The finance industry is at an interesting fork in the road. Continuing along a well-worn path of investment and financial services that support carbon intensive economies might feel like a model that still offers gains in an unstable global context to some, but most financial institutions now recognise that alternative routes are needed, where the grass and financial offerings are greener. Nevertheless, we are only near the beginning of the journey to an economy that recognises the value of nature.
Alarming levels of species loss and a pandemic caused by a virus transmitted from animals to humans are signals that habitats and biodiversity continue to be stripped away. Nature is in severe decline and yet more than 50% of the global economy relies on it in one form or another, be it fresh water, clean air or productive soils.
Value chains that cross borders and regulations, sectors and resources, and fluctuating levels of human, worker and land rights can appear too complex to distil into a nature-positive action plan. But some of the equations aren’t that hard. Agricultural expansion causes 80% of deforestation. Since banks provide finance and financial services along soft commodity supply chains, they have economic relationships with deforestation and can therefore help stop it. Yet, the banking sector needs to be more proactive in joining the dots between its activities and those that damage the environment and hamper the response to climate change.
By attaching conditions to finance, recipients could be economically rewarded for meeting anti-deforestation criteria. By creating a pipeline of conditional finance, such as sustainability linked bonds, banks create opportunities to avert forest clearance.
Banks also have an increasing number of clients willing to pay to reduce and halt deforestation, such as investors with nature protection and restoration agendas. One such example is HSBC-Pollination Climate Asset Management Fund, a partnership aiming to unlock natural capital investment opportunities at scale. The appetite for protecting and restoring forest looks set to grow further with efforts to create a global carbon offset market.
Using blended finance to create a pipeline of green securities has started gaining traction. Prominent examples in soft commodities exist, including the Agri3 Fund, which seeks to mobilise finance for more sustainable practices in agricultural value chains and avert deforestation, and the Tropical Landscapes Financing Facility, providing long-term finance that stimulates green growth and improves rural livelihoods. The challenge is how to move such innovative initiatives into the mainstream to make finance sustainable.
By attaching conditions to finance, recipients could be economically rewarded for meeting anti-deforestation criteria
A new action plan from the University of Cambridge Institute for Sustainability Leadership proposes that banks along the supply chain – local, regional and global – seek to align anti-deforestation policies to an agreed standard of best practice. Alignment would enable banks to share the due diligence burden and better identify clients connected with deforestation. This is not only an exercise in the identification of deforestation risk, but could encourage the scaling of sustainable finance and soft commodity supply, target setting and advocating for global systemic support.
It is hoped that the actions proposed, when taken by a large and diverse group of banks and stakeholders, could serve to enhance the availability and quality of data, due diligence and transparency. Such action reduces the risk of a future where the rainforest becomes savannah and viruses like Covid-19 move from animals to humans more frequently.
Without halting deforestation, we cannot meet our net zero targets nor realise a nature-positive future. Instead, we risk a future with greater uncertainty for both people and planet; a matter of both financial and existential risk.
By bringing an active mindset to their role, banks can support the transformation of soft commodity supply chains, supporting clients to transition and offering opportunities to investors and corporates who recognise the need for change. This move is vital to banks becoming drivers of a new sustainable economy, ensuring their relevance to progressive businesses and safeguarding their societal licence to operate.
Nick Villiers is the director of the Centre for Sustainable Finance at University of Cambridge Institute for Sustainability Leadership (CISL).
