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Daniel Power

Jennifer Munnings

“Most companies do not understand how their business impacts and relies on nature,” one panellist said at the COP15 conference.

In response to this widely held sentiment, COP15 closed with a historic agreement to halt biodiversity loss, hailing the 15th Conference of the Parties to the United Nations Convention on Biological Diversity hosted in Montreal a success.

The monumental passing of the Kunming-Montreal global biodiversity framework aims to protect 30 percent of the world’s land and marine areas by 2030, known as ‘30 by 30’.

For the first time in the conference's history, the private financial sector was widely represented and called for an ambitious global biodiversity framework. However, speakers made it clear that the majority of private finance had yet to deal with the “why” and “how” questions surrounding nature with the same depth afforded to climate.

“Even when a business does recognise the connectivity, they don’t have a target to aim for. There is no nature equivalent for a 1.5°C target.”

The framework has been labelled an “unambiguous message” to the finance sector that nature needs to be on its agenda both as a financial material consideration and in preparation for incoming regulation. For example, Target 15 of the framework requires governments to ensure that large companies and financial institutions assess and disclose their risks, impacts, and dependencies on biodiversity throughout their operations, value chains, and portfolios.

Acceptance of the framework also indicates that the financial sector is embracing ‘double materiality’ and the impact that its activities have on the planet and society.

Reporting frameworks like the Task Force on Climate-Related Financial Disclosures (TCFD) have been plugging government regulatory gaps. However, the TCFD is climate-focused and key issues like biodiversity are only marginally addressed.

The Task Force on Nature-Related Financial Disclosures (TNFD), a voluntary nature-focused disclosure regime, is still under development and is expected to be finalised in March 2023.

While reporting frameworks are essential to identifying risks, reporting alone will not ensure risks such as deforestation are integrated into investment decisions. As with the TCFD, there is a concern that the TNFD will increase the regulatory burden on firms without doing much to ensure nature related risks aren’t simply labelled negligible in the short to medium term and ignored.

In more concrete action, EU lawmakers have agreed to a deforestation law that requires companies to prove that their products are not linked to deforestation by tracking and disclosing their origin. Products that are linked to deforestation will be blocked from being sold on the EU market.

Panellists from the financial sector stressed that understanding nature's material risks for businesses will increase its priority. The World Economic Forum warns that $44tn of the world's economic value generation is moderately or highly dependent on nature and therefore exposed to nature degradation risks.

Nature-positive financing is still a seedling

Dr. Vian Sharif, CEO of Nature Alpha, stressed that given the size of debt markets, this is an asset class that must be brought into the fold.

While Gillis Kleits of the French Development Agency argued that for lenders, “the data exists and companies could start tomorrow.” Sharif acknowledged that traceability remains an issue because most firms’ economic activities are far removed from their impact on nature. Sharif added that advancements in geospatial technology like Trace and Starling will allow firms access to scalable data to assess their impact on nature across their supply chain.

From a lenders perspective, Marine de Bazelaire, HSBC’s Group Advisor on Natural Capital, discussed how incorporating metrics like water into HSBC’s loan book saw over 30% of in-scope issuers' moving from investment grade to speculative (HSBC has published this analysis as a case study here). According to Bazelaire this was “helpful enough to show that nature loss matters”.

Yet on the topic of sustainability linked-debt instruments, Bazelaire bemoaned the challenges of nature-based financing KPIs, stating that “we don’t know if our KPIs are actually good.”

This is a crucial challenge for lenders, and one that 9fin’s ESG team has been privy to (for example, 9fin’s QuickTake on Graanul Invest, If you are not a client you can request a copy of this report here). If sustainability performance targets (SPTs) do not facilitate the de-risking of an investment, according to Bazelaire, there is little logic in reducing interest rates in relation to these SPTs.

Although HSBC may be at the beginning of its journey, members of the TNFD and Science Based Targets Network (the biodiversity equivalent to climate’s Science Based Target Initiative) were adamant that while these tools remain in development there is scope for financial institutions to begin to reduce their exposure or contribution to biodiversity loss through reporting and target setting.

However, questions from the audience suggested this optimism is not universally shared. Several audience members expressed their frustration that the TNFD does not fully focus on double materiality and lacks civil society engagement.

One audience member argued that the best source of data is people on the ground, such as indigenous groups and civil society organisations. However, when these groups provide data on human rights and environmental abuses to investors and banks they are often ignored.

TNFD panellists pushed back against the criticisms, arguing they had sufficiently engaged with civil society and that feedback has been crucial in the TNFD’s evolution.

Climate change has been central to ESG strategies due to an increase in public awareness and the wide availability of data and tools. But in context, climate change is just one of nine planetary boundaries. Some of these boundaries are considered higher risk than climate change and as such require at least as much urgency to address them.

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COP15 Narrowing in on Nature

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