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ENCORE for Nature - a US$1.6tn opportunity

November 26, 2018

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Paris - emerging leader on Natural Capital finance?

 

Last month’s Climate Finance week in Paris was a landmark for natural capitalists. It featured lofty ambitions from the financial sector to divest from coal and strong rhetoric from politicians to drive up green finance, all to the accompaniment of fossil fuel riots by the Gilet Jaunes. At the old French Stock Exchange - the Bourse - a new set of Responsible Banking Principles was launched, and ENCORE - the world’s first tool that enables FIs to screen their portfolio’s for dependencies on nature - was revealed.

 

It was striking to see the leadership being voiced by François Villeroy de Galhau, Governor of Banque de France, who reiterated, "Finance that is not sustainable, will cease to be finance". The Chair of BNP Paribas, Jean Lemierre, said “Finance can no longer be neutral.” A mood to go far beyond just fossil fuel risk, is emerging.

 

Paris does not even make the top 20 in the Global Financial Centres Index, but - is it now the global leader on finance for natural capital? “After Brexit Paris can become a finance leader, but a green finance leader”, said Anne de Hidalgo, the city’s Mayor. Is she right? Three things make Paris a contender:  

 

First, policy leadership catalysed in France since the Paris Agreement, and backed by Macron’s One Planet summit in December 2017, is now also strongly emerging in the French finance sector. The banks there seem far ahead, in terms of rhetoric and action, than the City of London. The French legal framework is also stronger - with Article L173 making it mandatory to report on climate risk in FI portfolios and on ESG spending. Elsewhere it is voluntary. This law has been a game changer and I suspect will be copied across the EU.

 

Secondly, the major FIs in Paris such as AXA, BNP Paribas, Caisses de Depots, Credit Agricole, are driving forward green investment and divestment. Thomas Hubert, CEO of AXA, a global insurer, said less than 10% of insurers had removed coal from their investment portfolios, yet were paying out massively for climate change impacts. He announced a US$3bn divestment from coal and a further US$300 million from tar sands.  

 

Thirdly, SRI and Impact Investing are rising faster globally than other forms of investment and again it is French institutions such as Mirova Natural Capital and Moringa that are setting the pace. French banking giant Natixis, became the largest underwriter of green bonds in the world this year.

 

 

Two to watch:  Philippe Zaouati, CEO of Mirova and Brune Poirson, French Minister of Ecological and Inclusive Transition.

 

ENCORE, a new tool primarily for banks and developed by the Natural Capital Finance Alliance to help FIs “plug nature into financial decision making”, is aptly named and positioned, to be championed by French financial institutions and the Government. Regional launches will take place next year.  

 

ENCORE’s impact could be a game changer. This is because big pension funds and most banks still regard investing in nature to keep the Earth safe as high risk, yet investing in fossil fuels and businesses that destroy natural capital, as low risk. This is because natural capital risk remains largely invisible in asset manager decision making and off portfolio in bank lending too. Bloomberg terminals carry little data on nature. Tools like ENCORE will help to make the long-term folly of such false price signals clearer.  

 

The immediate danger is, that nothing will move fast enough without policy makers and financial regulators putting on the squeeze. Yet, when democratically elected Governments add climate costs for example to fuel, in the form of higher taxes; riots result. The French Finance Minister Bruno Le Maire said, violent actions of the Gilet Jaunes currently on the streets of Paris, represent: “… a breakdown of justice and trust in the way our finances are being governed”. Brune Poirson, the French Minister of Ecological and Inclusive Transition (yes they have one) suggested, investing in Natural Capital at scale by the financial sector, might restore that trust.

 

Gilet Jaunes protesting climate tax rises on fuel, Champs Elysees, Paris, 3rd December 2018 Courtesy of: News Africa

 

A trap for us all is that adding in the value of externalities for the protection of nature into the goods and services we buy, may disproportionally favour the rich and penalise the poor. A siren solution is to increasingly tax 'bads' instead of 'goods''. As the Paris riots have shown, whilst today there remains little choice between a 'good fuel' and ''bad fuel', the poor suffer disproportionately and get pissed off. Gilet Jaune drivers in French rural heartlands must, of necessity, drive long distances. Metropolitan elites, as they see it, are not so affected.  

 

The truth is, we have all been enjoying a $trillion free lunch on nature for too long and we have to get used to paying more for its vital menu of services. Those continuing to fund the destruction of nature will increasingly see their licence to operate challenged. As Minister Poirson suggested, revulsion felt about bankers financing slavery in the past, might emerge in the future, for those who continue to finance fossil fuels. Strong stuff.

 

My hunch is that Paris has a rival to the East, in the form of Beijing. Dr Ma Jun, Co Chair of the G20 Sustainable Finance Study Group said: “Risk weighting and disclosure are highly influential - yet few countries have implemented this in a mandatory way, apart from China”. Fortunately for Chinese politicians, riots count for less, than rules, so they will move faster than France - and the rest of us.

 

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