What is the role of financial services in nature and climate crises?

By Puja Sharma

In the context of the upcoming and separate UN climate and biodiversity summits, a new briefing paper from the Banking Environment Initiative, convened by the University of Cambridge Institute for Sustainability Leadership, suggests the universal reach of financial institutions gives them a unique perspective to combine these interconnected workstreams.

Climate change and nature loss are deeply interconnected. The temperature rises, changes in precipitation patterns, and extreme weather events have a range of impacts on nature. Furthermore, the decline of nature affects weather patterns and the resilience of ecosystems in the face of impacts from climate change, as well as their ability to capture and store carbon and provide benefits to society.

Despite deep interrelation, climate change and nature have historically been discussed separately, with the United Nations Framework Convention on Climate Change (UNFCCC) focussed on global warming, and broader nature loss themes covered by conventions on Biological Diversity (CBD) and Desertification (UNCCD).

Integrating climate and nature

The rationale for financial institutions states: “With multiple causes and multiple Earth systems under threat, the only logical response is a joined up one. The stability and strengthening of our society and economies rely on addressing the nature and climate change crises in conjunction.”

The report argues the universal reach of financial institutions means they are well-placed to leverage global networks of clients including governments, multinationals, and SMEs to raise awareness, build collaboration, and advocate for the integration of nature and climate responses. The report also suggests the finance sector can mobilise the capital needed for the transformation of the business to sustainable models, diverting finance away from organisations that damage nature and worsen climate change.

Nina Seega, Research Director, Sustainable Finance, University of Cambridge Institute for Sustainability Leadership (CISL), said: “Urgent efforts to find solutions that slow and potentially reverse climate change and revive nature are failing because we are treating these issues as separate when the reality is they are inextricably linked on multiple levels. Systems change, by dint of its very essence, cannot be tackled by extracting subject strands and expecting a focus on those in isolation to offer the answers.”

To highlight the interconnections between nature and climate change, the Intergovernmental Panel on Climate Change (IPCC) and Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) recently published a joint report. This heralds a step change in approach to tackling these two crises and is likely to have knock-on implications for how business, finance, and governments are expected to drive change across both issues as a blended whole. As climate-related assessments and associated disclosures become more granular and accurate, it is anticipated that broader-nature-related processes will do the same.

In the financial sector, the risks and financial implications of climate change and the degradation of nature are also largely tackled as independent issues. Institutions have first focused on addressing the challenges of managing climate-related risks and the transition to a net-zero economy, given the increasing prominence of this agenda since the Taskforce for Climate-related Financial Disclosure (TCFD) published its recommendations in 2017.

Subsequently, financial services are engaging and supporting clients with their emissions reduction plans. This engagement must also address nature loss. If it does not, several risks and opportunities will be missed, including:

Key takeaways

• Materiality of nature-related risks, over and above climate-related financial risks
• Unintended consequences for nature when actions focus exclusively on climate mitigation and adaptation
• Compounding effects from interactions between climate change and nature loss
• Potential synergies and cost efficiencies when addressing climate change and nature
• Macroprudential risks to the stability of the financial sector