A session at the recent KangaNews Sustainable Debt Summit covered significant ground in terms of what is needed to advance the transition toward a sustainable, low-carbon economy.
Mobilizing capital for nature-based solutions and biodiversity protection
The importance of using the entire sustainable finance tool kit to support the climate and nature transition was a key theme throughout the final session at the KangaNews Sustainable Debt Summit in Sydney, titled “Transparency, disclosure and transition finance.”
The session featured experts from across the financial sector, including Sarah Thompson, Global Head, Sustainable Finance at RBC Capital Markets.
The discussion began with the urgent need to address nature and biodiversity loss following research from the World Economic Forum that found that over half of the world's GDP is moderately or highly reliant on biodiversity1.
While climate change and biodiversity are highly interconnected, biodiversity impacts are much more complex and difficult to quantify. Nonetheless, the panel agreed on the importance of advancing efforts across the capital markets to measure and disclose biodiversity-related risks and opportunities.
Last year, the International Capital Market Association (ICMA) published an illustrative key performance indicator (KPI) registry for Sustainability-Linked Bonds with over 300 sector-specific sample KPIs, of which more than 40 related to nature and biodiversity2.
During the discussion, Thompson articulated the importance of building on existing climate frameworks to help mobilize capital for nature-based solutions and biodiversity protection. Innovation will play a key role: “There is now a suite of metrics that we can use to align sustainability-linked financings with nature and biodiversity objectives,” Thompson observed.
The importance of transparency and disclosure
There were mixed views from the panel on how best to mobilize capital for the climate and nature transition; however, there was widespread agreement that consistent and comparable sustainability disclosure will play a critical role.
“We have the right financial instruments in the market today to help advance sustainability objectives, but to really grow adoption we need standardized disclosures supported by globally aligned, regionally relevant sustainable finance taxonomies,”- Thompson
The panel noted that the growth in the sustainable finance market over the last few years is an indication of success in driving capital towards sustainable outcomes and highlighted the opportunity to diversify beyond green bonds.
Demand is increasing for financing solutions tailored towards positive social outcomes as corporate issuers seek to increase their sustainability impacts. For example, targets related to increasing diversity and inclusion in the workforce are common in many sustainability-linked financings today given their importance to companies across all sectors. And finally, encouraging further product innovation such as sustainable commercial paper will increase opportunities for issuers and investors alike.
Scaling the carbon markets
All panellists agreed that carbon offsets will be key for companies to achieve their net zero commitments and many companies are increasingly seeking a bespoke approach to carbon offset procurement that aligns with their business and sustainability strategy.
“Not all companies can completely avoid, reduce, or replace their emissions. There’s going to be residual emissions that will need to be offset,”- Thompson
In anticipation of increased demand for carbon offsets, there is a focus on unlocking a high-quality supply and improving integrity in the carbon markets.
Thompson agreed, adding that, “Scaling the carbon markets is our opportunity to direct financing to the protection and restoration of nature and biodiversity.”
Tackling the rise of greenhushing
The discussion turned to the phenomenon of greenhushing, the antithesis of greenwashing, when companies choose not to publicize or communicate their sustainability efforts for fear of backlash.
The panel agreed on the need to support companies in their sustainability journeys, and the importance of setting ambitious sustainability performance targets without fear of reputational risk if those targets are not met. They argued that one of the reasons why sustainability-linked loans have been so popular is because they reward the achievement of ambitious targets whereas sustainability-linked bonds are more punitive.
“I believe that one of the reasons we haven’t seen more sustainability-linked bond issuance in Canada is because there needs to be more give and take when it comes to the financial incentives,”- Thompson
Investors also play a critical role in encouraging corporates to set ambitious sustainability targets. Robust targets for material KPIs should be rewarded, and capital providers have an opportunity to demonstrate their support.
[1] World Economic Forum, 2020, Biodiversity and the Economy, https://www.weforum.org/reports/biodiversity-and-the-economy
[2] International Capital Market Association (ICMA), December 2020, KPIs for Sustainability-Linked Bonds https://www.icmagroup.org/assets/documents/Regulatory/Green-Bonds/KPIs-for-Sustainability-Linked-Bonds-Dec-2020.pdf
