Banking on natural capital, beyond debt

Debt is essential in addressing many environmental challenges, but it has its limitations

Michelle Quah
Published Sun, Aug 28, 2022 · 05:15 PM

As the world grows more cognisant of the need to value and preserve natural capital, the investment opportunities associated with it will correspondingly increase. As vast and varied as nature itself is, so are the ways for a financier to bank on natural capital.

Debt currently represents the largest pool of global capital; and debt-based sustainable finance instruments have enjoyed near exponential growth in recent years. But it has its limitations and shortcomings, says a report published by global professional services firm Deloitte, and wildlife advocacy and protection group, WWF-Australia, titled “Banking on Natural Capital”.

The report noted that the predicted finance required for the conservation of biodiversity alone - which is just one aspect of nature - is estimated to be between US$722 billion and US$967 billion annually by 2030. That’s notably higher than the US$124-143 billion in biodiversity finance committed in 2019. The disparity suggests a minimum nature financing gap of US$598 billion annually.

Economic transitions will be needed to shift nature-negative financial flows to nature-positive ones - not only to address the risks associated with nature loss, but also to amplify the opportunities afforded by healthy ecosystems; and there is an imperative and opportunity for the private sector to increase investments in nature and lead this shift.

“Change will have to happen; the unavoidable economic consequences of nature loss will mean that ‘business as usual’ (BAU) is no longer an option,” says Guy Williams, Deloitte Asia Pacific & Global Nature lead. “But more can be done to spell out the business case to convince financiers to take action today.”

Debt, currently the largest pool of global capital, is essential in addressing many of the environmental challenges, says the paper. However, the exponential growth seen in debt-based green loans in recent years has come at a price: a decrease in the proportion of funding allocated as grants.

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There are also limitations to focusing only on debt-based instruments. For one, it has been easier to demonstrate financial returns on conventional investments, which means they’ve been funded significantly better than have sustainable investments focused on nature. For another, debt can further disadvantage already at-risk and in-debt communities.

There’s also the ongoing concern around green-instrument credibility, due to a lack of consistent and rigorous standards. Some green-labelled instruments, particularly those that focus on energy and emissions, also obscure nature-negative impacts such as the use of unsustainably sourced materials.

“There is a need to expand out the sustainable finance options to include consideration of non-debt asset classes as a means to address the nature financing gap,” said Williams. This includes nature-positive finance, greening finance and blended finance.

  • Nature-positive finance

Public and private equity investors have already begun to use screening tools and standards to help them identify environmental, social and governance (ESG) risks, guiding them towards investments more likely to have a positive impact, the report said.

BlackRock Investment Stewardship’s 2022 Engagement Priorities, for example, includes a Natural Capital key performance indicator (KPI), compelling targets to disclose in detail how they manage natural capital-related risks and opportunities. ESG indices also provide a means to direct capital towards nature-positive targets at scale, and away from nature-negative activities.

  • Greening finance

Examples of this include thematic funds - one of the earliest sustainable-finance mechanisms - which value the triple bottom line of environmental, social and financial returns. Returns from sustainable funds are either comparable or exceed those of traditional funds over multiple time horizons.

Sustainable funds can also be accessed via a range of vehicles, including private equity, venture capital, and exchange-traded funds (ETFs). 

“While many equity funds do not have a specific focus on nature, natural-capital funds are becoming more prominent. Key examples include HSBC and Pollination’s Natural Capital and Nature-based Carbon Funds, as well as Mirova’s Land Degradation Neutrality fund,” Williams said.

  • Blended finance

Blended finance is defined by the Organisation for Economic Co-operation and Development (OECD) as the strategic use of public finance for the mobilisation of additional finance towards sustainable development. Not necessarily requiring new capital, it represents an opportunity for development actors to strategically redeploy existing funding to catalyse commercial capital towards nature-positive outcomes. 

“This has been identified as one of the key means to overcome the barriers to investing in natural capital, where direct investments do not always result in a profitable financial return and/or where the return takes more time to be realised,” Williams said.

The Global Environment Facility, for example, reported that a public investment of US$175 million for blended finance operations in 2013-2014 mobilised about US$1.1 billion from the private sector.

Still, Williams stresses, green debt will have an important role to play in the transition to a nature-positive economy. “Being cognisant of the potential pitfalls of any finance option can help to mitigate any limitations or adverse impact.”



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