1) Biodiversity must be preservedRight now, approximately 1 million – or one in eight – species are threatened with extinction. The situation has become so serious that a number of scientists are of the view that the world is entering into its sixth mass extinction period, the last being the demise of the dinosaurs. Unlike previous mass extinctions, which were brought about by natural events (i.e. volcanic eruptions, meteor strikes, etc.), this one is entirely manmade. The impact of biodiversity on economic growth, however, is vastly undervalued. Some estimates suggest that ecosystem services generate around $125-$140 trillion, or 1.5 times global GDP. A loss of biodiversity will therefore have far-reaching economic ramifications. More seriously, unchecked ecological destruction will also create a crisis in food security, something that could be a precursor to further geopolitical instability. Further, a loss of natural wildlife habitat also brings animal species into closer and more regular contact with humans thereby increasing the transmission risk of new infectious diseases.
Covid-19, however, has given society a chance to reset itself. Instead of economic growth being contingent on environmental destruction, businesses need to invest into ecological restoration and conservation, as this will be crucial to their long-term sustainability. This can be facilitated by financial institutions channelling funding into companies with a strong commitment to sustainability and biodiversity. In order to mitigate wider ecological degradation, businesses need to develop measurable KPIs and build robust data-sets enabling them to assess the impact they are having on biodiversity. In response, a handful of leading global banks including BNP Paribas are now in the process of creating non-financial KPIs for investments linked to biodiversity.
2) Accelerating sustainabilityDuring a panel session titled “Sustainable Finance in a Covid-19 Impacted World,” Katerina Elias-Trostmann, Head of Sustainability for BNP Paribas in Brazil, highlighted that companies needed to come together and take systematic action to address future threats such as climate change. Others concur that an entirely different approach towards investment is required. Adam Kanzer, Head of Stewardship for the Americas at BNP Paribas Asset Management, argues investors need to be more proactive in reshaping corporate behaviour and traditional business practices, embracing their role as future makers, as opposed to future takers. “We are in the midst of several global crises – climate, biodiversity collapse, and inequality. If we don’t embrace our role as future makers, we’ll be forced to take a future none of our clients want, comments Kanzer.
The increased focus on sustainable practices is being accelerated by several drivers. Mark Howard, Senior Multi-asset Class Specialist at BNP Paribas, says investor demand is prompting organizations to take sustainability more seriously. So, too, is risk management as corporates – especially those that are major carbon emitters – are facing growing scrutiny from lenders and shareholders about whether their business models are sufficiently future-proofed to weather the challenges that climate change will bring. While US regulators have been less forceful on sustainable finance than, say, in the European Union, pressure is mounting on companies to demonstrate their ESG credentials ahead of the November election.
3) The path to net zeroThe transitionary process by which carbon-intensive sectors evolve their business models is gaining momentum. Ravina Advani, Head of Energy Natural Resources and Renewables Coverage at BNP Paribas, says the bank’s energy clients are making commendable efforts to de-carbonise their businesses by reducing emissions and investing in renewable assets. These initiatives, she adds, are supported by sustainable financing solutions and provided by forward-thinking banks like BNP Paribas. While issuances of sustainability-related bonds have increased exponentially, there are some concerns among some investors about the risk of green-washing. To mitigate this problem, Advani says BNP Paribas conducts robust vetting and due diligence that entails understanding the client’s sustainability agenda and leveraging extra-financial rating agencies and second-party opinion providers.
4) Don’t forget about the S in ESGWhile there has been an enormous emphasis on the green elements in ESG, experts say it is vital that the social aspect does not slip through the cracks. Panellists say that quantifying social progress is difficult, mainly because there are no universally agreed-upon standards on which to benchmark success. Compounding matters further is that subjective judgement is often required when making a determination on social impact, in contrast to climate change, which is fairly simple to quantify. It is also complicated by the fact that there are a lot of data subsets on social issues meaning analysts are sometimes swamped with information. Industry experts say market participants need to collaborate and come up with better data standards and harmonized reporting around social impact.
5) A bank on a missionBNP Paribas is taking a lead on sustainability and is pursuing a number of initiatives designed to promote innovation in ESG in the corporate and start-up world. As part of this, BNP Paribas has developed an exciting new scheme whereby employee volunteers with extensive experience in sustainability and impact investing are paired with promising cleantech start-up executives. From this, the BNP Paribas employees will then help coach these start-ups in applying for the Solar Impulse label.