists have repeatedly concluded that rising temperatures and changing weather patterns are intrinsically linked to Earth’s impending sixth mass extinction.
Kuhlow is of the opinion that corporates can “definitely” do more to act across the nature axis during the green bond process – but that they may need support from academics, policymakers and regulators to do so.
She said: “I think some of the reasons we haven’t seen as much pickup of biodiversity and nature-related issues [in corporate green bond frameworks] are, in a way, natural. Some of the benefits tend to be accrued to the public; public goods are not necessarily a benefit stream that goes directly back to the corporate.”
This positioning of biodiversity benefits as publicly accessible and, often, with long timelines on returns, Kuhlow explained, has also led to a supply and demand balance on investable nature projects. She said that many businesses working in partnership with WWF cite “a dearth of nature-related investment projects” as a barrier, claiming that most of the projects available cannot be contributed to by green bond proceeds.
But these "natural" challenges also make nature-related investments more attractive to public sector investors. Sovereign green bonds have been issued by nations including Sweden, Germany and Italy – which claimed that its initial issue of €8.5bn was the largest of its kind – over the last 12 months, with the UK eyeing £15bn of issuance this financial year. Many sovereign green bonds have links to national nature targets.
Green bond issuance has also continued to expand at the sub-national level. West Berkshire Council launched what it claims was the first green bond from a local authority last July and Warrington Borough Council followed suit soon after.
A further challenge facing businesses that want to develop a credible biodiversity strategy and finance delivery appropriately, Kuhlow said, is a lack of definitions and metrics. It is easier to measure and define energy efficiency and energy-related emissions, she explained, than it is to track biodiversity impact.
This sentiment was shared by speakers from Nestle and Pernod Ricard – both businesses with a heavy reliance on natural goods and services, and with dedicated targets to match – at edie’s recent Sustainability Leaders Forum.
“I think that is improving considerably with things like the EU Taxonomy, which makes it clear what will qualify for a nature investment,” Kuhlow said. Implemented last year, the Taxonomy requires all economic activity to contribute substantially to positive progress against at least one bloc-wide environmental objective. Funding must also be allocated in ways that “do no significant harm” in regards to other objectives.
Kuhlow added that further policy and regulatory changes may result from the Dasgupta Review. Commissioned by the UK Government, the Review outlines how the true cost of nature can be factored into economic decision-making.
“This set of analysis and narrative is finally falling on receptive ears,” Kuhlow said of the review. “There have been people saying similar things and doing similar work, but this pulls everything together strongly, and comes at a time when this work is getting traction in the mainstream.
“One of the biggest pieces was this realisation that, yes, GDP is important to help us measure productivity and consumption and production, but there are so many things it does not cover, and it was never intended to measure everything we care about.
“We do a terrible job of accounting for the benefits that accrue to us from nature, including those things that are not all that hard to measure. We have not taken advantage of tools and data that already exists to ensure that pricing and economic decision-making reflect the true costs of nature loss and the benefits of nature to us.
“There are also plenty of things in nature that are not directly measurable; cultural, religious and moral values, for example. But those things do not count less because we cannot count them numerically…. The least we can do is doing far better at counting the things we can.”
Aside from policy and regulatory changes, collaboration and data sharing have been raised as ways of unifying definitions and improving metrics and measurements – all things that help build strong business cases for nature-based investment.
While the corporate green bond market may need support to embed biodiversity, Kuhlow believes that the market for sustainability-linked loans (SLL) is undergoing a significant shift in this direction already.
SLLs can take one of two forms – businesses either receive lower rates for meeting key targets or be penalised with higher rates if targets are unmet. Uptake has grown rapidly in the past 18 months or so. Last month, the world’s largest brewer, AB InBev, announced what it claims is the world's largest corporate SLL to date, priced at $10.1bn. Other backers of SLLs include Thai Union, Tesco and City Developments Limited (CDL).
Kuhlow explained how the standardisation of nature requirements through the International Capital Market Association’s SLL Principles has potentially helped, here. There is also the argument that SLL targets can be far more specific and shorter-term than those covered by bonds – and that the accountability link is more direct.
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