World Wildlife Fund (WWF) taking A Stand On Global Sustainable Finance

Introduction

The World Wildlife Fund (WWF) was established in 1961 by a group of nature enthusiasts who wanted to protect habitat and species which were threatened by human development. Since then, WWF has become a prominent partner in the nature risk and global sustainable finance arena.

After the recent COP27 Climate Change meeting in Egypt and before the COP15 Bio-diversity meeting in Montreal, I had the opportunity to learn about WWF viewpoints on meeting outcomes and expectations, as well as their wide-ranging policy initiatives.

I spoke with Maud Abdelli, Lead, Greening Financial Regulation Initiative (GFRI) and Benjamin Hunt, Senior Policy Advocate, International Climate Finance, Policy & Government Affairs.

F - How did WWF get involved in global sustainable finance issues?

WWF - WWF has worked on sustainable finance for over a decade, engaging banks, insurers, investors, regulators and policy makers to ensure the financial system recognizes nature’s true value and contributes to its conservation.

Finance is a massive lever for change that can help deliver an equitable, net-zero, nature-positive future - but we have an economic system that does not recognize the value of nature and its services. We are faced with policy disincentives which allocate capital to nature depleting activities and fail to convey clear policy signals toward nature-positive activities. As per the Paulson Institute report, there is currently a US$700 billion annual gap in financing for biodiversity.

WWF has a twofold strategy to address this - financing green and greening finance. Financing green fosters greater investment in sustainable development and nature-positive activities from all sources - public, private, domestic, and international.

Greening finance seeks, through greening financial architecture and regulation, to avail resources for conserving nature, to align public and private financial flows and to remove harmful incentives.

F - What is WWF’s assessment of the COP27 Climate Change meetings in Egypt?

WWF - Despite progress on “loss and damage”, and on the role of nature in the climate process, the talks were a grave disappointment. The negotiations were poorly organized, delivered little, and, in the crucial issue of the energy transition, even took the process backwards. Given those developments, WWF notes with concern that barriers were placed on civil society involvement in the COP process by the host country and that the industrialized world still failed to make good on its 2009 promise to direct an annual $100 billion in climate funds to the developing world. Furthermore, WWF regrets the lack of progress towards a global goal for adaptation. Finally, WWF is surprised that the strong wording around 1.5°C of the Glasgow Declaration was weakened at COP27.

F - What are your expectations for the current COP15 Biodiversity conference in Montreal?

WWF - COP15 must result in the agreement of an ambitious Global Biodiversity Framework, ready for Parties to begin implementing immediately through the setting of national targets and the updating of National Biodiversity Strategies and Action Plans (NBSAPs) in line with the new global framework. But the current text proposed for the Global Biodiversity Framework does not go far enough to address our biodiversity crisis.

F - In the financial realm what are WWF’s specific ambitions for 2030 and 2050?

WWF - WWF approaches finance and the global economy with system thinking to address two of the more complex intertwined systems on our planet: climate and nature.

WWF, along with the World Economic Forum (WEF), developed the notion of a “Nature Positive Economy.” This framework targets that by 2030 at least 30 % of land and oceans are protected, and the footprint of our production and consumption is halved, without any allowance for nature-based offsetting.

WWF is currently in the process of developing a Nature Positive Economic Roadmap that addresses every part of our world economy, not just the financial realm, and sets the world on a specific path for both Nature Positive and Net Zero.

In the financial realm, we know climate change and nature loss are two intertwined risks for the planet, human health and the global economy. The President of the European Central Bank, Christine Lagarde, noted in her keynote speech during the IUCN World Conservation Congress in 2021, “There is no economic and financial stability without respect for nature and without nature’s contribution, because our economies depend on it. That’s why we need to make sure that economic decisions internalize the damage inflicted by our societies on biodiversity.”

F - WWF advocates that central banks take a precautionary approach to climate change and biodiversity loss. Can you define this?

WWF - The precautionary approach allows institutions to act before the full materialization of the risks, based on the science that non-action would not be neutral and will in fact exacerbate the financial risks linked to climate change and nature loss. Adopting a precautionary approach requires that central banks and financial supervisors integrate financial risks and impacts related to climate change and biodiversity loss into their daily decision-making processes now, using all the financial regulation and monetary policy instruments they have at hand, and in a way that is globally coordinated with their peers.

F - How does WWF envision this practically?

WWF - WWF recommends a three-phase pathway by 2050 with intermediary goals (2025 and 2030) to reduce Greenhouse Gas (GHG) emissions and to restore biodiversity. Central banks and financial supervisors need to proactively and effectively encourage financial institutions to adopt similar measures.

Ahead of regulation, financial institutions should set up voluntary ESG risk management frameworks and identify business opportunities that will emerge with the new nature positive economy.

As defined in WWF’s “Criteria for net-zero commitments by financial institutions”, financial institutions should pledge to reach net-zero by 2050 or sooner. To achieve this, financial institutions should set up a combination of science-based, short-term (2025) targets, adopt investment policies for the most material sectors that involve fossil fuels, deforestation- and conversion-related sectors (agriculture and forestry), high-carbon transport, high-carbon industry (e.g. cement, steel, chemicals, etc.). Eventually, they should report transparently on progress.

F - How does WWF perceive the progress on Nature Positive and Net Zero in the US?

WWF - In the US, WWF has seen credible progress on multiple fronts in the last 18 months since the Biden Administration and the 117th Congress have joined together to push the ball forward. These actions amount to concrete steps that will transform the US economy over the next 10 years. This has been good progress, but we need drastically more in the years to come.

Our GFRI and a Ceres report show that the US has made inroads on financial regulation and supervision as well. Several agencies, among them the Federal Reserve Bank the Federal Deposit Insurance Corporation (the U.S. Securities and Exchange Commission) and the U.S. Department of the Treasury—collectively have taken over 230 public actions that will help address climate-related financial risk.

F - In your latest Living Planet index, you revealed that almost 70% of wild species were lost since the 70s. What could financial institutions do in order to not only halt this trend but also reverse it?

WWF - Indeed, the 2022 Living Planet Index shows an average 69% decline in monitored wildlife populations around the world between 1970 and 2018.

Meanwhile, WWF knows from its recent Our Climate’s Secret Ally report that the world’s oceans, plants, animals and soils have absorbed 54% of man-made greenhouse gas emissions in the past 10 years. Critical ecosystems, such as wetlands, mangroves and coral reefs help to protect us from the worsening hazards of extreme weather and sea- level rise.

The business and finance sector must help restore nature and create equitable, net-zero, nature-positive markets and economies. Companies and investors can reduce nature- and climate-related risks by immediately making commitments, acting and calling for change.

Financial institutions can do this in three distinctive ways, by assessing impacts on nature-related risks, using tools like the Natural Capital Protocol and WWF’s Biodiversity Guide for Business, by factoring natural capital and climate- and nature- related risks into financial decision-making, and finally, tracking performance and publicly report on progress. The latter can be achieved by aligning with Taskforce on Nature-related Financial Disclosures guidance and with reporting norms emerging from the International Sustainability Standards Board (ISSB).

F - There is much talk about the “just transition.” What would this specifically entail and what would be the right transition energy mix be from now till 2050?

WWF - Only by promoting synergies between environmental, economic and social goals can we ensure energy transitions, which deliver a future that will be fair, sustainable and climate neutral. The holistic support of the entire global community is needed to effect the transition from fossil fuels to renewable energy.

We can no longer treat energy transitions separately from questions about social justice. Events in just this past year alone, including the historic flooding in Pakistan have underscored the risks of not tackling climate change, especially to the poorest: they are the least resilient to increased extreme weather events and remain too exposed to price-volatile fossil fuels. Yet nearly 800 million people lack basic access to electricity and consequently suffer the impacts of polluting and inefficient energy systems.

A gold standard for just transition practice is captured by the International Labour Organisation’s Guidelines for a Just Transition to environmentally sustainable societies (2021), which WWF supports as a main reference.

F - Central Banks and Financial supervisors are improving requirements for environmental disclosure. But this is insufficient to achieve change at the scale and speed required. What else would have to be considered?

WWF - Increased transparency and disclosure simply aren’t enough. Regulators and central banks could play a much more pro-active role in protecting against the future financial risks and instability posed by climate change and biodiversity loss. Given the scale of the twin crisis climate change and nature loss, there is an urgent need to move beyond measurement and reporting. Central banks and financial supervisors have at their disposal a range of tools to ensure a rapid and just transition, including requirements for regulated institutions to publish detailed transition plans, as well as raising capital requirements and systemic risk buffers, and tightening liquidity requirements, to ensure the risks of investing in environmentally harmful activities are properly accounted for.

There is already a wealth of information to inform investors and financial institutions of the long-term risks of environmentally harmful activities. However, financial institutions continue to fail to incorporate those data into their financing decisions, misguided by the focus on the short-term horizon and enticed by short time remuneration policies. As a result, they often do not account for the catastrophic long-term risks those investments could trigger. It is therefore incumbent on regulators and central banks to act in a precautionary way and pro-actively use their power to overcome this dangerous mismatch between long-term risks and short- term lending and investment horizons and incentives.

F - WWF claims that biodiversity loss and climate change are inherently linked to the core mandates of central bank and financial supervisors. On what grounds is this conviction premised and if so, why is there still a widespread discussion about the true purview of central banks?

WWF - The twin crisis of biodiversity loss and climate change is unique: there is scientific certainty that the twin crisis will happen; there is strong consensus on the level of planetary destruction and loss that could occur if the twin crisis is unabated; there is clear evidence that these impacts are already happening, and that they are happening at a faster rate than predicted.

Other major risks at this scale (such as large-scale or nuclear warfare or future pandemics) are not so certain to occur, and there are clear corrective actions that central banks and regulators can take now to limit the risks of the twin crisis. They must take a long-term view and act on the scientific certainty that the twin crisis is currently generating significant impacts, and, if left unchecked, will inevitably lead to catastrophic risks in the future.

F - In your research, you have identified “always environmentally harmful economic activities” and “almost environmentally harmful companies.” How should those activities and companies be approached by the central banks and financial institutions?

WWF - The most environmentally harmful activities are also the financially riskiest. These include companies involved in coal, oil and gas extraction, whose actions are driving the twin crisis and whose assets are likely to become “stranded” as the world transitions. They also include cement (with some exceptions), mining and deforestation companies, active in biodiversity hotspots.

Financial institutions that are lending to companies involved in environmentally harmful activities should face far higher capital requirements to account for the long-term risks involved. Several elements are important to note:

WWF suggests three ways in order to identify “always environmentally harmful”: first through a sector lens, second through a company lens, and third, through an economic activity lens.

The overall exposure of the financial sector to the fossil fuel industry and activities related to deforestation are of the highest priority, as they are the core driver of GHG emissions and biodiversity destruction. These exposures present the highest financial risks. By diverting financial flows away from damaging activities towards green investments such as renewable energy, green technologies, or projects to protect and restore nature, such as nature-based solutions, they can be a powerful tool for tackling the twin crisis of climate change and biodiversity loss.

Regulators, like the ECB, have been calling for a "brown taxonomy" to define environmentally harmful activities, akin to the green taxonomy defining sustainable economic activities.

With this always harmful list, companies could only be removed from the list if they respectively publish time-bound, science-based target(s) for the environmental issues that create material risks to their operations, publish five-year detailed implementing transition plan(s) and annually report on the progress towards the achievement of the target(s).

F - The ISSB will shortly release their final recommendations for voluntary climate related risk disclosures. Is the financial and investor community waiting for another set of voluntary risk disclosures? What is WWF’s stance regarding ISSB’s inclusion of Scope 3 emissions and the double materiality feature?

WWF - WWF welcomes the ISSB developments in relation to the harmonization of reporting standards. Hopefully these voluntary standards will become mandatory. There is still a need to work closely with the Taskforce on Nature related Financial Disclosures on the integration of nature-related risks.

In the US, WWF identifies that the SEC’s new rule addresses systemic risk within the US financial system while affording companies multiple new opportunities to engage more fully in the new, green economy.

Regarding scope 3, WWF supports the proposed rule’s inclusion of Scope 3 reporting, but also recognizes that Scope 3 measurement and reporting standards are still maturing. WWF endorses the rule recognizing the difficulty in providing an accurate estimate of Scope 3 emissions, removing the requirement for smaller reporting companies (SRCs) to report Scope 3 emissions, and phasing in assurance for Scope 3 emissions from large companies and accelerated filers.

In reference to materiality, WWF notices that companies and investors are understanding that the financial materiality of climate change and nature loss is systemic. Unfortunately, in the US, climate emissions and related financial materiality have been confined to firm-focused risk. Given the magnitude of the challenges ahead, we need to address both firm-level financial risks and systemic risks of climate change that impact every company. American businesses stand strongly to benefit from this SEC rule which helps them translate and navigate broader systemic environmental issues to firm-level risk.

F - Where does WWF stand regarding a global carbon price, akin to what exists globally for currencies (Euro/$) and commodities (ounce of gold)? And what about the implementation of Art.6 within the 2015 Paris agreement?

WWF - WWF supports a broad-based carbon price that increases over time, along with a minimum global carbon price, especially for internationally exposed sectors. However, there are many political, equity and practical obstacles that must be overcome on the way to this worthy goal. An important element is agreement on strong rules under Article 6 negotiations that ensure rigor and transparency in transactions between jurisdictions, and to the extent possible, in the voluntary carbon market.

COP27 clarified some of the Article 6 Rulebook issues left unsolved in the Glasgow decision. We are happy with the decision to name non-authorized units “mitigation contribution 6.4 units”. These units must not be used by companies as a basis for offset claims.

F – Thank you for your time.