"Currently, nature is treated as an unlimited, free resource. We are not considering how economic activities affect future growth and human welfare. The cost of restoring a destroyed ecosystem can be larger than the value of the services it provides," writes Marina Unnérus, Senior Economist at NIB.
21 Feb 2022
Financing sustainability: understanding impact and the value of natural capital
By Marina Unnérus, Senior Economist at NIB
Significant investments will be required to tackle the social and environmental challenges the Nordic– Baltic region is facing. To effectively target financing at sustainable investments, companies will need to ramp up efforts to understand their overall carbon footprint and to quantify the progress of value creation.
In recent decades, it has become clear that to achieve lasting economic prosperity, we will need to reconsider how we use natural resources and assets. As the general focus has shifted to long-term value creation, the concept of sustainability has become a criterion in decision-making for both financial institutions and investors.
We are dealing with significant uncertainty around the impact of global mega trends. According to the World Economic Forum, among the highest likelihood risks of the next decade are extreme weather, climate action failure and human-led environmental damage. The impacts of changes on the global ecosystem include destroyed capital and reduced economic capacity.
Climate change is affecting entire societies, economies, and industries. Companies that fail to integrate climate risks into their strategies and operations are likely to suffer from asset write-downs and a shift in capital allocations.
Over the past few years, emission targets to be met by the mid-century have been identified. Nonetheless, ambitions need to be raised to address clean electrification, energy use in buildings, transport, and industry to achieve net zero emissions.
Mitigation efforts that intend to prevent the world from passing its tipping point require huge investments and substantial socio-economic changes, which will in turn affect industries and labour markets.
Fossil fuels still dominate the primary energy use but can at least be partly replaced by the continued electrification of society. However, an outdated infrastructure is a significant constraint to scaling up renewable sources. The largest emitters, such as heavy industry, utilities, and transport, are also facing difficult journeys, because there is no immediate clean substitute available, and the costs of replacing technology, assets and processes are high.
To support the transition towards climate neutrality, NIB has financed several electrification projects that aim to increase capacity for infrastructure and transport, and for expanding the industrial base.
Undoubtedly, Nordic industries and corporates have ambitious targets and are willing to be at the forefront of the climate transition. However, understanding one’s overall carbon footprint is a complex task, and it is challenging to quantify the progress and outcome of potential value creation in a global landscape.
Quantifying and reporting impact
While the taxonomy does provide some protection against greenwashing and a reference point for companies in their green transition, there is still a need to develop consistent metrics and reporting requirements for sustainable value creation.
Continual work is required to expand impact reporting not only to include direct emissions connected with company activities, but also to disclose information on “Scope 3” emissions – all indirect emissions occurring in the value chain, including both up- and downstream emissions. The effort is needed to provide necessary information on hot spots in the supply chains and a more comprehensive picture of sustainability performance.
The non-financial reporting landscape is becoming even more complex when social elements, such as human rights, business ethics and supply chain management are included. On the positive side, it has been observed that efforts to mitigate reputational risks have increased transparency.
The financial value of natural capital
Finally, there is room to expand the decision-making criteria of sustainable financing to include the contribution and value of nature, as expressed in monetary terms. The stock of natural capital has supported a substantial increase in produced and human capital in recent decades, but at the same time, the estimated value of natural capital has massively declined.
It would therefore be fair to assess the true value of economic activity by accounting for the impact on ecosystems and the risks of environmental damage. Currently, nature is treated as an unlimited, free resource. We are not considering how economic activities affect future growth and human welfare. The cost of restoring a destroyed ecosystem can be larger than the value of the services it provides. Going forward, the need to quantify natural capital assets in economic terms will be crucial for understanding nature’s contribution to productivity and long-term sustainable growth.