Protecting and investing in marine capital makes business sense
Every day, unknowingly, every citizen of the world benefits from the oceans. They generate 50% of the oxygen we breathe and absorb 25% of carbon emissions. Just one mature whale sequesters more carbon than 30,000 trees.
The ocean allows us to live – driving our economy as well as maintaining the health of the planet and its inhabitants. But this is undermined by the progressing climate change, and there's solid evidence confirming that the ocean has a strong impact on climate. The future financial consequences of climate change are becoming increasingly apparent to companies, investors, and policy makers. While the protection of oceans and the blue economy are environmentally and socially justified, they also make good business sense.
Who owns the ocean?
The short answer is we all do. As much as 75% of all seas lie beyond national jurisdictions and are owned by the global community. However, it also means that no one is fully accountable for the ocean and its condition. The challenge is to mobilize international cooperation to ensure that marine resources are protected and future-proofed to support further human endeavor.
The value of natural capital
Nature is priceless. But we can and should translate its value into financial terms. This way, the use of natural resources and the services nature provides will be properly measured and accounted for. Also, it will fully expose and quantify risks stemming from climate change.
To date, nature has either been ignored as an externality or underpriced by the finance and insurance sectors. Popular economic indicators, such as GDP, don't take natural capital into account. The overlooked figures are big. As estimated by Scripps Institution of Oceanography, Mexico's mangrove forests provide 70 billion US dollars to the economy every year through storm protection, fisheries support, and ecotourism. Despite the fact that mangroves are a better storm protection than any man-made structure and their overall positive contribution to the ecosystem is well-known, they are being destroyed at an alarming rate.
Environmental reasons why protecting and investing in oceans makes sense
Managing risks, not disasters
According to Trucost, almost 60% of companies in the S&P 500 (market capitalization of 18 trillion dollars) and more than 40% of companies in the S&P Global 1200 (market capitalization 27.3 trillion dollars) hold assets at high risk of physical climate change impacts, such as floods, droughts, wildfires, heatwaves, and other extreme weather events.
We believe companies and investors should seek a better understanding of their exposure to climate change risks. The financial industry, on the other hand, needs to review its risk modeling to take into account climate change and drive investment into mitigating harm and building resilience. The UN estimates that an annual investment of 6 billion dollars in disaster risk management could save around 360 billion dollars in the next 15 years.
The ocean is one of the least invested of all the UN Sustainable Development Goals, particularly from a private capital point of view. As the blue economy is a relatively young concept, there aren't yet many investment products available and those that are, are in a pilot phase. Insufficient data to understand and quantify ocean risk and lack of understanding of how blue investments generate returns are the key barriers for investors. Blended finance could bridge the blue investment gap by bringing to the table actors with various levels of risk tolerance and with so-called “patient capital”: philanthropic finance, private sector finance, and public sector finance. This is particularly important in the early phase to get the blue projects off the ground when the risk could be too high for private investors but the public sector is ready to take it, doesn't expect as high of a profit, and can wait longer.
One should bear in mind that so far the externalities haven't been priced into these investments. This is one reason why the returns may appear low.
Marisa Drew – Chief Executive Officer, Impact Advisory and Finance (IAF) Department, Credit Suisse
Shifting the investment paradigm
Undoubtedly, sustainable investing and the blue economy require a long-term time horizon. But investors need to start looking at their risk profile and understand that sustainable investments can reduce that risk profile. At Credit Suisse, we expect this emerging investment theme to become increasingly important for investors over the coming years.
Business reasons why protecting and investing in oceans makes sense
World Ocean Day webinar questions to Marisa Drew and Karen Sack
When it comes to nature capital investments we always argue the need for designing projects that meet returns expectations and short-term horizons of private investors...when it comes to nature and the future of the planet should we not be making the case for investors to realign their return expectations and lengthen their investment horizons to ensure long-term sustainable economic models and returns if somewhat lower? Does the investment paradigm need to change?
Marisa – It is very clear that investing in the environment is not a "quick-fix" opportunity but there are plenty of markets of exceptionally large scale that rely on patient, long-term capital. The multi-trillion dollar private equity market is a very good example of investments that are designed to be ten-year illiquid strategies. Investors want and need to be compensated for this patience but if the case for an attractive risk-adjusted return can be made (and I believe we should attempt to make the case in the first instance), the capital will then follow. Investors such as pension funds and insurance companies want to be able to "match fund" long-term assets and liabilities—and in the case of insurance companies, they are already well-versed in climate risk modelling so they should be better equipped than most to conceptually understand the value of investing in nature to help mitigate climate risk.
One of the issues with the environment to date is that we have not adequately factored in the risks of inaction or unsustainable practices in the belief that the environment is a perpetual "free resource" versus a finite one. As a result, the risk/return calculations of investing in natural capital versus other alternatives is arguably mispriced. This is now changing as the cost of climate change is becoming ever more tangible. It is not the whole story, but in the natural capital sector, I believe we need to tell the risk, but even more importantly, the returns story better and be able to show good proof points that can be replicated and scaled while delivering attractive returns alongside positive environmental impact. Of course, not all projects and investments can generate a market rate of return. For those that cannot, we need to think about accessing investors who have a tolerance or a mandate to accept a concessionary financial return in the quest to achieve the impact or we need to perhaps blend such catalytic capital with traditional investors in order to make the risk-return equation work for both.
How do you envisage working with big industry and corporates please? SMEs and leading tech startups are great but are more substantial companies needed?
Karen – Absolutely. Several years ago, Ocean Unite launched an initiative called "The Ocean is Everybody's Business," partnering with businesses to encourage them to go on a "blue voyage" to ensure they take into account their potential impacts on the ocean in their operations and help them understand how they can make a positive contribution to ocean protection. We've worked closely with the Virgin Group throughout and have been working with AXA to develop the multi-stakeholder Ocean Risk and Resilience Action Alliance (ORRAA) to pioneer breakthrough solutions that drive private and public investment into coastal natural capital to regenerate biodiversity and build resilience in the most exposed and vulnerable regions and communities. We have also partnered with the B-team, which is working to shift the culture of accountability in business to include not only numbers and performance, but people and planet. Big corporates need to commit to net zero and then work quickly to implement investment and business decisions to achieve that, as well as develop ESG indicators to understand how their practices impact on biodiversity and resilience. We know it is possible because several leading corporates are moving quickly to change from business as usual.
What have we learned from greenwashing and how do we avoid bluewashing?
Karen – It is really important that there are clear bottom-line standards for accountability, disclosure, and transparency to ensure that "bluewashing" doesn't happen. UNEP-FI, the EU and WWF are working at the moment to take the Blue Finance Principles that they developed with other partners and outline how they need to be applied in practice so that there is a common "taxonomy" of application and standards of excellence that can be applied for investing in sustainability in the ocean space. The Carbon Disclosure Project and Planet Tracker are two organizations keeping corporates accountable and so perhaps we need to work more closely with them in the ocean space – and of course, we need to make sure that governments are also being held accountable. Transparency is absolutely key.
Marisa – I completely agree. Alongside the Blue Finance Principles, we at Credit Suisse, the UN Global Compact and several other financial institutions are taking a cue from the playbook of the green bond market (which has raised over 1 trillion dollars in capital in roughly a decade to apply to green investments) to help establish a set of Blue Bond Principles for the liquid capital markets arena. The aim of this effort is to guide best practice on what issuers should adhere to when using the "blue" label on any public bond offering. Having a rigorous, harmonious set of standards will give investors confidence and transparency and is one of the key requirements for a market to scale.
How will investing in blue economy be beneficial for the local communities?
Karen – The key is that the investment is in activities that are sustainable and that local communities are engaged from the start in the thinking, planning, and then delivery of any activities. It is really important that close, sincere, and meaningful partnerships are developed with local and coastal communities so that investments build economic as well as social resilience. Displacement from the climate emergency and biodiversity crisis is going to result in huge migrations and displacement of communities as they seek livelihoods and shelter. Working now as quickly as possible and in close collaboration with communities to understand their needs and build forward with nature is key to reducing that displacement and seeing beneficial outcomes for people and nature.
Do you think there is a strong business and environmental case for habitat restoration around offshore renewable energy sites?
Karen – Absolutely. And not just habitat restoration but also habitat conservation. Marine spatial planning and prior environmental impact assessment are key to this. The areas around offshore wind turbines would be wonderful sites for marine protected areas, for instance, as you don't want fishing vessels destroying the infrastructure that has been located there. But that also means taking account of critical areas before infrastructure is installed and developing plans that incorporate the importance of green infrastructure investment as part of the investment and development planning mix. The InterAmerican Development Bank has been doing significant thinking on this and recently released a useful paper on integrating nature-based solutions into infrastructure development.