London 2023: Financing the transition to net zero and nature positive

Humanity and economic activity fundamentally depend upon “natural capital”—the world’s stock of natural assets, such as forests, rivers, and oceans. Yet, this natural capital is deteriorating at an unprecedented rate. Reversing the trend will require coordinated action across a broad range of sectors and roughly $3 trillion in investment each year by 2030.¹“New initiative to help unlock $3 trillion needed a year for climate and nature,” World Economic Forum, 17 January 2023. That would help prevent tangible consequences, such as ever-worsening water shortages, crop losses, and wildfires, and, in a substantial number of cases, could generate positive return on ROI.²“Nature in the balance: What companies can do to restore natural capital,” McKinsey, December 5 2022.

The adoption of the Global Biodiversity Framework (GBF) by 188 countries at the 2022 Biodiversity COP, as well as progress by the Taskforce for Nature-related Financial Disclosures (TNFD), have helped to accelerate positive momentum toward a net-zero and nature-positive future.

On July 10, 2023, McKinsey & Company and TNFD convened senior leaders from banks, investment firms, insurers, and other financial institutions to explore the role of the financial sector in the net-zero and nature-positive transition. Participants shared a legitimate sense of urgency and momentum, and the following themes emerged:

• Act now to meet the GBF goals. Only “seven harvests” remain to meet the 23 targets agreed to under the GBF. With natural capital in rapid decline globally, consensus among participants was clear on the urgent need to act immediately to address the full range of sustainability issues, over and above what is needed to protect natural capital and achieve net-zero emissions by 2050.
• Start managing and reporting on nature-related dependencies and risks. Participants shared a strong appetite for a better understanding of how financial performance is linked to natural capital, as well as the related financial risks and opportunities. The TNFD framework for reporting and managing risk provides one of the most mature tools in this regard. Near-term expectations should not be to report perfectly on all nature impacts and dependencies, but rather to get started and learn along the way.
• Build on existing climate capabilities to expedite the integration of nature into risk models and reporting. Leveraging best practices and lessons learned from the drive to achieve net-zero emissions will be crucial for developing nature capabilities at the required speed. Several financial institutions are piloting the TNFD framework with the same teams that deployed the Taskforce on Climate-related Financial Disclosures (TCFD) framework. Other participants pointed out similarities in the risks between nature and climate, such as transition risks and the need for transition planning.

• Shift financial markets’ attitudes to nature through consumer pressure and policy changes. Participants agreed on the need to balance generating financial returns with their fiduciary duty and moral obligations. Investors are increasingly turning their attention to nature and want to support the nature-positive transition. Governments, regulators, and consumers have a role in sending signals to the market. Participants generally shared the view that clear policy from government and regulators can help financial institutions align financial returns with the transition, as has been seen with energy transition policy. Consumers can also play a transformational role by switching to or demanding more sustainable products and services.
• Create opportunities through innovative financial products and mechanisms. Some financial institutions, like banks, can create opportunities by developing new products that generate returns aligned with the nature-positive transition. Participants discussed innovative mechanisms, such as debt-for-nature swaps, blended finance, or sustainability-linked bonds, that could provide opportunities for financial institutions to engage. A crucial requirement is the need for robust evidence of nature performance through credible nature-related KPIs, and the use of transparent monitoring, reporting, and verification (MRV) techniques, to manage the risk of greenwashing.
• Use available data while working to close data gaps. While there is no shortage of data, participants noted the challenges of securing quality nature data that factor in location, supply chain traceability, and enable scenario planning. Collaborating with peers to align on nature metrics, close data gaps, and standardize data will be important to make progress. Despite the challenges, participants agreed the absence of perfect data does not preclude using available data to inform decision making.
• Engage with companies to drive change in portfolios. Financial institutions can play a critical role in the nature-positive transition through signaling what will be required from their portfolio companies in terms of education and capacity building. For example, financial institutions can engage with energy companies to develop potential approaches to the energy transition rather than divesting, and they could support portfolio companies in building capacity in emerging markets for identifying and mitigating nature-related risks. Collective engagement by asset owners and asset managers was seen as an effective approach, as demonstrated by the Climate Action 100 model, and is being launched by the Nature Action 100 investor coalition. Participants also aligned on the need for better storytelling of positive outcomes and celebrating nature champions.

With nature cited as a leading indicator of a sustainable economy, participants agreed on the urgency to work together and act now to enable the nature-positive transition.