There has to be a common focus on Earth – Kiran Dhanapala
This decade is characterised by VUCA (volatility, uncertainty, complexity and ambiguity). Sustainability visionary John Elkington foresees an “exponential decade” with an increasingly disruptive operating environment and mounting impacts.
The next 10 years pose several challenges. Let’s consider a few that require our urgent combined efforts and collaboration…
First and foremost, climate change and its impacts will increase, and affect everyone. We have better data and estimates as highlighted in the latest UN Intergovernmental Panel on Climate Change (IPCC) report, which documents them as “widespread, rapid and intensifying.”
Every region will feel increasing changes, and rising temperatures in the tropics will make outdoor work impossible. Meanwhile, coral reefs and livelihoods that depend on this ecosystem will die.
Even action to reduce CO2 and other greenhouse gas emissions (particularly methane) will take 20-30 years to stabilise global temperatures while immediately benefitting air pollution and health outcomes. This means organisations will have to assess what risks climate change poses for their businesses. Banks are already stress testing their portfolios for such risks.
Both reductions in emissions and investments in practical adaptation measures need to be urgently taken to scale. Adapting, such as investments in flood defences, also makes political sense as there is no free-rider problem unlike in emissions reduction.
All investments from now on will need to consciously account for climate change. This needs to be speedily integrated in sustainable financing products and services by financial institutions (FIs).
A second challenge is the increasing loss of biodiversity despite its link to human health and livelihoods, as illustrated by COVID-19 and other zoonotic diseases. There needs to be more discussion as to why COVID-19 happened, its links to our relationship with nature and animals, and how we can prevent more zoonotic diseases in the future.
The One Health movement is trending on the premise that the health of humans, animals and the ecosystem health are inextricably linked.
Biodiversity is in its most rapid decline ever. There is a gap between what we use and what the Earth is able to provide, and that compromises the ability to regenerate.
The authors of the recent Dasgupta Review commissioned by the UK Treasury include not only the namesake economist but also a distinguished banker. Pricing natural resources like any other market commodity is seen as a must.
It’s also necessary to incentivise the preservation of nature such as protecting land rather than clearing and selling it for construction. Interestingly, global funding for biodiversity still depends on governments and philanthropy, given that biodiversity finance is only 0.1 percent of global GDP. This needs to change.
Actions required include FIs undertaking assessments of the impact of their investments on biodiversity. Often, asset managers are challenged to identify and consider biodiversity linked investment opportunities.
Biodiversity related risks are hard to capture. However, tools, methods and standards are increasingly being developed to allow for better accounting of biodiversity impacts. Businesses and investors need to integrate biodiversity with data and metrics as with climate impacts.
For instance, BNP Paribas is partnering with CDP (formerly known as the Carbon Disclosure Project) to develop a global corporate diversity reporting framework.
A third challenge is the effective rolling out of sustainable finance to fund initiatives that contribute to strengthening resilience and sustainability linked initiatives. This includes climate adaptation and requires public-private partnerships (PPP) that support sustainability but may often be challenged by aspects of governmental failure.
We also need ‘transition finance’ to enable companies to take steps towards being less carbon emitting and polluting while also creating positive social impacts. And yet, universal definitions and frameworks are still pending on what transition finance entails.
The International Capital Market Association (ICMA) has issued a Climate Transition Finance Handbook but the debate continues. The financial sector needs greater transparency, standardisation and increased collaboration, to develop and use uniform standards.
FIs will need to develop new skills that include sustainability-related knowledge, advisory services and packages. Sustainability linked financing is also a growing trend with financing tranches being conditional to a client’s sustainability specific progress.
One such example is the multi-year sustainability linked bond that’s connected to a sustainability performance target to construct water recycling facilities and minimise water pollution.
Financial institutions such as DBS Bank in Singapore have ambitious sustainable financing goals with Singaporean Dollars 50 billion being available in sustainable financing by 2024.