Searching for bankable nature-based solutions
WHEN it comes to preventing climate change, our strongest ally is nature itself, but the drive to unleash nature’s full potential to absorb carbon, prevent floods and heal from years of abuse is struggling.
The biggest barrier to creating a sustainable future is not climate scepticism, or the scale of the problem or even cost: It’s an accounting anomaly.
The value of our natural environment does not appear as an asset on our national accounts or corporate balance sheets, nor does pollution or diminishing biodiversity appear as costs. Beyond the obvious problem that this arrangement does nothing to deter new emissions or preserve vital environmental systems by registering the costs of pollution or damage to biodiversity, it also means there is no immediate bottom-line return on investment in sustainable business practices.
This poses a significant challenge when it comes to encouraging businesses to support nature-based solutions to address issues such as climate change, human health, food and water security, and reduce the risk of natural disasters by protecting, preserving, or restoring natural ecosystems.
The connection between protecting the environment and saving costs is well established. A report published by the Nature Conservancy and others estimated that mangroves alone protect property from damage valued at US$82 billion each year, but in the short term, there is greater profit in cutting down the mangroves and using the land for fish farming or other agricultural production.
Although the transition to a net-zero future will cost tens and possibly hundreds of trillions of dollars, the money seems to be available: The 450 firms which joined the Glasgow Financial Alliance for Net Zero in April 2021 between them manage US$130 trillion in assets, and many individual savers are starting to insist that their pensions schemes or college funds are invested in sustainable assets. The problem is less a shortage of money than a shortage of projects that are both sustainable and bankable.
The growing – if largely still voluntary – market for carbon credits, driven by governments and companies like HSBC which have made fixed pledges to transition to carbon-neutral operations, is an encouraging development. These range from Gabon’s recent offering of 90 million tonnes of sovereign carbon credits; to Norway’s new agreement to pay Indonesia to preserve forests under the United Nation’s REDD+ (reducing emissions from deforestation and forest degradation) scheme; to more ambitious debt-for-nature swaps where creditors forgive debt in return for undertakings to preserve or expand natural assets.
But all these schemes have struggled with definitional loopholes and enforcement issues. Climate-related agreements and financial instruments are still evolving, and there is no generally agreed consensus on terms or terminology. Various groupings in Europe, Asia and the Americas are working to come up with what is known as a “taxonomy” – a framework that defines what is a green asset and what is not.
This lack of consensus is limiting the expansion of the market for green bonds, many of which have a nature-based component, if only as a carbon offset. To be fair, the issues are complex. If a company is raising money to build a new factory and is promising to compensate for its carbon output by planting trees, is it going to plant millions of the same species and are those species native or not, either of which would be detrimental to biodiversity? What are they going to replace? Where is the water going to come from?
The market is hungry for green financial products, many of which will have nature-based components, but until asset managers have the confidence that the funding will be used sustainably, they will be reluctant to commit at anything close to the scale we need to contain and reverse climate change.
Clear taxonomies also hold the potential to unleash the power of central banks. Central banks, with their remit to preserve and enhance the long-term health of the economy, have a clear interest in limiting global warming.
Ma Jun, a former member of the People’s Bank of China monetary committee and current co-chair of the G20 Sustainable Finance Working Group, has suggested that central banks could increase green lending by offering commercial banks cheaper financing for their green loan book, and others have suggested offsetting green loans against reserve requirements.
The profit from investing in strengthening natural systems is real, but rarely registers on our national or corporate balance sheets. But if we are to limit and eventually reverse our impact on the environment, we must find ways to mobilise the investment we need to preserve and enhance nature’s powers.
Kelvin Tan is head of sustainable finance and investments, Asean, at HSBC and board member of Pentagreen Capital.
