At the recent World Forum on Natural Capital (WFNC) in Edinburgh 21-22 November, a major discussion focused on the challenges of mainstreaming Natural Capital and project financing into the banking sector. Moderating a panel looking at how the financial sector has responded to the challenge of natural capital since Rio+20, Ivo Mulder, Coordinator Biodiversity and Ecosystem Services at the United Nations Environment Programme (UNEP) Finance Initiative, highlighted the National Capital Declaration launched at Rio+20 as a key plank in UNEP’s strategy. Similarly, Shaun Kingsbury, CEO of the UK’s Green Investment Bank, announced that on the same day as the World Forum the organisation had published a set of five green policies that will underpin their investment decision making process. Kingsbury pointed out that the GIB is the first of its type in the world with £3.8bn of UK government funded capital to invest with £700m committed to sustainable projects so far. Importantly, the relative certainty of GIB funding has resulted in additional private sector financing of £2bn. The GIB, now one year old, seeks to provide financing – debt, equity, mezzanine, etc – but with ‘green purposes’. In assessing a low-carbon capital infrastructure project the GIB lends at commercial rates and to that extent is comparable to other banks. It aims to make a profit but crucially new undertakings must, as Kingsbury emphasised, be ‘green and profitable, not green or profitable’ – ‘the double bottom line’. Sustainability criteria are built into contractual arrangements and banking covenants. Laurent Piermont, Biodiversity Director for Group Caisse des Dépôts and Chairman of CDC Biodiversity, discussed his organisation’s activities in bio-diversity. CDC is a French public sector organisation established in 1860 with 120,000 employees operating in 60 countries with €400bn of assets. As it operates on behalf of the French Government it has clear mandates,which give it enormous influence both inside and outside of France. CDC can, for example, finance the reclamation of natural habitats and sell credits to project developers without any certainty that it will be able to create a market for those offsets, or at what price. Piermont said CDC has sold one-third of the credits its holds. He gave an example of another project – a motorway from Bordeaux – where the private contractor did not want to pursue the construction and assume the environmental liabilities. CDC was able to step in and assume the liabilities, offset the environmental impact and provide a 60-year guarantee. Last year, the group made a commitment to consider bio-diversity issues in decision-making across the whole organisation. Namita Vikas, Senior President and Chief Sustainability Officer of YES BANK, described how the firm has grown rapidly from inception in 2005 to become the 4th largest private bank in India. At an early stage the firm decided to adopt the Equator Principles and IFC Guidelines into decisions on its lending portfolio to align stakeholder interest with its environmental and social policies. Andrew Cave, Group Head of Sustainability, RBS noted that banks have been consumed with rebuilding balance sheets but they are also attempting to rebuild public trust. Sustainability issues, according to Cave, are at the heart of these efforts. Mulder added that in his view, ‘the financial sector is well beyond writing sustainability reports and planting trees’. It is clear that in the banking sector progress since Rio+20 has been made. It is difficult to know, however, the extent to which this is entrenched in the corporate culture as well as the level and development of integration into mainstream corporate banking. Externalities such as water usage and CO2 emissions that have so far been more or less free to corporations can be reduced by a change in lending and investment policies. The key challenge for banking is not how to price nature but how to price natural risk.
Natural Capital Accounting (NCA) – Practical Mechanisms
Accounting for natural capital in financial products (loans, bonds, equities, etc) and on the balance sheets of financial institutions is in its infancy. What are the possibilities that related labels for financial products or profit and loss accounts could become a reality? A panel session at the Forum, co-ordinated by Yuvan Beejadhur, Partnerships Specialist – Sustainable Development Network Vice-Presidency, at The World Bank Group, explored the development of NCA methodology, with a caveat on whether is it possible or even desirable to place a value on nature? There is little awareness of NCA terminology and neither is there consistency in the language, according to Assaad Razzouk, CEO of Sindicatum Sustainable Resources. Razzouk believes the costs to SME’s of accounting for natural assets would be prohibitive and that there is a need for simplified metrics. He said Sindicatum is attempting to create its own natural capital inventory. They do this by following up on every single project they invest in, and trying to measure its environmental benefits. However, he noted his frustration at efforts to engage governments in the project. He said Sindicatum was also in talks with the large accounting firms on the same issue. Dr Stephanie Hime, Lead Specialist, Biodiversity and Ecosystem Services at KPMG said major stumblingblocks to the take up of NCA included the test of ‘materiality’ for natural capital as well as a lack of specialist knowledge on the subject in corporations. Without knowledge and experience of bio-diversity, Hime said, it is difficult for any senior professional, regardless of specialist expertise, to determine business risk and opportunity. A major issue for one company could be water resource management while for another it may be CO2 emissions. She said this pointed up the need for a collaborative approach across professions towards NCA. Beejadhur asked the panel what is and could be done to progress NCA matters? However, the panel said a consensus did not seem to be emerging. Lois Guthrie, Executive Director, Climate Disclosure Standards Board, said regulation was the key; once governments legislate for specific outcomes (along with a form of global consensus) only then can appropriate standards, measures and tools be developed. Razzouk said it could take class action law suits, as was the case with tobacco or asbestos, to concentrate the minds of senior industry executives. Beejadhur suggested that outcomes needed to be defined, sacrifices accepted, leading to a “progressive realisation” that corporations and individuals could no longer continue to over-exploit the world’s natural resources.