When we think of threats to the environment, it’s usually climate change that comes to mind. But, increasingly, degradation of natural resources is leading to a series of challenges that, over time, are likely to compromise business’s sustainability. The time to take action is now – but what does that look like?
Because nature is such a new – and complex – issue, there is no simple answer to that question at this point. What is clear is that we need to confront it together. This seemed to be the unanimous agreement of panelists who recently met to discuss a way forward for the protection of South Africa’s natural capital. As moderator, I was privileged to have a front row seat to this discussion, which included input from Saphira Surina Patel, acting head of ESG at the Development Bank of Southern Africa; Abel Sakhau, Chief Sustainability Officer at Sanlam; Tanya Dos Santos, Global Head of Sustainability for the Investec Group; Shameela Soobramoney, Group Chief Sustainability Officer for the JSE Group and Annabel Ross, senior programme manager of the CISL’s Banking
Environment Initiative.
Why now?
As Kelvin Massingham – Director of Risk and Resilience at FSD Africa – notes: when it comes to the protection of natural capital, we do not have the luxury of time. While it took several years for industries across the world to take action against climate change, a speedier, more urgent response is required for nature. This is undeniably difficult, as our knowledge around this topic is still in its infancy. What we do know, however, is that nature and climate change are inextricably linked, and the impacts of one amplify the effects of the other.
Here's an example of just how these two factors work hand in hand, explained by Tony Goldner, Executive Director of the Taskforce on Nature-related Financial Disclosures (TNFD): In California, a finding that PG&E's negligence resulted in raging bushfires saw the company's asset value and cash flow negatively affected when its funds were reevaluated. There has been extensive damage to the company’s infrastructure, and it has faced
lawsuits of $30 billion, all because of damage caused by the fires. It shows us that, as much as we may consider our business activities to be beyond nature’s reach, natural capital has a pronounced impact on what we are able to do – just as our activities have an unavoidable impact on natural capital.
The African situation
This is especially true in Africa, where we have been richly blessed with natural capital. The continent is home to the world’s second largest rainforest, and its living organisms comprise 25% of global biodiversity.
Against this backdrop, South Africa deserves special mention. The country boasts a rare wealth of natural capital and is considered one of just 17 megadiverse nations around the world. More than a point of national pride, these natural resources are critical for sustaining life. Just think of the panic surrounding Cape Town’s looming Day Zero during the 2018 drought if you have any doubt of how South Africa is affected by water scarcity, as just one example. Beyond this, the country's natural resources also support a number of economic activities, from agriculture to mining and tourism.
This situation is not unique to South Africa: 62% of the continent’s GDP is dependent on nature, and in most African countries, natural capital accounts for 30-50% of total wealth.
Nature presents many opportunities for further economic activity. Take the continent’s mineral wealth, for example: with more than 30% of the world’s mineral deposits, there is tremendous potential – just as there is in the area of agriculture, as the continent is in possession of no less than 65% of the world’s arable land.
It is enormously troubling, therefore, that Africa’s natural capital is depleting at an alarmingly rapid rate. UNEP estimates that Africa loses around $195 billion of natural capital every year, and that African countries lost 30% of their tree cover between 2001 and 202, compared to a global average of 11%. The situation is no less dire in South Africa, where almost half of the country’s ecosystems may be categorized as threatened.
Where to from here?
The implications are clear: if we don’t take action now, billions of people around the world will be affected.
Companies will face an equally heavy toll. Panelist Annabel Ross cited a study of heavy industry portfolios, conducted by HSBC in conjunction with the University of Cambridge’s Institute of Sustainability Leadership, considering how a three month water curtailment would affect the sector. The study showed that the entire heavy industry portfolio would be affected, with one third of all companies profiled being downgraded from investment to speculative grade. And that’s just one example. A similar study of Brazilian farmers showed that farmers who worked with degraded
soil would see a decline of 13% in the company valuation in the wake of an extreme weather event like La Nina.
Conversely, we stand to gain much if we work to protect natural capital. Kelvin Massingham points out that new industries may flourish in a nature-positive world: alternative protein sources are a case in point, as people seek options that are less likely to lead to environmental degradation that meat farming. Commercial opportunities exist –
it’s just a question of leveraging them.
Taking action
That’s one of the reasons the African Natural Capital Alliance, an initiative of FSD Africa together with the UN Economic Commission for Africa, has been formed. While the TNFD is a vital framework to guide considerations around nature in investment decisions, ANCA interprets this framework at a local level; providing a voice for Africans and ensuring that it is both relevant and appropriate to our context – important, because there are so many extremely nuanced dynamics that are specific to Africa. Although our situation as developing economies is not unique, local stakeholders have an on the ground insight into the trade-offs that take place between economic development and job creation, and environmental stewardship – which, similarly, means that our input around conversations about these topics is crucial.
More than this, ANCA acts as a collaborative platform to mobilize the responses of financial institutions, galvanize action and provide leadership around the management of natural
resources.
Members of the financial services sector have another role to play, too: As the JSE Group's Shameela Soobramoney points out, banks have the ability to channel funds towards nature positive projects, while also helping to raise funds through sustainability linked instruments like social bonds. While this may initially be the focus for development finance institutions, it is only a matter of time until commercial banks enter
the space, too.
But, as Abel Sakhau points out, we need to be aware that every project developed has significant impacts that extend well beyond its initial location – that after all, is the very nature of an ecosystem – and we therefore need to take into account the knowledge and experience of communities that have lived alongside the natural resources affected for, possibly, centuries.
Finally, we may also need to review the way we look at our traditional activities. Saphira Patel insists that we have to strive to add value where we can – and this may mean that, increasingly, our projects are based less on risk and credit assessments, and more on the benefits they offer communities.
Navigating nature may be a new challenge for the financial services sector – but finding solutions that help communities not only survive, but thrive, is a significant reward. Oliver Wyman is proud and excited to be part of ANCA as we join with other trailblazers to meet the demands of the future.
You can watch the recording of the event, organised by FSD Africa and ANCA in collaboration with the JSE, here.
Sandra Villars, Senior Advisor, published this article on August 31, 2022.