Overlooking nature-related risks and opportunities

The recent ‘Nature in Green Finance’ report released by CDP paints a concerning picture of the financial world’s approach to nature and its intertwined risks and opportunities.

A comprehensive analysis of disclosures from over 550 of the world’s leading banks, insurers, and asset owners was conducted in 2022. These institutions hold a combined market capitalisation that surpasses $8 trillion. However, the findings shed light on a significant oversight when it comes to nature-related considerations in decision-making processes.

Economic exposure to nature loss

Entities such as the World Economic Forum and WWF highlight that nature loss poses a severe threat, with over half of the global GDP, equivalent to $44 trillion, being exposed to such risks. It’s estimated that the global economy incurs a staggering loss of over $5 trillion annually due to declining biodiversity. This data underpins the vital need for the financial sector to pivot and integrate a more nature-centric approach to mitigate and manage these looming threats.

It’s encouraging to note that almost 95% of financial institutions now allow strategies and financial planning to be moulded by climate change concerns. However, a mere fraction, fewer than one-third, factor in the significant concerns of forest and water security. We’ve observed rapid advancements in the methodology for gauging carbon emissions with the introduction of Scope 1, 2, and 3 data. In stark contrast, an equivalent metric for biodiversity remains elusive. Natural capital accounting, while promising, is still in its infancy, and the inconsistency in biodiversity data continues to act as a formidable barrier.

Taken from CDP Financial Services Disclosure Report 2022

A look at governance and expertise

Progress has been noted in certain areas. For instance, 23% of banks have now woven forest-related covenants into their frameworks, and 21% have done the same concerning water. Yet, the broader landscape remains worrying. A significant majority of financial institutions are still operating without the necessary governance structures. Moreover, there’s a pronounced expertise deficit at board level, raising concerns about how nature-related risks are being addressed.

The power of engagement and shareholder action

The CDP report sheds light on a crucial avenue for change: engagement. Investors are not powerless spectators; they wield significant influence. By leveraging their voting rights during AGMs, shareholders can send a clear message, nudging companies to incorporate nature-related deliberations into their corporate roadmaps. This proactive stance can play a pivotal role in urging companies to map out their biodiversity risks, fostering a more nature-inclusive outlook.

Insights from the Taskforce for Nature Markets

CDP’s revelations gain even more weight in the wake of another significant report by the Taskforce for Nature Markets. It offers a roadmap to embed nature and equity objectives into global financial operations. Some notable suggestions include aligning global economic systems with a nature-oriented economy, synchronising financial efforts with government policies, and laying down a universal nature measurement agreement to curb greenwashing.

For asset managers and financial institutions at large, the message is clear: overlooking nature-related risks is not just an environmental oversight but a profound financial misjudgment. As stewards of vast economic resources, it is paramount to acknowledge and act upon these insights, shaping a future that values and protects our planet’s invaluable natural assets.

 

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