COP28 in Dubai will inevitably focus primarily on ways to reduce carbon in the atmosphere, but delegates will be well aware that the climate crisis is inextricably linked to another grave threat to the planet – the loss of nature. Indeed, almost 200 nations signed up to the Kunming-Montreal Global Biodiversity Framework last year, which placed biodiversity and nature solidly on the global agenda.
Ambitious in scope, with the goal of conserving 30 percent of the world’s land and oceans over the next seven years, the GBF aims to “fully rewire our economic and financial systems to allow nature to start recovering by 2030”, says Nina Seega, director of the Centre for Sustainable Finance at the Cambridge Institute for Sustainability Leadership (CISL).
A year closer to the 2030 deadline – and building on nature-related discussions at COP27 last year – nature is expected to be a significant talking point at COP28. One sign is the appointment of president of the International Union for the Conservation of Nature, Razan Al Mubarak, as a COP28 high-level champion.
“Getting nature onto the agenda has been a journey that has gathered a lot of momentum, and it looks like nature will be even more visible at COP28,” says Thomas Maddox, global director of forests and land at non-profit group CDP.
Nature and climate
While the link between nature loss and climate change is well established, the two topics have been treated largely as separate by investors. Climate retains a head start in terms of investor understanding, data disclosure, tools and frameworks, and still dominates conversations about the environment. Meanwhile, many investors view nature-related risks, dependencies and impacts as too complex and too granular to understand, lacking in specific metrics, and difficult to model.
“Perception number one is nature is very complex and investors don’t really know what to do with it,” says Seega. “There is some truth in that. There are different types of drivers and a lot more interconnections [with nature].”
According to CDP, almost 95 percent of financial institutions’ business strategies and financial planning are influenced by climate change. In contrast, only 20 percent of financial institutions assess their exposure to nature-related risks. However, attention is shifting. While only 10 percent currently measure portfolio impact on water and forests, almost a third plan to start within the next two years, according to CDP.
And, as initiatives like Finance for Biodiversity and the investor-led Nature Action 100 encourage action to reduce nature and biodiversity loss, company disclosure of nature-related impacts is increasing. According to CDP, 23,200 companies disclosed on climate this year, compared with 5,000 that disclosed on water security and 1,200 on forests. But both nature-related categories saw a significant increase in disclosure – 23 percent for water security and 10 percent for forests.
“The private sector is accepting that climate risk is a reality,” says Maddox. “Now the focus has shifted to what to do about it and, increasingly, organisations recognise that you can’t achieve climate strategy goals without nature.”
At the same time, “there is much better awareness of the tangible financial implications of nature for companies and financial investors”, says Maddox. “And the enabling environment that supports action is improving. GBF was key. It’s a North Star and a clear signal of where countries are heading and what’s coming in terms of regulation.”
Disclosure discourse
The regulation and standard-setting environment is dynamic. Key among initiatives driving the conversation around nature and climate is the Taskforce on Nature-related Financial Disclosures, which launched its recommendations in September. Drawing on progress made by the Taskforce on Climate-related Financial Disclosures, it also encompasses the work of the Science Based Targets Network.
Also in September, the International Sustainability Standards Board announced that it is working on materials for disclosing nature and social aspects of climate-related risks and opportunities, as well as considering including biodiversity and ecosystems in future work streams.
In recognition of the risk that nature loss poses to the global economy, in the same month the Network for Greening the Financial System – comprised of central banks and supervisors – launched a conceptual framework for nature-related financial risks. That follows the announcement of a European Central Bank study of the exposure of financial services to ecosystem service-related risks, which has already revealed that 75 percent of bank loans to companies in the eurozone are to businesses with a high dependency on at least one ecosystem service.
“The risks to the global economy of inaction are becoming so great that to safeguard financial stability, central banks must ensure that climate and nature risks are properly disclosed,” says Rupesh Madlani, senior adviser at NatureFinance and co-founder of Global Sustainable Capital Management. “There is a growing realisation that 100 percent of the global economy depends on nature, and if you simply focus on climate you are missing the broader picture.”
Making connections
While some organisations are moving forward with integrating nature and climate, others still “aren’t entirely certain how to connect the two”, says Seega. To support banks and portfolio relationship managers in building the capacity to engage with clients on the topic, CISL has produced the Let’s Discuss Nature with Climate Engagement Guide.
“We’re not seeking to reinvent the wheel but to connect nature and climate, and to convey that in financial language so that institutions can understand how to select, find and talk about the data,” says Seega. “We’re asking, ‘If you’re already having conversations with clients on climate, what’s the easiest way for you to start integrating nature into them?’
“Potentially, more institutions are taking action and they don’t realise it. Organisations might be talking to companies on water or looking at risks to their supply chain but not classifying it under the nature umbrella.”
And in some cases, companies – their attention drawn to nature-related issues by consumer pressure and the tangible evidence of nature impacts and dependencies on supply chains and operations – are ahead of investors. COP15 was notable for the level of interest from business and finance in discussions and negotiations, says Seega.
The benefits to investors of integrating the two topics are clear. “As an investor, it’s difficult to manage one set of obligations and opportunities that climate represents and then manage a whole separate architecture around nature,” says Madlani. “There’s a real opportunity to improve efficiency and compliance, and achieve a faster rate of transition and greater impact by combining the two.”
In future, “from an investor perspective it’s going to be super valuable for a company to offer an integrated climate-nature impact score”, says Madlani. “That will facilitate a far more detailed interrogation of management and strategy.”
And there’s an organisational imperative, says Deloitte sustainable finance partner Steven Lizars. “Increasingly, organisations are connecting [together] issues such as biodiversity, water and climate [because] it is the same teams – finance, risk and sustainability – that deal with them, [so] they come under the same function. And in a smaller organisation, it’s all in the same head.”
However, as nature rises up the global agenda, there is a risk it pulls attention away from existing commitments, says Maddox. “There’s always a temptation to move away from [climate change] mitigation, which is the hardest part, and focus more on adaptation and resilience, where nature clearly has a big role. Focusing on nature can’t be at the expense of what we must do first in terms of climate change mitigation and reducing emissions.”
Banking on nature
Lenders are recognising the risks from nature loss
Lender engagement around carbon issues is likely to set the template for bank engagement on nature and biodiversity, says Deloitte sustainable finance partner Steven Lizars. “Banks have a very active dialogue around climate, particularly with larger corporates and customers in hard-to-abate sectors. I expect that will increasingly include nature and biodiversity.”
These conversations are driven by a desire to understand risk, says Lizars. “Nature or biodiversity loss could fundamentally affect a business and its ability to repay a lender. Or there could be a regulatory change that impacts the cost of a business’s intersection with nature and biodiversity, which impacts cashflow. For a financial institution to understand its credit exposure, at the very least, it’s necessary to have that engagement.”
