Conservation finance: Can banks embrace natural capital?
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Conservation finance: Can banks embrace natural capital?

Climate is no longer the only risk in town: thanks to a loud call from the scientific community, nature has finally been given a seat at the table with finance ministers, regulators and central bank governors.


Degradation of natural capital through human activity has brought us to a tipping point. The risks are multiple and varied, from precipitous declines in economic growth to the uncertain future of our species. All sectors of society are being called on to go ‘beyond carbon’ and reduce their negative impact on the natural environment, finding solutions that regenerate natural resources. How can financial institutions best be of service? By examining their balance-sheet exposure to nature-related risks and by channelling finance to businesses and projects that are restoring natural resources. They have the full support of the scientific community.



Tucked in a box that seemed almost an afterthought in the April inaugural report on climate change and financial risk from 42 central banks and observers, including the World Bank, OECD and the IFC, was a clear signal that measuring climate-related risk is only a starting point for the financial industry.

The report from the new Network for Greening the Financial System (NGFS) said there were “compelling reasons” to look beyond climate risk to broader environmental risks. It raised concerns that environmental degradation could “cascade to risks for financial institutions” because “reduced availability of fresh water or a lack of biodiversity could limit the operations of businesses in a specific region” – businesses that banks are exposed to.

It was certainly not an afterthought, however.

Since April, heads of sustainable finance around the world say they have been in closed-door meetings with their central banks, regulators, politicians and peers to discuss how to measure environmental risk exposure, how to begin to price natural capital (minerals, water, oxygen, biodiversity) and the ecosystem services they provide, and to weigh in on a potential follow-up or expansion to the current Task Force on Climate-related Financial Disclosure (TCFD) – a Taskforce on Nature-related Financial Disclosure (TNFD).

The NGFS isn’t the only group pushing for greater global debate around finance and nature.

In May this year, the World Wide Fund for Nature (WWF) and Axa Investment Managers called for a task force on nature impact disclosures, highlighting not the risk to financial institutions of nature’s degradation but rather the risk to nature if investors and lenders continue to ignore its worth in their decision-making.

They are asking businesses to identify and analyze activities that have a material impact on biodiversity, as well as activities with ‘transition’ potential to support biodiversity protection and restoration.

If we do not integrate environmental costs and risks into capital markets, none of the sustainable efforts will make any difference – we will all go under - Peter Bakker, World Business Council for Sustainable Development

That WWF and Axa report came on the heels of yet another – the Global Deal for Nature – driven by One Earth, an initiative of the Leonardo DiCaprio Foundation, and a group of scientists that laid out the costs and actions required to protect up to 50% of the Earth’s natural resources in a bid to save biodiversity and prevent climate change.

That report estimated that costs for nature conservation measures could be more than $100 billion a year.

As environmental activists Greta Thunberg and George Monbiot declared in their video to coincide with the UN General Assembly meetings and New York Climate Week in September, we need to “protect, restore” and, in a sign of the times, “fund” nature.

These declarations, while seemingly having different motives, have at their core urgent calls from the scientific community on the plight of nature and the collective ignorance of what a degraded natural world means for humans.

Their message has been that climate change is a subset of a much broader set of environmental crises now unfolding.

Reports out this year have underscored this point.

The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) Assessment, compiled by 145 expert authors from 50 countries, reported that one million animal and plant species are now threatened with extinction, many within decades. It listed plastic pollution as having increased 10-fold since 1980; 300 million to 400 million tonnes of heavy metals, solvents, toxic sludge and other industrial waste are being dumped annually into the world’s waters; and fertilizers entering coastal ecosystems produce more than 400 ocean ‘dead zones’ covering more than 245,000 square kilometres.

Among other revelations, the IPBES stated that up to $577 billion in annual global crops are at risk from pollinator loss and nearly 75% of freshwater resources are being channelled to crop or livestock production.

It highlighted an increase in communicable diseases and malnutrition, and a heightened risk of flood, drought and extreme weather. On page after page it repeated that we cannot exist without nature’s contribution.

“The media seemed to focus on the issue of species loss, but the assessment offers very detailed and startling warnings of the flood hazard, food-supply shortages and water-supply shortages that will severely impact the human race due to nature’s degradation,” says Mary Ruckelshaus, director of the Natural Capital Project. “People have to understand that scientists are conservative in their estimates. This is a clarion call.”

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Peter Bakker, World Business Council
for Sustainable Development

The Natural Capital Project is run at Stanford University in collaboration with the Chinese Academy of Sciences, the University of Minnesota, the Stockholm Resilience Centre, The Nature Conservancy and the WWF. It provided the modelling for the IPBES report that shows how global environmental changes will transform ecosystem services and the lives of the people who rely on them.

IPBES chair, Sir Robert Watson, tried to connect the dots for those that didn’t understand when he pointed out that: “We are eroding the very foundations of our economies, livelihoods, food security, health and quality of life worldwide.”

The Intergovernmental Panel on Climate Change land use report that came in the summer only compounded the dire warnings: that our soil is so degraded from chemicals that it cannot support food growth or sequester carbon. That our use of land is also exacerbating climate change as agriculture, forestry and other types of use account for 23% of human greenhouse gas emissions.

This year has to be seen as wake-up call, says Peter Bakker, chief executive of the World Business Council for Sustainable Development. “The IPBES report showed us we’re not just in a climate crisis, we’re also in the middle of a biodiversity and nature crisis. A TNFD seems inevitable, and at some point TCFD and TNFD will have to become mandatory and not voluntary, because right now we’re coasting along and in five years’ time we’re going to be in a blind panic.”

Speaking of its 200 members that include firms such as PepsiCo, Unilever, ExxonMobil, Shell, Microsoft, BASF, Honda, Danone, Bayer and several banks, Bakker says businesses are responding to the crises by reviewing exposure in their own supply chains to natural capital and the ecosystem services it provides – food, water products, wood, fibre and medicine – both from a risk perspective and to better understand how they can reduce their impact on nature.

He stresses, however, that the transition of all sectors to ones that regenerate or conserve natural capital will only be possible if the financial sector supports that transition.

“If we do not integrate environmental costs and risks into capital markets, none of the sustainable efforts will make any difference – we will all go under.”

The move is away from focusing solely on climate change to see the broader environmental threats – many of which may come more acutely and more quickly. The financial community is being called upon on many fronts: to work with scientists, central banks and governments to assess and mitigate the systemic financial risk; to work with businesses to help them transition supply chains; and to work with conservation NGOs to develop the tools to move capital towards regenerating and protecting nature.

Finance is key, insists Ruckelshaus.

“When we are invited to work with governments on natural capital restoration ambitions their first introductions are to the minister of the environment, or resources such as fisheries or forests,” she says. “We often agree it is also critical to meet the finance ministers and central bank governors, because if governments don’t realize the economic risks of not preserving natural capital, then we will not be able to get done what we need to do.”

Assigned value

If you ask ecologists who to speak to about finance and the environment, they will tell you Ed Barbier.

Not that he always agrees with them – he’s an economist and not an ecologist, but he is one of few who can speak both languages. Indeed, Barbier is one of the best-known environmental economists in the world, having written for decades about natural capital and the need to price it accurately.

Over his 30-year career, Barbier has been asked many times how to put a price on nature; his response is a hard-truth: “When people talk about natural capital not being assigned a value, it’s not true. We have put a price on nature. And that price is zero.


Ed Barbier

“We are destroying mangroves as if they were worthless,” he continues. “But is that true? Is their ability to defend coastal areas from damage or support fisheries valueless? No. It makes no sense. We include the price of labour within the production of cars, yet we do not include how the natural environment supports and protects human activity.”

Barbier has been suggesting incorporating environmental values within decision-making for over 30 years. In 1989 at the International Institute for Environment and Development in London he co-authored ‘Blueprint for a green economy’ – it highlighted how environmental values must be internalized within costs and natural capital accounted for.

Then in 2009 he was commissioned by the UN Environment Programme (UNEP) to write ‘A global green new deal’. It was designed to offer a new way of looking at economics after the financial crisis – one that included greater consideration of the use of natural resources and the impacts of pollution and greenhouse gas emissions.

“It was all standard stuff – policy changes, pollution taxes, putting a correct price on nature and using that within accounting,” says Barbier. “This isn’t some radical solution that requires the end of capitalism. It’s about having sound approaches to break the deadlock of overusing the natural environment.

“Yet here we still are.”

But economics as we know it could be about to change. Several governments have begun work on understanding the cost of their natural capital in a way that moves beyond GDP as a means for measuring economies.

China, for example, is developing and testing a new measure of ecological performance – a Gross Ecosystem Product (GEP) that it will report alongside GDP. It is working with the Natural Capital Project as it seeks to re-zone the entire country to account for ecosystem service importance and ecological sensitivity.

When people talk about natural capital not being assigned a value, it’s not true. We have put a price on nature. And that price is zero - Ed Barbier

Ruckelshaus says the Natural Capital Project is working with an increasing number of stakeholder groups and governments to help them better understand the value of their ecosystem services. Countries as far apart as New Zealand, Scotland and Chile are following the likes of Bhutan and moving beyond GDP to include environmental metrics, recognizing not only the value of natural capital in terms of resources but also how it relates to the wellbeing of their citizens.

The UN’s Biodiversity Finance Initiative (Biofin) has a mandate specific to biodiversity. So far it has been working with 35 countries to help them understand their spending gap on biodiversity and how to bring in data and tools to help them.

Onno van den Heuvel, its global manager, says: “What came out of the Convention on Biological Diversity in Japan in 2010 was that one of the fundamental reasons biodiversity goals were not being advanced by nations was because of the inability to direct finance to those goals.”

The notion that nature has a role in economic growth began to gain momentum in the finance industry between 2005 and 2010.

In 2006, Pavan Sukhdev, a former banker (including as chief operating officer for Deutsche Bank’s global emerging markets division), led The Economics of Ecosystems and Biodiversity (TEEB) – a study commissioned by the G8+5 and hosted by UNEP.

Working with ecologists, biodiversity and soil scientists, economists, sociologists, systems modellers and policy analysts, TEEB sized the global problem of biodiversity loss and ecosystem degradation in economic and human welfare terms, providing financial estimates on what could be lost through environmental degradation.

karin Kemper_300

Karin Kemper, World Bank

It showed that nature and its services have value, but not price. The annual economic value of insect pollinating activity was estimated at that time to be $153 billion (9.5% of global agricultural output). At the ecosystem level, the benefits associated with coral reefs in terms of living conditions were estimated to be between $30 billion and $172 billion a year. The global over-exploitation of fishing resources, for example, led to a $50 billion shortfall each year.

“We cannot continue to leave nature outside of the economic system,” says Sukhdev, now president of WWF International, based in Switzerland. “How we measure, value and respond to externalities should be the number-one item on all government agendas. And until it becomes part of the reporting of companies, including banks, there will remain no visibility, and private profits will continue to create public losses.”

The TEEB marked the first steps in understanding the economic risk of exploiting natural capital – steps that are slowly becoming strides.

In 2010, the UN Principles for Responsible Investment (PRI) and the UNEP Finance Initiative commissioned Trucost to calculate the cost of global environmental damage.

Annual environmental costs from human activity were calculated at $6.6 trillion in 2008, equivalent to 11% of world GDP, with the top 3,000 public companies responsible for a third of this. In 2015, the Economics of Land Degradation Initiative estimated land degradation alone could be costing the world as much as $10.6 trillion every year.

The numbers on the page are brought to life in everyday examples.

Trucost’s chief executive, Richard Mattison, has them at his fingertips. “After 30 to 40 years of mass clear-cutting of trees to make way for farms to support its growth, China suffered catastrophic floods in 1998 and a subsequent drought – the forests that supported soil that could absorb water had gone. Around 4,000 people died, millions were displaced and the damages amounted to more than $30 billion – far more than the timber sales had produced for the economy.”

It’s incredibly important for these countries to maintain and productively use natural capital, and we think it is high time to have it considered as its own asset class – alongside human, produced and financial capital - Karin Kemper, World Bank

Alongside the realization that humanity’s negative impact on nature is being felt in the near term, there is the knowledge that the impact is being felt hardest by those already on the margins.

Karin Kemper, global director for environment, natural resources and blue economy at the World Bank, says: “In low-income countries, natural capital makes up nearly half of the wealth. It’s incredibly important for these countries to maintain and productively use natural capital, and we think it is high time to have it considered as its own asset class – alongside human, produced and financial capital.”

Policy changes

Policy changes are inevitable. In early September, for example, India’s prime minister, Narendra Modi, announced the decision to implement zero budget natural farming (chemical pesticide and fertilizer-free agriculture) across India at the UNCCD Conference of Parties.

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Pavan Sukhdev, WWF International 

In the same month, Germany said it will ban the use of the weedkiller glyphosate in 2023.

“We’re using a corporate model and accounting standards from the 1850s, and because of that, risk is building in the system,” says Sukhdev. “There’s reputational and litigation risk, risk of investors pulling out, and a risk of stranded assets. If you’re a bank making profits by lending to coal-fired power plants or pesticide firms, then the game is going to be up for you soon, because you cannot fool all of the people all of the time.”

Sonja Gibbs runs the sustainable finance working group at the Institute for International Finance. She agrees that policy changes are on the horizon: “So far, the policy push to curb climate and broader ESG [environmental, social and governance] risks – including environmental degradation in all its forms – has been slow to materialize. But it is coming, it’s going to be substantial and we in the financial sector need to prepare for a new policy and regulatory landscape.”

But the challenge is this: financial institutions cannot guess which policies are coming or the nuances they will contain.

If you’re a bank making profits by lending to coal-fired power plants or pesticide firms then the game is going to be up for you soon, because you cannot fool all of the people all of the time - Pavan Sukhdev, WWF International

Gibbs points to the work of the Inevitable Policy Response (a collaborative project of the UN PRI, Vivid Economics and Energy Transition Advisors) that could be helpful to banks as well as asset owners. It seeks to prepare financial markets for climate-related policy risks and opportunities that are likely to emerge in the short and medium term – such as lower sales of beef and an increase in nature-based solutions.

But even once it understands the coming policy changes, the financial industry still needs to measure its balance-sheet exposure to natural capital effectively. Help is coming.

Trillion-dollar free lunch

Along with Barbier and Sukhdev, Andrew Mitchell is a long-time proponent of putting a price on nature. He started his career up in the canopies of trees and saw first-hand how conservation efforts stood no chance against “the tsunami of capital markets that send money flowing, blind to its impact on nature”.

He set up research group Global Canopy 18 years ago to better understand the flows of finance that were indirectly or directly causing deforestation and biodiversity loss. Then in 2012, he established the Natural Capital Finance Alliance with the UNEP Finance Initiative to bring together banks and asset managers to help them screen their portfolios and see for themselves how their portfolios were exposed to natural capital risk.

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Andrew Mitchell, Global Canopy

The work was designed to support the Natural Capital Declaration announced at the Rio Earth Summit in 2012 – a commitment by leaders in finance to say they would start to include natural capital commitments in their investments and lending.

The NCD was an achievement, though only 40 chief executives signed up – mostly sector-leading banks and some insurers – though none of the largest banks.

“While it got a lot of attention, there wasn’t much of an appetite because everyone was busy obsessing about carbon,” says Mitchell.

Nonetheless it led to the creation of Encore, which launched in 2018, the first tool to help the financial sector understand dependencies on nature so it can better manage its risks.

“[Encore] boils down the world’s natural assets into eight categories with 21 ecosystem services that flow into 157 business sectors,” says Mitchell. “You can begin to screen your portfolio for those sectors or by environmental risk and see your exposure.”

BNP Paribas, Yes Bank and FirstRand Bank have been users. PricewaterhouseCoopers has tested the tool in Peru, Colombia and South Africa to see if its data is accurate. It also developed a tool with Bloomberg to allow investors in copper and gold mines to measure water risk.

Mitchell points out that banks are heavily exposed to water through agricultural finance.

More to the point: “We’ve had a trillion-dollar free lunch on nature,” he says. “It’s all coming home to haunt us now.”

Mitchell also points to the work of Trucost (now part of S&P Global Market Intelligence) in highlighting the risk on bank balance sheets.

Mattison at Trucost says there is a reason the firm isn’t called Climatecost: “Climate, biodiversity loss, water quality, air pollution, soil health – they are all interrelated. Increased air pollution, for example, means reduced crop yields, health issues and water contamination in addition to climate change.”

We’ve had a trillion-dollar free lunch on nature. It’s all coming home to haunt us now - Andrew Mitchell, Global Canopy

Trucost’s research shows that if companies must internalize the costs of natural capital, it will be painful. Its report on Brazil showed that if the animal slaughtering, rendering and processing sector had to internalize just 2% of the natural capital costs it generates, it would no longer be profitable.

In petrochemical manufacturing, the profits of the sector would disappear if 13% of its natural capital costs were internalized. Companies in highly natural capital-intensive sectors only have to internalize a small fraction of the cost of the environmental externalities they are generating for their financial performance to be greatly impacted.

A similar report by Trucost and Yes Bank in India shows the total annual natural capital cost of companies financed by India’s banks to be Rs90,496 billion ($1.3 trillion), equivalent to 2.9 times the credit provided to these companies. If companies had to pay these costs, it would impact their profitability.

Clearly, tools are needed to allow banks to screen their own lending and investment portfolios for entire risk. And, thanks to the work of CDC Biodiversité and a small Dutch Bank, those tools are being refined.

ASN Bank is a subsidiary of de Volksbank, the Netherlands’ fourth largest bank; it recently worked with CDC Biodiversité, Actiam and Finance in Motion to estimate the impact on biodiversity of its investments. The methodology is called ‘biodiversity footprint for financial institutions’ and its measurements are in hectares.

“In 2017, for example, we know we were responsible for a loss of 64.849 hectares of biodiversity,” says Roel Nozeman, senior adviser on biodiversity at ASN Bank – probably the only person with such a title in the banking industry.

He offers an illustration of how ASN Bank got to that figure using an investment in a Spanish shoe company as an example.

Roel Nozeman_300

Roel Nozeman, ASN Bank

“First we find out how many shares of this shoe company we own – 1% of the shares means 1% of the company’s biodiversity impact is on us. Then we determine which economic activities we are actually investing in. Does this shoe company produce only shoes? Then we use the database Exiobase to find the environmental footprint of a shoe company in Spain. It provides us with an exact list of emissions, resources used and land used there. Now, we have to figure out the effect on biodiversity.”

To do this ASN uses the ReCipe methodology developed by the Dutch National Institute of Public Health and Environment.

“The result is a parameter that expresses the fraction of species lost in a certain area during a certain time: potentially disappeared fraction of species (PDF). And this unit (PDF.m² per year) is then translated into hectares.”

Nozeman says the bank can now work to lower its biodiversity footprint. It intends to have a net positive impact on biodiversity by 2030.

Nozeman says ASN Bank began asking itself where it wanted to be regarding biodiversity by 2030 back in 2014 because it understood the value.

“Biodiversity is not only the source of life, it is also a source of prosperity: it provides services that are of economic, aesthetic, religious and cultural value to people,” he says. “What is more, to many people, biodiversity has an intrinsic value that, in itself, is sufficient to legitimize its protection.

“We are committed to protecting it – with its fragile balance between different animals, plants and micro-organisms. The extinction of just one species can lead to a chain reaction, causing their home ecosystem to no longer work properly and preventing it from providing any more ecosystem services.”

Nozeman says he is “genuinely appalled by the lack of urgency displayed in the banking industry” and says that both the financial sector and governments should take responsibility.

“Facing the life-threatening issue of biodiversity loss is not an issue of only ministries of agriculture and environment, it should also be a top priority for the ministries of economy,” he adds.

He says ASN Bank would welcome incorporating biodiversity into the TCFD or creating a TNFD.

ASN is not the only bank trying to understand the natural capital risk in its investments. Mirova, the sustainable investment affiliate of Natixis Investment Managers, is also working with CDC Biodiversité to find natural capital values for six to eight companies in its portfolio. The results will be released in October.

“If the model works, then the difficulty begins,” jokes chief executive Philippe Zaouati, “because then we’ll need to do it on 2,000 companies.”

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Philippe Zaouati, Mirova

He says Mirova is talking with data providers such as Trucost to see if it is possible to scale up natural capital valuation models.

“We think the momentum is here, but the technology at the right cost may not be yet.”

Nozeman, who says that ASN Bank will begin to look at its loan portfolio next, also puts forward an idea that has drawn attention.

“Policymakers should reward frontrunners and require higher capital requirements of financial institutions that do not address biodiversity loss, lack transparency in this field and that are therefore more likely at risk,” he says.

The corollary of this is to lower capital requirements of bank loans to companies that score better for biodiversity or natural capital preservation – an extension of the Green Supporting Factor that was put to the European Commission by the High Level Expert Group on Sustainable Finance (HLEG).

The People’s Bank of China, for example, offers capital relief to banks that are lending to green activities, passing on reduced rates of up to 60% to qualifying companies. But Zaouati, who was a member of HLEG, says it received push back from central banks because neither the risk nor the meaning of “green” was understood at that time.

Interestingly, it led Natixis to implement its own version of the Green Supporting Factor – an initiative it announced during UN Climate Week called the Green Weighting Factor.

The bank maps all of its loans from dark green to dark brown and applies internal capital requirements that favour green loans. How that works can be changed as green markets develop. Such a model could be extended to incorporate broader environmental risks than carbon emissions alone.


Through the work of CDC Biodiversité and tools such as Encore and those from the Natural Capital Project it is possible to see a future where banks are indeed including reports on environmental risk more broadly. It is also clear that the journey towards better assessing risk in the financial sector would be a lot easier if companies were offering up those details. However, corporations are almost as ill-prepared as the banks.

Andrew Deutz, director of global policy, institutions and conservation finance at The Nature Conservancy, says: “Companies have not figured out how species and ecosystem loss and environmental degradation impacts their bottom line. Just a handful of companies we speak to get it.

Andrew Deutz_300 

Andrew Deutz, The Nature Conservancy

“Beverage companies that rely on watersheds have a little more grasp of what is at stake, but we also have a challenge in that we don’t have simple and universal metrics that companies can be held accountable to for ecosystems, the way companies can simply count carbon emissions for climate. I spoke to a head of one firm leading the charge in sustainability who still thought that, in the absence of those metrics, accounting for degradation simply meant not sourcing from protected areas. We haven’t managed to get companies to fully understand what is coming yet.”

Martin Lok is deputy director of the Natural Capital Coalition – an international collaboration of more than 300 organizations that work collectively to identify, measure and value their direct and indirect impacts and dependencies on natural capital.

NCC has developed a protocol to help companies improve their decisions by better understanding natural capital risk and opportunities through implementing tools and methods such as Encore. Lok says businesses need confidence to publish their impacts and dependencies on nature.

“It is important that they understand the benefits of natural capital thinking and that they are confident about their approach,” he says.

The coalition is working with businesses to at least begin to improve the tools to help businesses embed nature in their decision-making.

Deutz says Encore is a start as it allows companies, including financial institutions, to see the risks of environmental degradation. But more detailed metrics and natural capital accounting is needed for them to realize policy changes are coming and that someone is going to be expected to pay the true price of natural capital.

That someone is unlikely to be the consumer in the near term.

Bakker at the World Business Council says: “Ideally, we would price externalities into consumer prices, so that products that are better for the environment are cheaper. However, pricing all externalities of food into the prices would more than double the prices of food; and we need to find new ways to give these price signals without causing social unrest.”

Tentative steps are being made, however, to price at least the cost of carbon into goods. For example, ice cream company Ben & Jerry’s ran a pilot in London last year where customers could join them in contributing towards carbon credits from a forest conservation project in Peru and take action at the point of sale using blockchain technology.

Lisa Walker, chief executive at Ecosphere+, which works with the project to source carbon credits, says customers were willing to pay the extra because of the transparency and explanation of where the costs were going.

Shell has also piloted an initiative whereby drivers can opt to pay for their carbon footprint at the pump as they fill their vehicle’s tank. Away from carbon, Danone North America is testing pricing of its dairy products as it has shifted farmers to non-genetically modified and regenerative farming practices.

Companies have not figured out how species and ecosystem loss and environmental degradation impacts their bottom line. Just a handful of companies we speak to get it - Andrew Deutz, The Nature Conservancy

It’s going to be an education for consumers, though it will more likely fall on the shoulders of companies to pay for government policy changes, pollution taxes or the removal of subsidies – at least in the short term.

They would be wise, therefore, to transition their supply chains to become more environmentally friendly sooner rather than later. Some are – such as Danone. But in a Catch 22, just as banks need companies to become transparent and transition their supply chains to lower the risk to those banks, so companies need banks to lend them the money to transition. And it’s here where it gets sticky. Banks’ own risk policies and their capital requirements are preventing them from making the loans.

The result of this Catch 22 is going to be stranded assets.

If any organization has seen the writing on the wall, it would be the WWF. Bob Litterman, former head of risk for Goldman Sachs and founding partner of Kepos Capital, sits on the US board of the WWF and advises the NGO on the investment strategy of its $250 million reserve fund.

“Back in 2013, we looked at what our risk was at having stranded assets, which we originally defined as coal and tar sands,” says Litterman. “Later we added oil exploration and production.”

After divesting a natural resources fund, WWF found it had less than 1% invested in stranded assets.

“There was exposure to tar sands and coal, for example,” says Litterman, “so we sold what we could and hedged the bits and pieces that were left in externally managed private equity, public equity or hedge fund allocations.”

The hedge was a stranded asset total return swap, long the S&P500 and short companies invested in stranded assets, says Litterman. It was the right call. The stranded assets have underperformed the broad equity market by an average 13% a year, almost 100% in a little under six years.

Litterman says he expects that rate of underperformance to increase: “I would suggest investors who have not started considering stranded asset risk to start doing so. Now.”

Learning curve

And so we arrive back at the urgent need to have banks begin to disclose their nature-related risks, and the creation of a TNFD, which may be a standalone set of requirements or may end up being an extension of the TCFD – a ‘TNCFD’ or ‘TCNFD’. There are conflicting views across the banking industry about which would be preferable.

Daniel Klier, global head of sustainable finance at HSBC, points out that if climate and biodiversity are separated then there is the risk of financing something like a hydro dam that ticks a box on clean energy but that would disrupt ecosystems.

“We need to be careful that we don’t just take things as piecemeal but rather look at the environmental risks together and take a view on a sector,” he says.

Those who argue for a separate taskforce say that the TCFD already provides a framework and that, while there are more complexities in valuing natural capital than carbon, there are enough stakeholders in the scientific community willing to help it come to fruition. They also argue there is an urgency to focus on nature.

One high-level financial industry expert who has been speaking to banks and governments about the possibility of a TNFD says: “It’s going to be a learning curve; we can develop the mechanisms that turn the information and insight that arises into action in parallel. We should not wait.”

Bankers and investors, however, say they are still coming to grips with the TCFD voluntary requirements (which look set to become mandatory) and that another set of disclosures so soon would be too much.

What everyone does agree, however, is that before the end of the 2020 Convention on Biological Diversity in Kunming, China, nature-related risk is going to be on the radar of every financial institution.


Which financial tools for conservation?

John Tobin was a tropical ecologist doing arboreal and biology studies under Edward Wilson, spending his time in the treetop canopy collecting insects for research. It was up one of these trees that Tobin felt called to conservation and, realizing he needed practical skills, he followed a three-year law degree and then took a job on Wall Street so he could better understand where the money needed for conservation would come from.

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John Tobin, Cornell University 

He ended up as global head of sustainability at Credit Suisse.

Now a professor of management at Cornell University, Tobin is one of a rare few who can straddle the worlds of finance, conservation, ecology and academia. He speaks the language of each sector – and they are entirely different.

“Their pace of work is different, the way they work is different and they don’t understand each other,” says Tobin. “While conservationists grasp the bigger picture of the threats to nature and what nature needs, they have little understanding of how business or the real economy operates. And on the other side you have bankers and investors who don’t understand the science, and see nature as unmeasurable and risky.”

If the collective goal is to move finance into the conservation of natural resources, then these fields need to start understanding one another so that they can work together.

Partly driven by this motivation, Tobin co-founded the Coalition for Private Investment in Conservation (CPIC), along with Frank Hawkins at the International Union for Conservation of Nature (IUCN), Deutz at The Nature Conservancy (TNC) and Fabian Huwyler (then at Credit Suisse).

While conservationists grasp the bigger picture of the threats to nature and what nature needs, they have little understanding of how business or the real economy operates - John Tobin, Cornell University

Its goal, through a collaboration of the public, conservation and private sectors, is to drive private capital into the restoration and conservation of nature. It is working with think-tank the Paulson Institute (founded by former US treasury secretary and conservationist Hank Paulson) on the funding gap and how it might best be filled.

“The good news is that from our research we can see that fund flows in foreign aid towards saving ecosystems have doubled to about $10 billion annually,” says Deutz. “The problem is that we estimate the amount needed to be $250 billion, and the majority is going to have to come from the private sector.”


Tobin says: “It’s easy to just throw in the towel when you see that kind of gap. But if we can tap into just 1% of new and reinvested capital from private sources, that gap would be filled.”

CPIC approached some of Credit Suisse’s clients in 2014; their response was that if capital was safe and doing something positive for the environment, then the appetite from the buy side would be there.

CPIC now has approximately 60 member institutions that include conservation NGOs, impact investment funds and platforms, consultants, universities and research firms, as well as the European Investment Bank and UN Development Programme.

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Charlotte Kaiser, NatureVest

What was missing was investable product, chiefly because conservation NGOs had only worked with donor money. But about the same time CPIC was being put together a shift had begun. NatureVest was formed in 2014, for example – an investment arm of TNC with the mission of creating investment opportunities in nature.

“We have to access that world,” says NatureVest’s managing director, Charlotte Kaiser. “There is no other way. All the research shows how much we need to do, and we’re just not getting near it. We need to see natural capital as an investable asset and not a charity case, and certainly not an asset of no value at all.”

Indeed, impact investments, where (in this definition at least) for-profit investors are prepared to accept low financial returns or a little more risk in exchange for positive environmental and/or social impact returns, have proved a good bedfellow for conservation.

But it has not been easy.

“We thought we would do a deal and the money would come,” says Kaiser, “but what emerged was that you can create a very compelling business case with a return, but if it is novel or a risky business model, it will not go through investors’ screens.”

Indeed, excluding sustainable forestry and sustainable aquaculture, impact investments in marine or land-based conservation have been minimal, according to impact-investment data platforms.

Hawkins, director of the North American office at the IUCN, says that one of the challenges for investors is that the data available doesn’t match investors’ need for impact measurements.

“We can talk about the number of hectares protected, the jobs created, we can even talk about carbon sequestration rates, but we’ve not been able to truly put a figure on biodiversity impact, so that we could say: ‘Yes, your investment in this rainforest initiative prevented the extinction of these frogs and lemurs.’”

That may be coming however. The IUCN is working on a species conservation metric that will help companies, the financial sector, countries and even individuals quantify their contribution.

“Biodiversity can seem esoteric in a way that maybe carbon isn’t because we’ve put metrics around the latter,” says Hawkins. “We’ll have something in the next few months to increase investor appetite and show how we can collectively achieve global targets such as the Sustainable Development Goals.”

Deal flow does seem to be picking up.

“I don’t think that risk appetite has changed necessarily, but the universe of those investing has increased,” says MaryKate Bullen, director of sustainability and communications for sustainable forestry investor New Forests.

We need to see natural capital as an investable asset and not a charity case, and certainly not an asset of no value at all - Charlotte Kaiser, NatureVest

Recent headline-grabbing deals include the Seychelles blue bond, launched last year. Calvert Impact Capital, Nuveen and Prudential were the main impact investors in the $15 million bond to help the island state replenish its fish stocks and protect its reefs, among other conservation aims.

The recently announced $50 million Rhino impact bond is another example of a new tool for investing in nature.

Furthermore, as the notion of ‘conservation’ has expanded, so too have the potential ways in which to invest in nature.

“People have thought of conservation as protected areas or protected species,” says Kemper at the World Bank, “but now it also includes protecting our ecosystems and biodiversity everywhere, so conservation can include sustainable forestry, sustainable farming and sustainable water use. It could mean reducing waste to prevent pollution. There are many ways in which we can invest in preserving natural capital.”

Land regeneration and a shift to sustainable or regenerative agriculture are providing impact investment opportunities in New Zealand and in the Amazon, for example.

These funds are all highly innovative in their design, using new financial tools such as outcomes-based payments or registering as carbon-offset projects to increase funding. But they therefore tend to be unscalable.

Because they are incredibly new, the up-front cost of research and time on the ground meeting with various stakeholders tends to be paid for by NGOs or multilateral organizations – such as the World Bank in the case of the Seychelles blue bond.

To help ease this up-front burden, CPIC’s members have been creating ‘blueprints’ – essentially case studies of deals done or ready to go – that could result in easier replication of the investments and that allow financial institutions to step in with loans or investments more comfortably.

“Financial institutions aren’t good at doing the long-term background work required to develop new financial instruments,” says Tobin. “Bankers have to meet their annual budgets, so there is huge disincentive to work on novel deals that can take a long time to execute, are legally intensive, and may ultimately lead nowhere – because new directions are always risky. They want something where there can be a level of certainty that results will be delivered in a few months.

“CPIC members provide 80% of the work that is needed to get done for a deal to close – the preliminary work on the deal structure, the types of investors, enabling conditions, etcetera – and then private institutions can pick that up and hopefully take it across the finish line,” he adds.


Abyd Karmali, Bank of America
Merrill Lynch

Yet while ticket sizes seem to be growing and more deals can be expected – certainly from NatureVest and impact investment houses such as Althelia and Conservation Capital – impact investing in this form is not going to get close to meeting the $250 billion a year needed for conservation – not in the short term at least.

“What we are all looking to figure out is what can be scaled and replicated, as well as being innovative,” says Abyd Karmali, managing director and climate finance executive at Bank of America Merrill Lynch.

He says his bank has been looking at creating a financial solution around water for some time to complement the work it has already done – a $5 million zero-interest loan to WaterEquity’s WaterCredit Investment Fund 3.

He also points to the forestry carbon bond that BAML co-arranged in 2016 as a structure to be explored further. The $152 million bond issued by the IFC had an enabling factor in which BHP Billiton provided a floor price for carbon.

“That experience showed us it is quite difficult to do something so bespoke and small and relatively illiquid that attracts investors,” says Karmali.


Much larger sums of investment money need to be moved, but without being able to show large investors their natural capital-risk exposure or biodiversity footprint, it is challenging to motivate them.

One way may be big deals in formats large investors are already comfortable with – green bonds, for example.

In September, the Conservation Fund launched a $150 million green bond that is perhaps the first pure conservation green bond of its kind. And it is as plain vanilla as you can get – a 10-year bond with a 3.4% coupon, rated A3 by Moody’s, with a green bond opinion by Sustainalytics. Goldman Sachs is the bookrunner.

Proceeds are being used to increase the scale of the Working Forest Fund, which invests in sustainable forestry and protecting natural ecosystems through the permanent conservation of at-risk working forests.

“The money will not be used for headquarters, general purposes or as a substitute for spending an endowment,” says John Gilbert, chief financial officer of The Conservation Fund. “It will go into specific forest conservation projects that would not be possible without the proceeds – so you could say it’s the greenest bond out there.”

The proceeds will help fund in its long-term plan to conserve five million acres of forests in the US over 15 years.

What the bond’s very plain vanilla structure enabled, however, was institutional investor involvement – insurance companies and large asset managers, as well as family offices and impact investors.

Gilbert points out that for some impact investors it was too plain even: “Some investors just like to be in smaller, more esoteric deals.”

However, it will be hard to replicate the bond because The Conservation Fund is a unique organization.

“We create outcomes with dual benefits of economic development and conservation of critical natural resources,” explains Gilbert. “We act as a financier of conservation properties on behalf of the US government, states and non-profits.”

Its portfolio has more than $800 million in assets and $500 million in conservation land. But he adds that there is a lot that could be learned from the bond, given it has brought conservation into the green bond realm. Green bonds have tended to be the domain of clean energy.

Gilbert says he hopes the green bond market will adopt more deals that deliver clear environmental and economic outcomes at scale.

Biofin’s van den Heuvel says it has been working with countries on the possibility of issuing a green bond to finance protected areas and identify other biodiversity opportunities within green finance frameworks.

Changing behaviour

The nascent transition bond market could also serve to move bigger chunks of funding through the large-scale transitioning of land use away from unsustainable to sustainable, or even regenerative, practices.

Beef supplier Marfrig’s $500 million transition bond from ING and BNP Paribas in July this year could offer an example. Its proceeds are being used to buy beef from cattle ranchers who comply with non-deforestation criteria.

Rabobank is working with development banks and UNEP on a deal where it can provide up to $700 million in loans to farmers moving to sustainable practices in developing countries.

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Marisa Drew, Credit Suisse

Together these deals show that the financial markets can be used to change behaviour towards conserving nature, as well as to finance companies that are transitioning supply chains.

Credit Suisse announced in September its collaboration with the Climate Bonds Initiative to develop a framework to spur the growth of a ‘sustainable transition bond’ market.

Marisa Drew, chief executive of the impact advisory and finance department at Credit Suisse, says this is where the large-scale change will be.

“Companies are slowly starting to understand their impact on natural capital and ecosystems through their supply chains, and are wanting to transition those to be aligned with the UN’s Sustainable Development Goals, which includes helping preserve our natural resources. Where we as a financial industry can play a role is by helping them do that.”

It echoes the earlier point of Bakker at the World Business Council: that financial institutions need to start developing models to help finance company’s transitions. Drew says it may require a form of blended finance whereby the private sector steps in at the end.

“We need to look at everything,” says van den Heuvel. “Biodiversity credits, carbon offsets, payments for ecosystem services, impact investments, bonds, equities, taxes, lotteries, crowdfunding. We have to be open to it all.”

Companies are slowly starting to understand their impact on natural capital and ecosystems through their supply chains, and are wanting to transition those to be aligned with the UN’s Sustainable Development Goal - Marisa Drew, Credit Suisse

Indeed, it is clear that it is going to take the collaboration of the private sector, scientists, academics and the public sector to truly get private capital moving. Many bankers interviewed for this article that were yet to be involved in any conservation-specific deals say that the incentives are just too small to build teams committed to small-scale transactions. Credit Suisse is still the only bank member of CPIC.

Deutz suggests we “need to change market mechanisms or provide incentives” – such as a Green Supporting Factor. Indeed several former bankers-turned-conservationists say that the change won’t come without regulation.

CPIC’s Huwyler adds: “We’re just not going to be able to save our natural resources by taking small incremental steps. Just ‘doing a little better’ is not going to be enough. We have to crack natural capital valuations and build them into the entire market.”

Human-driven crisis

And so it comes full circle. To move large-scale financing towards protecting and restoring natural resources, financial institutions need to be able to put a price on nature so they can begin to understand the risk and opportunity that nature-related investments hold.

Or they need governments and central banks to offer them support and incentives to start lending to or investing in companies and projects that themselves support conservation.

As yet, very few banks have stepped forward to lead the way. At the launch of the UN Principles for Responsible Banking (PRB) in New York during Climate Week in September, of the 15 or so bank chief executives that discussed their role as a signatory at BNP Paribas’ PRB event, only one mentioned the word ‘biodiversity’. That was Jean-Laurent Bonnafé, chief executive of BNPP.

The French bank has announced it will be making several commitments in the field of biodiversity, and early this year dedicated €6 million to a climate and biodiversity initiative programme that supports eight scientific research projects until 2022.

There are others joining it, but for the most part the focus has been clean energy and carbon because it has been an easier nut to crack. It’s not enough.

We’re just not going to be able to save our natural resources by taking small incremental steps. Just ‘doing a little better’ is not going to be enough. We have to crack natural capital valuations and build them into the entire market - Fabian Huwyler, CPIC

Kaiser says it is the inertia of the financial industry that concerns her most: “There’s an old adage: ‘No one gets fired for buying IBM stock’. It means no one wants to go against the tide, least of all in the financial industry. But we have been slow to recognize exactly how volatile the world is about to get.”

Indeed, there are those in the financial industry who are trying to sound the alarm that we don’t have until 2030 – the timeline many are currently working to.

Jeremy Grantham is co-founder and chief investment strategist of Grantham, Mayo, & van Otterloo, a Boston-based asset management firm with over $66 billion in assets. He is also a conservationist and this August announced he is dedicating 98%, about $1 billion, of his personal wealth to fight climate change.

“My pitch is this,” he says. “We are in the race of our lives between technological progress and increasing environmental damage. Use your influence as a portfolio manager, as a boss, as a banker to push for behaviour change directed to saving our planet – that includes your clients. This isn’t something trivial – this is the future of our children and grandchildren, and yet people sit around chatting about their Christmas bonuses. Work with NGOs. Demand policy change. Work with others. Be useful.”


Thomas Lovejoy, United Nations

There is perhaps no one better than Thomas Lovejoy to sum up the urgency of what is required from bankers, investors, finance ministers and central bank governors. He is known as the ‘godfather of biodiversity’ having coined the word in the 1980s.

A conservation ecologist who began working in the Brazilian Amazon in the 1960s, Lovejoy has served as director of conservation for WWF-US where he originated the idea of debt-for-nature swaps and went on to be the chief biodiversity adviser to the World Bank.

Today Lovejoy is a senior fellow of the United Nations Foundation. He advises foundation leaders on biodiversity and environmental science, and is a professor at George Mason University.

His message is simple: “The living planet and its diversity of life is fundamental to a sustainable and promising future for humanity. We are in the initial stages of a human-driven crisis, the likes of which has not been experienced in the history of life on Earth and which is neither necessary nor inevitable. We need to wake up to the peril and the promise – and lift our eyes above our immediate surroundings and self-interests to scope out the path to sustainability for humans and all forms of life.”

Over the following pages Euromoney explores the tools being explored and used by policymakers, financial institutions, philanthropists, multilateral organizations and NGOs to turn finance into a vehicle for conservation.

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