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ESG

A vision for nature-based financial disclosures

Bank of America’s Abyd Karmali is on the Taskforce on Nature-related Financial Disclosures. Ahead of the nature-based COP15 and climate-based COP26, he tells Euromoney what is at stake.

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Thirty senior executives from financial institutions, corporates and service providers were announced as members of the Taskforce on Nature-related Financial Disclosures (TNFD) on September 30. Subsequently increased to 33 members, the group met for the first time on Wednesday (October 6).

Their mandate is to develop and deliver a risk-management and financial-disclosure framework to support a shift in global financial flows away from nature-negative outcomes and towards nature-positive outcomes. They are due to release a finalized framework in late 2023, after a draft beta version in early 2022.

One of the taskforce members is Abyd Karmali, managing director of environmental, social and governance (ESG) client advisory at Bank of America. He spoke to Euromoney about the road ahead.

How important is it to standardize nature-related ESG reporting?

On ESG in general, it is absolutely critical for there to be a more uniform approach. Why is this important? It’s basically to make sure that we remove an asymmetry of information in the marketplace. Some investors have reasonably good access to ESG data and others don’t, and it’s about levelling it up so ESG-related risks and opportunities are there for all to see, and to allocate capital more efficiently.

ESG reporting in general is in a much better place than a few years ago, in part because of investor interest in improving the information in the public domain. Stronger disclosure on ESG has led to better allocation of capital from investors, more demand for ESG-related products – and that’s helped to promote better engagement with companies.

But there is still a lot of work to be done before we have fully standardized approaches, including on the biodiversity front. There is low reporting of biodiversity-related ESG data. There are countries on the high end of the curve like France and Japan, but the two biggest capital markets, the US and China, have limited disclosure on biodiversity risks at present.

As we head to COP26, how important is it that we don’t just look at climate change as the be-all and end-all, but bring in nature-based considerations too?

There are some interesting parallels between what’s going on in the climate reporting space and biodiversity. Climate is probably at least five years ahead, and in part that’s because there’s clarity about what’s the end goal. The ultimate meta-framework is the Paris Agreement: it has set the target, and the language of net zero comes from that.

Then from the Intergovernmental Panel on Climate Change (IPCC), which is deriving the scientific approach, we have the magic number of the level of warming that is going to trigger more frequent incidences of extreme weather events and further climate disruption: 1.5 degrees and 2 degrees are numbers that are in the Paris Agreement.

Biodiversity only has the beginning of those things. We have the relatively newly formed IPBES [Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services], which is helping to generate the science, and it will be interesting to see what comes out of the virtual meeting in a few weeks [COP-15, the UN biodiversity conference that will be held virtually from October 11 to 15 and then in Kunming in April]. Will it codify this idea of no net biodiversity loss by 2030, and a net gain in biodiversity by 2050? Those are the draft targets in place.

Turning to the task force and TNFD, you have a huge amount to do. Where do you start? What are your immediate priorities?

The first thing to do is to take a deep breath. It is a programme where we have two years to build on the strong foundations from the interim working group, which helps define the scope, and then we’ve got the TCFD [Taskforce on Climate-related Financial Disclosures] lessons to learn from. The framework that has been articulated is very clear and very focused. This is basically about delivering a nature-related risk disclosure framework by 2023, which will enable companies to allocate more capital to nature-positive investments. That, in simple terms, is the one major deliverable.

One of the things that is going to be different to TCFD is a willingness to pilot draft approaches to the framework. One working group will look at how to do some early pilots to road test approaches. That will feed back useful insights and improve the quality of the final product.

There’s going to be an attempt to use the same kind of taxonomy TCFD identified, which is to focus on physical risks as well as transition risks.

You mentioned learning from TCFD. What lessons from that have been learned about what to do or what not to do?

One of the positives was there was strong endorsement coming from financial regulators, helped by the fact that it was sponsored through the Financial Stability Board and championed by Mark Carney. TNFD is early days, but it does have the sponsorship of the G7, where it launched in June this year, and it’s on its way to get broader endorsement from government bodies.

The second is that engaging with a broad set of stakeholders from across the financial community was the case for TCFD, and TNFD has done a good job in replicating that. Our members have good representation across the banking sector, asset management, insurance and, of course, companies in the real economy.

I’m speaking to you from Asia. I’m not sure if you saw the Temasek and World Economic Forum report last week talking about the scale of the potential impact of biodiversity loss in Asia, and the investment opportunity around doing things differently. But obviously here we have the lion’s share of the world’s population, and the biodiversity, and therefore the proportion of world biodiversity that is under threat. What would you say about approaching the challenge in Asia?

One way to look at it is from the perspective of: where can you get win-win? By focusing on efforts that contribute to meeting the goals of the Paris Agreement on climate and simultaneously reverse nature loss and land degradation. In both cases, some of the biggest opportunities are in Asia Pacific.

Bank of America is part of the Energy Transitions Commission, which recently has come out with a report highlighting how we might be able to achieve alignment with 1.5 degrees. That identifies a significant emission-reduction gap to 2030, and says roughly six gigatons of that gap can be delivered through investment in nature-based solutions. The majority of that can be achieved in Asia. The World Economic Forum has estimated a $10 trillion opportunity in terms of annual business value by 2030 from a nature-positive transition, and Asia will see the lion’s share of that.

There are familiar challenges here that we’ve already seen on the climate side: barriers to entry, catalyzing the involvement of private-sector capital, scaling finance to make it interesting to institutions. If we look more specifically to biodiversity, what are the barriers to getting money where it needs to go?

I can draw on Bank of America’s early experiences. It has been opportunistic to date, but one of the reasons it has been opportunistic-only is because it has been difficult to identify clear areas where private investment in nature-enhancing areas is going to deliver the right kinds of risk-adjusted returns. That is one of the challenges that TNFD is going to tackle, to bring some clarity to that.

As an example, we were very early in trying to make REDD+ a commercially viable proposition [a carbon credit mechanism for avoiding deforestation]. It has not really gained traction at all. It has never been part of a compliance carbon market, and there are still debates today about the right approach.

In another example, we attempted to launch a forestry bond around 2009, working with a Latin American country. When we took the concept to investors there was a great deal of scepticism from the investment community about where the returns would come from; how the coupon would be delivered on an annual basis.

We have some experience in the blended finance area. Bank of America launched the Blended Finance Catalyst Pool in late 2018, and it’s our attempt to steer some capital into areas that can deliver SDG [sustainable development goals]-related impacts. We have had some interesting experiences in climate-smart agriculture, for example, which address nature-related opportunities. But it’s early days. There’s still not a broad swathe of investors that have been convinced these are commercial-scale opportunities.

So, first, greater clarity needs to be gathered on where the opportunities are, and second, strategic use of public capital from the multilateral development bank (MDB) and development finance institution (DFI) community, which we are beginning to see. Third, it will be helpful to present the quantification of biodiversity-related risks as we have seen with climate. Once institutional investors can engage with the C-suite in a more quantitative way on climate-related risks, that will help drive more positive investment sentiment.

Meeting number one of the task force was yesterday. How was it? How was the mood?

It was good. It was a very informative session. The approach is to really engage with the members of the taskforce to provide the variety of different perspectives that we can bring to the key issues in the work programme.

No one is under any illusions that this is going to be easy. But the governance of TNFD is very clear for everyone to see. We will benefit from a consultative forum of 100 companies who are already providing input, and importantly we will have a technical research hub, which will provide the cutting-edge expertise to support those of us who are not biodiversity experts.

COP26 is dominating everyone’s thinking at the moment. Will biodiversity and nature-based outcomes be a part of what people are discussing at COP26 or is it still considered something of a separate, parallel issue to climate?

It’s helpful in the chronology that we have COP15 happening a couple of weeks before. One of the chairs of TNFD is Elizabeth Mrema [UN assistant secretary general, who is also executive secretary of the UN Convention on Biological Diversity], so that’s helpful.

At COP26, there will be a focus on biodiversity-related issues in the area of the role of nature-based solutions, and that’s where we will see the synergy. Article 6 in the Paris Agreement includes the opportunity to deliver market-based solutions that can address climate and nature-related opportunities simultaneously. That’s where I see the most immediate overlap.

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