Finextra Research, in collaboration with Responsible Risk, has launched Sustainable Finance Live—an innovative series of virtual events aimed at developing actionable ESGtech strategies within the financial services industry. The goal is to cultivate partnerships that translate strategic concepts into real-world action.
The latest session, titled "Valuing Nature: Better Assessing Financial Risk," featured an opening address from Richard Peers, founder of Responsible Risk. Peers highlighted the pressing challenges the financial sector faces in tackling climate change and the decline of biodiversity.
Following his introduction, the first keynote speaker, Susanne Schmitt, nature and spatial finance lead at the World Wide Fund for Nature (WWF) UK, presented a sobering overview of biodiversity loss, its repercussions for ecosystem services, and current industry responses.
Assessing Biodiversity Loss
According to the WWF’s 2020 Living Planet Index, there has been a concerning 66% decline in global wildlife populations since 1970. Schmitt emphasized the severity of this issue, citing the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) report forecasting that up to one million species may face extinction in our lifetimes. Such biodiversity loss endangers approximately 80% of the United Nations’ Sustainable Development Goals (SDGs), impacting areas such as poverty and environmental health.
The economic ramifications of ecosystem degradation are increasingly evident, with the WWF reporting a 40% decline in natural capital from 1992 to 2014. Natural capital—the stock of renewable and non-renewable resources—is vital to the global economy, as half of global GDP relies on nature-based activities. This reliance is particularly pronounced in low-income countries, where natural resources account for nearly half of total wealth.
Maintaining economic and financial stability necessitates a commitment to preserving our natural environment. Encouragingly, industry players are beginning to recognize and respond to their roles in this pressing matter.
One pivotal report from De Nederlandsche Bank, titled Indebted to Nature, highlighted that Dutch financial institutions have a combined exposure of EUR 510 billion to biodiversity-related risks—representing nearly 36% of the assessed assets from Dutch banks, pension funds, and insurers.
More recently, the Network for Greening the Financial System (NGFS) initiated a research project with the London School of Economics to quantify the interplay between finance and ecosystem services, as well as the consequences of biodiversity loss for financial stability. These initiatives indicate a shift toward environmentally conscious practices within financial services.
To effectively address nature-induced risks, the financial sector requires enhanced access to high-quality, granular data. Establishing biodiversity targets similar to those for climate change will soon become necessary. Schmitt asserted that the current decade should be dedicated to biodiversity and climate action, urging the global community to become “nature positive” by 2030 and restore ecosystems to avert catastrophic changes to our biosphere.
The Importance of Science-Based Data
Frank D’Agnese from Earth Knowledge reinforced the need for businesses to target specific metrics regarding nature recovery. While concrete temperature goals for nature are absent, businesses can aim for no net loss of nature by 2024, achieve nature positivity by 2030, and ensure comprehensive recovery by 2050.
D’Agnese emphasized how climate change and habitat fragmentation impact physical assets, backing up his points with a case study of Pacific Gas & Energy (PG&E). He argued that science-based data can underpin mitigation strategies and reshape business models in line with sustainability goals. He provided examples from California, illustrating how climatic patterns can predict disastrous events like wildfires, with significant financial implications for companies like PG&E.
Companies across all industries should leverage science-based data to evaluate ecological risks. Understanding the probability and scale of these risks enables organizations to grasp their interaction with nature and the potential impacts on business operations.
Investment Management and Natural Capital
Philippe Zaouati, CEO of Mirova, concluded the day’s discussions by addressing how investment managers can effectively engage with biodiversity through their natural capital strategy. Mirova, established seven years ago within the French investment bank Natixis, now oversees around €22 billion across various asset classes, including substantial investments in renewable energy and sustainable development.
Zaouati recounted how Mirova responded to a UN request to create an investment fund for land restoration, despite initially lacking experience in natural capital investments. Over the years, the firm has formed partnerships with numerous stakeholders, including NGOs, government entities, and financial institutions to develop a robust project pipeline.
The structure of their fund seeks to balance risk by offering different share classes to attract investor interest, with a focus on de-risking strategies. Currently, Mirova is managing about $200 million in its natural capital fund, expanding into other areas such as sustainable agriculture and conservation projects.
Interest from institutional investors is growing, as corporate entities, like L’Oréal, seek to initiate their own sustainability projects rather than merely purchasing carbon credits.
In summary, Sustainable Finance Live presents a critical platform for fostering innovative financial solutions aimed at addressing environmental challenges, ultimately contributing to a more sustainable future.