How climate change and natural capital are changing banking

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Concepts like natural capital and green infrastructure are changing investment calculations in the financial services sector.

The climate in financial institutions is changing. With a keen eye on market forces and a core business focused on supporting economic growth, leaders in financial institutions are launching low-carbon initiatives and investing in green infrastructure.

The reason is simple: The transition to a low-carbon economy is underway and includes a focus on investing in resilience of infrastructure — green and grey infrastructure alike.

With growing clarity on the business risks and opportunities associated with climate change, deforestation and habitat loss, an increasing number of financial institutions are investing accordingly.

For example, TD Bank Group (TD), where Karen is chief environment officer, identified climate change as a global economic mega trend in 2008. TD conducted research on the link between the environment and the economy to better understand the risks and the market opportunities associated with climate change. Key findings are summarized in TD Economics reports such as The Greening of the Canadian Economy (PDF), which offers clear data-based evidence that "greening" is driven by market forces and occurring in every sector of the economy.

With quantitative research in hand, the bank’s leaders acted. TD became carbon neutral in 2010, while concurrently investing in green buildings, energy efficiency and renewable energy sources.

TD also applied its insights to its core business through the creation of new financing products, including the industry-leading $500-million green bond. The TD Green Bond (PDF) is translating into real ROI, while also creating shared value in the form of natural capital value of $356 million annually through reduction of carbon emissions and air pollutants, as detailed in TD's 2014 Corporate Responsibility Report’s Executive Summary (PDF).

TD's additional investments in green infrastructure, such as reforestation, are helping to create millions of dollars of value each year. One example: an estimated $150 million per year (PDF) of environmental benefits provided by the urban forest in New York City.

Other leading financial institutions are also recognizing the value of natural capital.

For example, JPMorgan Chase and Company’s partnership with The Nature Conservancy in the launch of NatureVest, which seeks to “transform the way we protect natural capital — the soil, clean air and water, and other valuable resources that nature provides … by capitalizing on the growing impact-investment sector and by fostering ways to advance investment in conservation.”

In addition, Citi, in its 2014 environmental policy framework (PDF), stated that the corporate leaders “understand the serious threats to natural capital and society that are posed by climate change, water scarcity, the loss of biodiversity and other critical sustainability issues. These threats are interconnected and present unprecedented challenges to value generation.”

Citi’s response to this challenge has been to make a commitment to “being a leading financier of a sustainable global economy through financing clean energy solutions; partnering with our clients to develop water- and biodiversity-positive businesses. ...”

And Sumitomo Mitsui Trust Bank, Limited offers “environmental rating loans with the evaluation of natural capital preservation (PDF),” based on the evaluation of the borrower’s activities to maintain natural capital. The list goes on.

Further engagement and investments from the financial services sector is expected, given that 28 financial services sector companies are signatories of the Natural Capital Declaration, which focuses on “the materiality of natural capital to the health of financial institutions … [and] proposes that natural capital-related risks are included in the cost of capital.”

Capital in the context of climate

As awareness of the business relevance of environmental and natural capital issues grows, so, too, does the need for real action on climate change, water-related concerns, biodiversity loss and ecosystem deterioration.

Developing an understanding of the path forward is key, and a number of NGOs are providing valuable guidance: for example, BSR on climate through We Mean Business Coalition; The CEO Water Mandate; and Net Positive Approaches by Forum for the Future, the Climate Forum and WWF-UK.

The business context is changing. And so is the investment portfolio mix within financial services companies.

Ultimately, there needs to be investments in all forms of capital — including the historically overlooked area of natural capital” (think forests, grasslands, wetlands and other environmental systems and the value of the economic value of the benefits they provide), as well as energy sources that do not undercut natural capital.

Assessments of where current investments are falling short highlight business opportunities. Clearly, two such opportunities stem from creating more low-carbon energy sources, as well as maintaining and restoring the systems that stabilize our climate, create oxygen and enable us to grow food — forests, grasslands, wetlands and other ecological systems.

For the financial services sector, there are clear opportunities to grow financial capital by integrating consideration of natural capital. The business rationale for investing in green infrastructure (PDF) becomes clear when companies assess the full range and value of the benefits that they receive from well-functioning ecological systems — in other words, when they measure and even place financial value on natural capital.

The leading companies are already investing. It is time now for the rest of the financial services sector to engage — both as investors in low carbon energy sources as well as projects and businesses that restore and maintain resilient natural systems.

Looking for more on the financial case for resilient infrastructure? Check out City Summit 2015.