Interest in the theme will continue to grow but talk needs to be converted to action, writes Genevieve Redgrave
A growing recognition that climate and biodiversity crises are interdependent has helped nature to become embedded as a core tenet of sustainable finance.
Focus on natural capital will continue to grow in 2024 – with policymakers, companies and investors raising their game ahead of COP16 in Colombia.
1. Nature reporting to be encouraged/mandated
The Taskforce on Nature-related Financial Disclosures (TNFD) released its much-anticipated framework last year.
While this has initially been introduced on a voluntary basis, throughout 2024 the market will face increasing pressure to align with its standards, or a similar form of nature-related reporting.
For example, France's pioneering Article 29 requires financial institutions to disclose their biodiversity-related risks and strategies, or a plan to do so.
While it has not yet been replicated elsewhere, many jurisdictions are now making moves to introduce some form of nature-related reporting. The EU, for example, has aligned much of its European Sustainability Reporting Standards with the TNFD's 'concepts' and has outlined plans to enhance the 'interoperability' between the two frameworks throughout 2024.
There have also been suggestions that the UK will introduce mandatory nature-related reporting and Australia has indicated plans to include nature in its reporting standards.
The International Sustainability Standards Board said nature reporting could be the next area of focus of its recently launched sustainability standards. Given that these have been endorsed or adopted by many countries, this would be a major development and an indication that nature-reporting is going mainstream on the international stage. There is already some aspects of nature in its existing sustainability standards.
There is concern, however, that nature reporting is a fiendishly complex task, given its localism and the lack of a singular metric. Environmental Finance was recently told that most investors simply 'lack maturity' on nature at this stage.
However, there is a growing recognition that time is running out to address the nature crisis. A UK treasury minister recently told an event that it is crucial that the TNFD is adopted faster than its climate counterpart.
The ECB, which has been at the forefront of central bank work on climate, recently signalled its intent to broaden its focus to include nature-related risks and, while it did not suggest these would be included in future expectations, a member of its executive board did say it should consider nature in its lending and bond purchases.
It is one of several central banks to have studied the exposure of economies to nature-related risks and if the trend for central bank action on climate is replicated for nature, it would be logical to assume subsequent studies to focus in on micro prudential risks for individual banks will follow.
2024 will see rapid progress on nature reporting from all actors in the financial sector.
2. Data to open up?
A lack of useable or comparable data relating to natural capital is commonly cited as a key barrier to progress. Data providers, however, often claim ample data already exists, but the market does not know how to access or use it.
There is a growing suite of technologies available to investors, including satellite imagery that can be used to track the impact of a portfolio's assets on nature, as well as DNA sequencing to give a detailed picture of change over time.
The TNFD announced it is working on an open data platform which was tipped as a counterpart to the Net Zero Data Public Utility, an open-source climate data platform currently under development.
However, it was recently suggested that this might not be a similar platform and could "just be a data standard that could be developed quickly".
Data provision and its openness will be a key topic this year, as well as a continued growth of emerging nature data platforms and technologies for investors.
3. Implementation of the Global Biodiversity Framework
Signed at COP15 in Montreal at the end of 2022, the Global Biodiversity Framework was seen as a 'landmark' agreement to halt and reverse biodiversity loss on a global scale by 2030.
However, just over a year on, there is widespread recognition that not enough is being done to implement the goals of the agreement, including restoring 30% of degraded ecosystems and conserving 30% of land, water and seas.
It was widely discussed on 'nature day' at COP28 in Dubai in December that, if these targets are to be met, 2024 needs to focus on implementation.
Clear policy and investment strategies need to be put in place at a national level, in order to develop international strategies at COP16 in Colombia in October.
4. Investor action to forge ahead
This will require action from the private sector, which needs to move to its next phase: away from purely setting targets or assessing risk and move into action.
This will likely include increased scrutiny of portfolio companies and more engagement – particularly with the launch of nature-related investor coalitions. This includes Nature Action 100, which will target 100 companies deemed to have a high impact on nature across 'key sectors', as well as a Principles for Responsible Investment-led initiative on corporate lobbying activities relating to nature.
Some investors, such as Fidelity International, have announced plans to step-up proxy activities and begin voting against companies if they do not meet its minimum standards of deforestation-related practices and disclosures.
With increasing pressure to be first-movers and a growing reputational risk of being associated with practices such as deforestation, it is likely nature engagement and action will be a key theme throughout 2024 and its proxy season.
Increased action is also required in investment decision-making, particularly in areas which have previously lacked private capital, and solely been within the remit of multilateral development banks or philanthropies.
This is especially true of land restoration, which has been overshadowed by nature protection investment. This is often attributed to a lack of restoration opportunities, or protection being seen as an easier entry point into nature investment.
Yet, to meet global and regional restoration goals including the EU's recent forest restoration legislation, 2024 is likely to see a major push to channel private capital into these underfunded areas.
5. Innovative mechanisms for developing economies
Nature protection and restoration will be critical for many emerging economies that rely on nature, but are often facing major nature degradation and are at the forefront of physical climate risks, such as floods or rising sea levels.
Emerging economies will increasingly look to new financing mechanisms to help attract private capital into nature restoration or protection projects. These might include debt-for-nature swaps, which have grown in interest over 2023 and were endorsed at COP28, especially as they can help lower sovereign debt – which is a growing problem for many emerging economies.
While there are challenges to scaling up these mechanisms, ongoing work by the likes of the Colombian, French and Kenyan taskforce or multilateral development bank reforms to speed up capital flows, will likely help these instruments grow.
6. Biodiversity credits – a potentially massive market
Nature credits are emerging as a way to help funnel capital to local communities and finance restoration projects, although it is unlikely the credits will be allowed to be used as 'offsets'.
Operationalisation of a fully-fledged biodiversity credit market is unlikely in 2024. However, a market for credits is being built in numerous countries including Australia, which recently passed legislation to develop a 'first-of-its kind' credit market for the protection and restoration of nature and biodiversity.
The UK has also recently introduced legislation, which means that building developments will be required to achieve a 10% biodiversity net gain – which will then be turned into a tradeable 'BNG' unit.
A number of discussions are taking place in countries from France to Colombia on how a biodiversity credit market might work in their jurisdiction, as well as biodiversity credit methodologies being developed by carbon credit certifiers.
Demand for these credits is growing. McKinsey predicts the market for them could reach $2 billion by 2030 and upwards of $69 billion in 2050. However, a significant amount of market building is needed until demand of that size could be facilitated.
In the meantime, carbon credits that provide biodiversity 'co-benefits' are seeing increased demand, and selling for a higher premium than many other types of carbon credit. However, doubts remain about the assumptions that underlie nature-based solutions and their permanence.
To learn more about this agenda, visit Environmental Finance's natural capital page and attend its conferences, including the upcoming Natural Capital Investment EMEA conference in London this march.
Channels:Natural Capital
Companies:Nature-related Financial Disclosures
