Save the world one standard at a time

Without change, the social and economic consequences could be devastating, and time is running short. British economist, Professor Sir Partha Dasgupta, puts the damage we cause to nature year after year through our economic activities at US$4-6 trillion¹. At the same time, nations only spend between $78 billion and $143 billion to protect natural resources². The alarming disparity laid bare in Dasgupta’s review of ‘The Economics of Biodiversity’ published for the UK government in February 2021³, shows humanity is a long way away from a sustainable economy.

In his report, Dasgupta attempts to describe the value of nature from an economic perspective, showing the economic consequences of destroying natural resources. According to Dasgupta, an economic system based on limitless growth will inevitably lead to ecological and economic collapse. That's why future economies will have to balance the use of resources with protecting biodiversity in all its forms – diversity of species and ecosystems as well as genetic diversity.

Decisive transformation needed

There are already a whole range of initiatives where banks, NGOs, governments and companies are closely examining how they can transform economies all over the world. What's already clear is that, in the future, capital will need to flow in a different direction, away from measures that are harmful to the environment and towards an economy that places a smaller burden on nature.

"The transformation must be decisive, ambitious and also socially acceptable," according to Marine de Bazelaire, Head of Sustainability for HSBC Continental Europe. She explains the Bank’s role in the Taskforce on Nature-related Financial Disclosures (TNFD), an initiative launched in 2020 to bring together 74 financial institutions, regulators, companies and other organizations, with the aim of developing nature-related financial metrics and ultimately creating new financial products.

In order to build confidence in new financial products and in the effectiveness of the measures taken by companies, de Bazelaire says, “we need uniform standards that all stakeholders around the world can follow, and we can only develop these standards if we work together."

Building awareness

One of the big barriers, however, is that awareness of this issue varies widely from country to country. "In Europe, for example, everyone understands the importance of preserving our forests," says de Bazelaire, “but in other parts of the world, the attitude is entirely different. The Amazon rainforest, for example, is being cut down to use the land for agriculture, with demand for these products coming from China."

According to de Bazelaire, such complications exist in almost every sector, and it is precisely these that make the work of banks and initiatives like the TNFD so difficult.

While instruments such as the EU's emissions trading system are a good start, they are still somewhat insufficient. Other options, currently in development, such as the so called ‘debt-for-nature swaps,’ could offer significant potential in the future. Here is how it works: environmental organisations from industrialised countries pay off a developing country's debt and, in return, the developing country pledges to carry out certain environmental protection projects, such as reforestation or creating new nature reserves.

The developing country offloads part of its debt, while the NGO achieves its goal of protecting the forest. "The potential behind it is tremendous," according to de Bazelaire.

Infrastructure standards

But new products are also needed to finance infrastructure projects and, says Christian Déséglise, Head of Sustainable Finance and Investments at HSBC Global Banking and Markets, creating standards will be crucial.

"We need some kind of gold standard, as we are familiar with for domestic construction, but for new infrastructure projects," he says. That could mean that companies that meet certain criteria when building a new road, for instance, could then receive loans on better terms. It could help realign the flow of capital in this area that is so urgently needed.

"If we want to meet the goals of the Paris Climate Agreement, it's imperative that we reform how we build and finance infrastructure projects," Déséglise adds. In addition to the construction and maintenance of roads, reforms must also encompass transportation and energy generation, he explains, looking at the infrastructure sector as a whole, which he says, “accounts for 70 per cent of global CO2 emissions."

Opportunity to make a difference

Developing countries in particular are set to double their infrastructure base again in the next 30 years. "We need to retrofit existing infrastructure, for one thing, and ensure that new projects are as low-carbon as possible, as well as particularly robust against environmental disasters," says Déséglise.

It is, however, a challenge, with many emerging economies preferring to build and upgrade their infrastructure quickly, without much consideration for environmental factors. That, says Déséglise, is precisely where banks and investors can apply some pressure. "If we're going to build sustainable infrastructure around the world, it's going to cost US$7 trillion a year," he points out. However, with only US$3-4 trillion invested in infrastructure annually to date, that creates a significant funding gap. "If we develop products that allow us to close that funding gap, then we'll have a chance at making a lasting difference," says Déséglise.