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Finance – a powerful new climate change frontier

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On August 2 this year, we reached the point at which we used more natural resources than our planet can produce in a year through overfishing, overharvesting forests, and emitting more carbon dioxide into the atmosphere than forests can sequester.

In financial language, that means we ran through our revenues before the third quarter even ended, and have been spending our capital ever since. If we were farmers, we would now be eating the seeds we are supposed to plant next year. This is not a sustainable way of doing business.

Climate change and finance

Sustainable finance is the link between financial systems and ecosystems. Finance enables economic activity that brings us goods and services and jobs, all of which can increase human well-being. Sustainable finance also takes into account the natural resources that underpin our economies: our natural capital.

Natural capital generates sustainable economic and environmental benefits that support healthy and resilient economies. It includes forest watersheds that sequester carbon and protect our drinking water, wetlands that moderate floods, mangroves and coral reefs that protect us from coastal storms, all while providing food and livelihoods for hundreds of millions, including many of the world’s poorest people.

If we were farmers, we would now be eating the seeds we are supposed to plant next year. This is not a sustainable way of doing business.

 

Some businesses and financial institutions have made great progress in incorporating environmental risks in their business models, and there is growing interest in investment opportunities shaped by global frameworks like the Sustainable Development Goals and the Paris Agreement. But, the finance sector urgently needs a more strategic response to climate change, and investing in healthy ecosystems makes sense.

For example, a recent report- Making the financial case for protecting Belize’s coral reef showed that Belize’s coral reefs and mangroves provide more than half a billion US$ per year (US$559 million) in goods and services through recreation, fisheries and coastal protection. These estimates of economic benefits far exceed the annual costs of managing the respective protected areas, demonstrating that investing in biodiversity conservation can be cost effective.

Green Bonds growing

There is growing interest in “green bonds,” which raise funds for environmental solutions like climate-friendly green energy. As the green bond market grows, investors want to know that they are really buying green assets. Together, we need to establish meaningful, effective, and credible standards and impact reporting metrics for green bonds in order to ensure the continued positive growth in this market.

Accounting for the real cost of climate change is vital

But, we don’t just need more green assets. We also need fewer brown assets.

That means accounting for the real cost of climate change. Investments in fossil fuels, for example, have costs far beyond their financial value. Businesses can and should include those costs in their reporting, and financial institutions should weigh those costs in their lending and investment decisions.

We are getting better at understanding the risks of ignoring the environment. Even more importantly, we are increasingly seeing the economic benefits of investing in our natural capital. Running through our revenues in the first seven months of the year doesn’t make sense for business, and it doesn’t make sense for nature. Maintaining and restoring functioning ecosystems yields not just financial returns, but social and natural returns as well.

Margaret L. Kuhlow is WWF International’s Finance Practice Leader. She is based in London. mkuhlow@wwfint.org

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