The concepts of 'natural capital' and 'nature-based solutions' are gaining attention in the global capital markets, as public and private sector issuers consider ways to finance projects to enhance their physical asset resiliency to climate change or support reforestation and native species regeneration.
While these forms of sustainable debt are well suited to financing diverse adaptation and resiliency activities, the volume of issuances to date is still low, when considering that just five per cent of the proceeds from green, social or sustainability bond issuances in 2020 went to sustainable land use projects, compared to 85 per cent directed to the categories of energy use/efficiency, green buildings and clean transport1.
Melissa Menzies and the team at Scotiabank's Sustainable Finance group are actively introducing clients across the Americas to the potential of these climate adaptation and nature-based financial instruments, to tackle pressing environmental challenges, from destructive flooding in central Canada to deforestation in Chile and Brazil.
The new frontier in sustainable finance
Nature-based solutions are earning profile in the Americas, following early moves by European policy-makers and business leaders, notes Melissa Menzies, Associate Director, Sustainable Finance at Scotiabank: "There is growing recognition by corporations and governments around the role of nature-based solutions in creating climate resilience and sustainable infrastructure, and preserving the planet's biodiversity."
She also points out that, "The market for green financing for resilience and adaptation programs is still maturing, as organizations build an understanding of the opportunities, and begin to align their capital-raising programs with their ESG priorities." Although global green bond issues reached $1 trillion by 2020, just five per cent of all green bonds issued in the past decade were categorized as 'adaptation,' with their proceeds allocated to adaptation and resilience projects2.
Menzies and the Sustainable Finance group are helping clients understand terms like 'natural capital' and 'ecosystem services,' which have arisen from growing consensus that the world's longstanding focus on 'financial capital' did not adequately account for other important forms of capital. In particular, 'natural capital' includes all the natural resources that humans use to provide a return3. 'Ecosystem services' are the benefits that people obtain from the planet's rich biodiversity4. Although natural capital enables companies to create value, historically these natural elements were undervalued or it was difficult to calculate their financial benefit.
"These topics are attracting much attention, as we witness natural disasters and the deterioration of critical biodiversity and natural capital – from the Amazonian jungle to Canada's boreal forests, which serve as natural 'carbon sinks' that sequester carbon in the ground to reduce GHG emissions," explains Menzies. It is estimated that 85 per cent of the world's wetlands have been impacted, 75 per cent of land surface has been altered and millions of hectares of primary forest have been lost5.
And there is growing acceptance that nature-based solutions are an efficient remedy. For example, research shows that improved land management rules through natural climate solutions can deliver 37 per cent of all cost-effective CO² mitigation needed to the year 20306. This means that countries can use products like sustainable land bonds to access inexpensive capital, transition to sustainable, low-carbon land management practices and preserve their resource economies. In fact, sustainable finance instruments can also directly help countries meet their nationally determined contributions (NDC) to the Paris Agreement on Climate Change.
Turning awareness into action
Awareness of climate and biodiversity risks is prompting many stakeholders to act, including investors like BlackRock Inc., which urged companies to disclose how their business practices are consistent with the sustainable use of natural capital7. And, industry groups are tallying the impacts of climate change, including the Insurance Bureau of Canada (ICB), which determined that severe weather in Canada caused $1.9 billion in insured damage in 20188.
Now there are multi-lateral efforts to incorporate natural capital into economic and political decision-making, and ensure the conditions are in place to help the private and public sectors leverage nature-based solutions. For instance, the International Integrated Reporting Council (IIRC), Sustainability Accounting Standards Board (SASB), GRI, CDP and Climate Disclosure Standards Board (CDSB) are developing a comprehensive corporate reporting framework to ensure that environmental, social and governance metrics are represented in financial statements. Simplified, unified accounting and reporting systems will help organizations satisfy stakeholder demand for transparent ESG disclosure and equip them to design investment programs focused on adaptation and resiliency.
Since the natural question is, "How will these massive adaptation projects be funded?", the green bond market – in which bond proceeds are applied to finance or refinance eligible green projects – can help organizations bridge the financing gap. In fact, the Green Bond Principles provide guidelines for the use of proceeds of green bond financing, ranging from sustainable land and resource use to climate change adaptation and development of resilient infrastructure.
Under these guidelines, an array of innovative financial instruments, from green bonds to blue bonds to climate bonds, are coming to fruition. On the grand scale, they include the Netherlands's recent EUR 5.98 billion green bond, which will fund coastal and river ecosystem projects to safeguard the low-lying nation against severe flood risk9 – part of the country's recent Green Bond Framework to become climate-proof and water-resilient by 205010.
On a smaller scale, Central Arkansas Water recently issued a US$31 million municipal green bond, to acquire 4,300 acres of watershed land at risk of development. It is believed to be the first issuance of its kind to buy and protect forests in order to secure clean drinking water, in this case for the small utility firm's 500,000 customers11.
"Such success stories are helping to create greater awareness," says Menzies, who notes that sustainable finance debt has more than doubled year-over-year, and it has often resulted in a green pricing benefit for issuers. "Demand for green assets will only continue to grow, when you consider spiking interest in impact investing, the rise of ESG-integrated asset managers, and net-zero commitments made by a growing number of organizations."
Sleuthing out green opportunity
Scotiabank's Sustainable Finance group is helping clients identify the unfolding opportunities and challenges of green financing. They often advise clients on methods to establish in-depth, corporate ESG reporting and data collection to identify their priority material issues and to build out robust ESG frameworks and governance structures.
Clients often require support steering through the green financing market, since corporate treasury departments may lack in-house resources to focus on unfamiliar considerations in the nuanced sustainable debt sector. For example, since green bond transactions often involve a sizable financial threshold, smaller organizations and municipal or regional governments might turn to green term loans. Or, clients may opt for sustainability-linked instruments, such as sustainability-linked bonds, which enable the issuer to allocate the proceeds of funding across various initiatives for general corporate purposes. They can set material and ambitious targets to the pricing of such instruments tied to achieving nature-based metrics over a set timeframe, such as the number of hectares of forest conserved or the birth-rate of an endangered species.
Menzies guides clients through these multi-faceted issues as part of Scotiabank's dedicated Sustainable Finance group, a team helping the Bank mobilize billions of dollars to reduce the impacts of climate change, support clients in the transition to a low-carbon economy and contribute to the global conversation on climate change.
For example, Scotiabank served as joint bookrunner on two of the Province of Ontario's benchmark green bond issues in support of climate adaptation and resilience projects. The proceeds of the province's two green bonds issued in 2019-20, totalling CAD$1.2 billion, will be directed to the Port Lands Flood Protections program. This colossal project will fortify 240 hectares of downtown Toronto land that is at risk of flooding with earthworks/flood protection infrastructure, parks, roads and bridges, naturalized greenspace and wetlands.
In Latin America, Scotiabank also acted as joint bookrunner on significant transactions such as ARAUCO's US$1 billion in sustainability bond issuances in 2019. These issuances will enable the global leader in sustainable forestry to protect native forests and high conservation value areas in Chile. Similarly, the Bank helped Empresas CMPC launch its UF$2.5 million, 10-year green bond in 2019, with proceeds dedicated to restoration of native pine and eucalyptus forests in Chile and Brazil. Scotiabank also supported Klabin's 2019, US$500 million green bond issue to help Brazil's largest paper manufacturer protect vast swaths of forest conservation areas and perform endangered species reintroduction and reproduction at the specialized Klabin Ecological Park.
Menzies is enthusiastic about the impacts of nature-based solutions for the planet's diverse stakeholders – and Scotiabank's ability to bring value to the process: "Green financing for adaptation and resiliency is an opportunity to connect project developers and investors in sustainable development. There is a lot of room for the Scotiabank's creativity and capability in this area to flourish, and deliver significant, enduring benefits to our clients and communities."