For some industries, nature-related financial risk is growing at an alarming pace, with ratings agency Moody’s recently issuing a $1.9trn warning over biodiversity.
As a result, biodiversity is “now the fastest developing ESG theme in global capital markets”, according to Catherine Howarth, CEO of ShareAction.
Aiming to generate opportunity from this newly visible corner of green finance, given the potential for this thematic area to grow by some 2000%, some of the world’s biggest money managers – Aviva, Schroders, Hermes, Jupiter, Credit Suisse, HSBC and Pollination – are just some who have opened funds and investment products to invest in this area.
If ever there were a need for the public and private sectors to work together towards a common solution, perhaps this it is – and it’s possible that long-term outcomes could align given three key trends.
The first is the evolution of regulation and disclosure in this area. The integration of nature risk considerations into financial decision-making is experiencing an unprecedented surge. The mainstreaming of nature and biodiversity risk into investment decision-making continues at pace, given the disclosure requirements of the EU Taxonomy and Sustainable Finance Disclosure Review alongside the evolving Taskforce for Nature-related Disclosures, and the mandated actions of signatories to the Finance for Biodiversity Pledge.
The Sustainable Markets Initiative’s Natural Capital Investment Alliance also continues to grow, with leading names in asset management recognising the need to mobilise investment in nature-based economic opportunities.
Second, data is improving. Evidence-based frameworks uniting science and sustainable finance, combined with systematic data collection, technology and transparency from business, will be key.
The rise of geospatial data, remote sensing, and multiple growing data lakes to capture quantitative data points and aggregate them with more power than ever before means that connecting activities and their impacts can finally be revealed. Transparency of impact, supported by innovations like AI and spatial data, can close the data gap.
As with climate-related investments, measurement may actually herald the birth of a new asset class, this time with pro-nature outcomes. Long-standing barriers – be it tangible returns, readily available projects, or robust data – to private investments may then become available to balance the scales in favour of both nature and returns. Blended finance, pooled funds, nature bonds or broader sustainable investing may all become beneficiaries for innovative investors.
Finally, we enter a landmark quarter for the policy landscape around biodiversity, which will see the long-awaited definition of ‘nature positive’ as a target similar to a ‘net-zero’ for nature delivered at the International Union for The Conservation of Nature’s gathering in October 2022 and new global targets being set at December’s Convention of Biodiversity.
Biodiversity loss is now acknowledged by international governments and industry bodies such as the UN PRI as a systemic risk.
Ultimately, improved understanding and management of nature-related dependencies, impacts, and financial risks has the potential to further unlock financial flows that achieve twin aims: both enhancing natural assets and supporting sustainable economic activities. The result could be a paradigm shift in capital allocations at scale – one that is positive for investors, and for nature.