BUSINESS CASE – BANKING
The banking industry has substantial risks and opportunities from natural capital. Around $5-7 trillion a year will be needed through to 2030 to deliver the UN Sustainable Development Goals, many of which reference natural capital.
Green bond issuance has passed $100bn for 2017 and we have begun to see new products such as rainforest bonds and loans backed by the Natural Capital Financing Facility. Understanding natural capital impacts and dependencies will enable banks to manage their risk more effectively as well as maximise their participation in the growing new bond markets.
Risks & Threats
Banks who are lending to businesses need to understand how those businesses are reliant on natural capital and how they impact it. For example, a bank may make a loan to an agricultural business, which is dependent on natural capital services such as pollination, water security and natural pest control.
If the business does not sustainably manage this natural capital, it could, for example, reduce biodiversity on the land, leading to reduced yields and thereby harming its ability to service its debt to the bank. While some banks already conduct environmental impact assessments before making a loan, the scope of such assessments is often limited to direct impacts of the business and does not take into account other impacts and dependencies on natural capital. Applying a natural capital-related dependency and impact analysis can enhance a financial institution’s ability to manage risks.
Beyond simply impairing the ability of a business to pay back a bank loan, there are further reputational and regulatory risks for banks. Banco do Brasil and Banco da Amazonia have both been sued by public prosecutors for allegedly funding deforestation in the Amazon by making loans to farms that have violated environmental or employment laws. More recently, the Commonwealth Bank of Australia has been sued by shareholders for what they say is a failure to adequately disclose climate-change related risks to the bank’s business.
As the recent Dakota Access Pipeline controversy in the U.S. has also shown, banks that finance extractive projects that are harmful to natural capital can suffer from negative media attention and from customers withdrawing their assets or refusing to do business with the bank. In the wake of negative media coverage and pressure from residents and activists, the city of Seattle decided not to renew its contract with Wells Fargo, costing the bank an estimated $3 billion.
For banks that take into account natural capital, there can be opportunities to create new lines of business or draw in new customers. TD became the first commercial bank in Canada to issue a green bond, and based on the success of the initial bond was able to issue a second bond for $1 billion USD in 2017.
New initiatives and types of financing are also being created in partnerships between banks and non-governmental organizations that focus on natural capital preservation and restoration. Examples of these partnerships include NatureVest, which raises impact capital and is a partnership between J.P. MorganChase and the Nature Conservancy, and Rewilding Europe Capital, which provides commercial business loans and was established by Rewilding Europe and financed via a loan from the European Investment Bank.
As providers of financing to companies across sectors and geographies, banks are exposed to multiple natural capital-related risks and opportunities. Therefore, banks can benefit—more effectively managing risk and seizing opportunity—by taking natural capital into account at the transaction, portfolio, and bank-wide level.