JPMorgan says finance firms cannot ignore biodiversity

by Natasha White

JPMorgan Chase & Co. is cautioning against inaction after a summit intended to steer more private finance toward protecting biodiversity ended in limbo.

Instead of putting plans on hold, Wall Street’s biggest bank says it now intends to step up work on designing products for clients interested in exploring the risks and opportunities around the theme of biodiversity. And only products deemed financially viable will make the cut, said Gwen Yu, JPMorgan’s head of nature and biodiversity. 

“Definitions and disclosures are helpful, but showing that projects are bankable is essential to meeting client demand,” Yu told Bloomberg News after sitting through multiple sessions at the COP16 biodiversity summit in Cali, Colombia. The bank is now looking at “a variety of innovative financing and investment solutions,” she said.

The 16th United Nations Biodiversity Conference staggered to a disappointing end on Saturday, after representatives from 177 countries failed to agree on how to mobilize significantly more capital. That’s left private finance with few meaningful updates on its role, forcing bankers and investment managers to come up with their own interpretations of how to proceed.

The final hours of the summit were overshadowed by fatigue and frustration, with some exhausted delegates falling asleep on their desks. Those still awake were forced to abandon hope of reaching a financing agreement after COP16 President Susana Muhamad declared there was no longer a quorum.

In light of the “significant challenges” facing the finance industry when it comes to designing viable biodiversity strategies, JPMorgan intends to draw on its existing “sustainable finance expertise to accelerate what we can deliver to clients,” Yu said. In that way, the bank will be “avoiding the paralysis of seeking perfection over progress.”

Studies suggest investors already face considerable losses if they ignore nature risk, which can take the form of anything from fines imposed for soil or water contamination to reputational damage if, for example, a company’s products are associated with deforestation in ecologically vulnerable areas. 

A recent report by Morningstar Sustainalytics describes the loss of biodiversity as a “severe new risk for the markets.” An analysis by the market researcher found that a model portfolio with a lower biodiversity risk returned 97% from January 2019 through September of this year, compared with 23% for a portfolio containing a higher biodiversity risk.

Such findings have put pressure on corporations across sectors to show investors they’re paying attention to biodiversity. 

Kering SA, the luxury firm behind labels including Gucci, was among companies that last week adopted the first-ever corporate targets to combat nature loss. It was joined by Holcim Ltd., a Swiss maker of building materials such as cement, as well as pharmaceutical giant GSK Plc. The three made pledges spanning limits on water consumption to the remediation of natural ecosystems. 

Abyd Karmali, managing director, environmental business advisory at Bank of America Corp., says it’s also noteworthy that more than 500 companies have agreed to be early adopters of the Taskforce on Nature-related Financial Disclosures guidance, and in doing so report their biodiversity risks to investors.

“We’re seeing much more systems-level change that’s beginning to integrate nature risks and opportunities into markets,” he said. And the data show that private finance going into nature-positive investments is increasing, “regardless” of the absence of a COP16 agreement, he said.  

However, “tailwinds for investments would come from supportive policy that could provide an extra catalyst,” Karmali said. 

While corporate valuations are in the crosshairs, taking nature into account in sovereign-debt assessments offers an opportunity to unlock financing at scale, said Oliver Withers, head of nature at Standard Chartered Plc.

In addition to looking at company balance sheets, “there needs to be a greater focus on valuing nature and integrating it into sovereign debt,” he said after attending the COP16 summit.

Some sovereign markets are starting to see the early fallout of doing too little to protect against nature-related risks. In June, Moody’s Ratings warned that India’s worsening water shortages pose a threat to its sovereign credit strength. And last year, Dutch asset manager Van Lanschot Kempen NV said biodiversity risks contributed to its decision to blacklist Singapore assets. 

JPMorgan’s Yu says the bank is looking into incorporating a biodiversity lens on existing product structures such as loans, bonds and portfolio strategies. In the runup to COP16, the bank completed a $1 billion debt refinancing deal for El Salvador, with roughly $350 million earmarked for the conservation of the country’s longest river. 

Robert Cozzari, co-head of Latin America markets at JPMorgan, described the deal — the bank’s first-ever debt-for-nature swap — as combining “traditional and innovative capital market technologies.”

One of the side agreements to come out of COP16 was a pipeline of debt swaps supported by six nonprofits, which was accompanied by an analysis noting that the market has the potential to unlock $100 billion of climate and nature finance. That’s as banks, including Goldman Sachs Group Inc. and StanChart, line up to help arrange such transactions. 

But while such swaps are gaining ground on Wall Street, some question their sudden popularity.

“They play an important role,” said Avinash Persaud, special adviser on climate change to the president of the Inter-American Development Bank. But it’s “a niche role.” 

The concern is that such products are getting more policy attention than they deserve, he said.

“In the search for magical solutions, people have latched on to debt-for-nature swaps as solving debt and climate together without anyone paying, but that’s an illusion,” Persaud said. “Debt swaps are not about reducing your debt, they’re about redirecting some of your interest payments.” He says the ideal candidate for such a swap is a country that’s generally managing its debt without too much trouble, with just a few “pockets” of high-yielding debt.

Persaud says the ultimate hurdle is getting the private sector to invest in nature in the absence of a market.

“If you can’t get the private sector to do that, it will need to be the government,” he said. “The government can value nature more highly than the market and, as a result, invest more in it. But governments’ fiscal abilities, especially in developing countries, are limited.”

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