Natural Capital and Financial Regulation
Environmental campaigners may have led the way in raising awareness of what is now referred to by some commentators as the “twin crises” of climate change and biodiversity loss, but real change on a global scale becomes much more likely when global and national financial institutions start to factor these risks in to their work.
In 2020 the Task Force on Nature-related Financial Disclosures (TNFD) was established by four founding organisations (Global Canopy, the United Nations Development Programme, the United Nations Environment Programme Finance Initiative and the World Wide Fund for Nature) to provide a framework for corporate bodies and financial institutions to assess, manage and report on their dependencies and impacts on nature. The intention is that this will support the appraisal of nature-related risk and ultimately redirect global financial flows towards nature-positive outcomes.
The TFND now sits alongside its older sibling, the Task Force on Climate-related Financial Disclosures (TCFD) which was created to improve reporting of climate-related financial information, including the risks and opportunities presented by rising temperatures, climate-related policy and emerging technologies. It published its first set of recommendations in 2017.
The work of these high-level Task Forces will be supported by the likes of
the Natural Capital Finance Alliance – led by the UN Environment Finance Initiative and Global Canopy, it provides knowledge and tools to support the finance sector to reduce and manage environmental risk
the Natural Capital Investment Alliance – a partnership of HSBC Pollination Climate Asset Management, Lombard Odier and Mirova established by the Prince of Wales’ Sustainable Markets Initiative, which aims to accelerate the development of Natural Capital as an investment theme
the Green Finance Institute – a UK public-private collaboration, backed by Government but led by industry, with a mission to “accelerate the transition to a clean, resilient and environmentally sustainable economy by channelling capital at pace and scale towards real-economy outcomes that will create jobs and increase prosperity for all.”
On 14th July 2021 the WWF published a report Nature’s next stewards: Why central bankers need to take action on biodiversity risk calling on central banks and financial institutions to
integrate environmental risk into their supervision
address the environmental risk on their own balance sheets
require enhanced disclosure from the financial sector, and
begin to adapt international financial standards to properly take these new risks into account.
Pressure from central banks and leading financial institutions will inevitably filter down to high street and commercial lenders, who will be asking far more questions about the sustainability of the investment that the business is seeking to make. They will be looking to invest funds in projects which are deemed low-risk, or, even better, offer a high return for nature and climate outcomes. This will create new opportunities for farmers and landowners who can offer nature restoration projects for investment which will score highly on these new risk factors.
There will be much more to come on this area as global standards are set and banks and other investors start to implement them. It will be worth keeping a close eye on this space.