3 ways banks, insurers and investors can fast-track the transition towards a nature-positive economy

Business leaders worldwide are getting more serious about nature as a raft of new agreements, including the Kunming-Montreal Global Biodiversity Framework to halt and reverse biodiversity loss by 2030, require increasingly urgent corporate action.

Now, financial institutions need to catch up.

The market known as “nature finance” is in its infancy – and it is time for financial services firms to bring it to the next level. Today, the private sector puts only $35 billion into nature-positive investments annually, a pittance compared with the $5 trillion pouring into nature-negative investments each year.

The nature-positive transition requires businesses to transform their operations and value chains into nature-neutral or, ideally, nature-positive processes. Banks, insurers and investors can help by steering capital towards this transition. To date, nature funding from the private sector is skewed towards nature conservation and restoration for critical biomes, which currently receives more than half of the private nature finance. While supporting these activities remains critical, allocating and scaling capital towards the systemic transformation of real economy operations and value chain is at the core of “financing the nature-positive transition.”

While the return potential is only beginning to come into focus, there are other compelling reasons for financial services firms to dive in now.

First and foremost, the risks of not acting to safeguard nature are very real. The World Economic Forum’s 2024 Global Risks Report, prepared in collaboration with my firm's parent company, Marsh McLennan, ranks biodiversity loss – whether directly via a sudden lack of natural resources, such as palm oil or indirectly via a public backlash over nature-unfriendly behaviours – as the third biggest global economic risk over the next 10 years. The collapse of critical ecosystems could trigger widespread defaults and devaluations that would ripple through financial institutions with systemic consequences for the broader financial system.

At the same time, central banks and market-led initiatives are already working on developing disclosure requirements for financial services firms’ nature transition plans, so getting out on the front foot is not only admirable but also strategic. And from a public affairs standpoint, the halo effect from being seen as a leader in this area could carry over to other aspects of financiers’ businesses.

So, how can financial institutions allocate capital towards the nature-positive transition? After numerous discussions on this topic at the Forum’s Annual Meeting in Davos, Switzerland, in January 2024, I put forward three clear ways that banks, investors and insurers can accelerate nature finance.

Financial institutions’ progress in nature directly depends on the real economy clients they fund. As such, financiers must understand the nature-related risk exposure of their clients. However, a lack of corporate disclosures on nature and inconsistent methodology to make sense of it is preventing financial institutions from assessing clients’ progress and taking action systemically. Financial institutions must understand clients’ nature-positive starting point, the credibility of their plans and how different clients compare.

For example, banks with large exposures to food producers, dependent on palm oil as a critical natural resource, might need information on the location of their client’s operations to assess supply chain and cost risks due to deforestation before making a credit decision. Insurers underwriting agriculture companies might need to understand how resilient their clients’ supply chains are to extreme weather. Investors with large metals and mining portfolios might need to understand the extent of ecosystem disturbance from mining sites to design a nature-positive stewardship strategy.

While several organizations, such as the Taskforce on Nature-related Finance Disclosures, the Transition Plan Taskforce and the Glasgow Financial Alliance for Net Zero are working on advancing nature transition frameworks, financial institutions can already get started by requesting the five to 10 key pieces of information required from their corporate clients to make nature-related financing decisions. That will not only support portfolio steering, client engagement strategies and credit and investment decisioning but it will also inform the nature transition plan development process more broadly.

With half of the world’s gross domestic product moderately or highly dependent on nature, humankind needs to connect ecology and economics better so that business systems respect this once largely free but now quite expensive resource.

One vital step is measuring and integrating natural capital valuation into business models via “nature capital accounting.”

Until well-developed, natural-capital accounting models emerge, financial institutions can use their assessment of clients’ nature performance to price externalities. Financial institutions can incorporate nature risk premiums into their loan or investment pricing models by understanding corporates’ progress in nature (such as by assessing their nature transition plans). Corporates with a mature nature transition strategy in place, for example, might receive better interest rates on their loans.

Nature is not only undervalued but largely seen as “uninvestable.” During my interactions in Davos, people asked whether there are actual financeable or investible nature-positive assets with economic return potential.

The business case for nature-positive financing solutions is plagued by high upfront costs, long payback periods and many small, fragmented projects lacking clear revenue models. De-risking measures and tailored nature-positive financing mechanisms, including blended finance structures, public subsidies, philanthropic capital and support from insurance companies and development capital, can address some of these challenges.

Financial institutions should engage with public finance and real economy corporates to showcase investable market opportunities with an attractive economic return. Over time this can simulate a larger pipeline and mobilize more private and public finance, creating the conditions for mainstream nature-positive investments worth pursuing at scale.

The financial services industry has led in the climate transition and can also play a leading role in nature. In parallel, the Forum, supported by Oliver Wyman, is working to develop in-depth guidance around these three levers, including a Nature Transition Plan Assessment Framework (in 2024) and Financing Blueprints (potentially in 2025) to help financiers take action and address key challenges.

I am delighted to be part of this programme and excited to see what comes next.