Led by Richard Conway, CEO, Elastacloud, Sam Gandy, head of innovation, Ecosulis; Jigisha Lock, head of platform strategy, portfolio, and ESG solutions, NatWest Markets; and Vian Sharif, head of sustainability FNZ and Founder Nature Alpha, FNZ, took to the stage to whiteboard the financial institution’s role in managing and measuring a climate transition when financing sustainable cities.

What must be considered before building a sustainable city?

To set the scene, Lock provided some statistics and revealed that 70% of energy consumption across the world occurs within cities, as well as 75% of emissions. Introducing the role of the bank, Lock asked: “What would it take to have a sustainable smart city? The key parameters are a smart grid, good insulation, water management, waste management, almost a self-sustaining local produce and a growing community, at a very high level.”

She continued: “How would banks enable that? Through a series of financial products. Those could be green bonds, sustainability bonds, sustainability linked bonds, carbon markets, project financing, pretty much all your traditional financial products with a sustainability lens on it, where the returns are not purely financial, but also environmental.”

Summarising the challenges that investors would face within this realm, Lock mentioned “measurability and scalability, which both impact profitability.” While non-financial returns are important for sustainability, if these do not translate into direct profit, banks could get penalised by shareholders.

In Sharif’s view, nature capital has a place in investment decision making and should be considered across financial services. Dependencies such as water and soil will need to be factored in for certain projects and what impact these will have or present a risk to the bank in future. “It is not only about the impact that we’re having, but also about the risks that we can mitigate for the future and how that might sustain the businesses in which we’ve just invested. When creating metrics, we must start to think about the materiality of investments, impact dependency, the risks presented to that investment in this situation,” Sharif said.

She added that the sheer amount of regulation incoming proves that there is a huge amount of awareness that wasn’t there before. Another element that must be considered is location specificity of biodiversity and nature. “As much as I love where we live today, it’s not quite the same in terms of biodiversity richness as a place in the Amazon rainforest. Biodiversity is specific to location and that is crucial in terms of all the regulation that’s coming up,” Sharif said.

The third piece of this pillar is the technology that is available to measure change over time, as well as the proliferation and accessibility of satellite imagery, and the ability to process satellite imagery of ecosystem change over time. Combined with traditional financial metrics at our disposal, the industry is in a place where these developments can be effectively measured, and standardised.

What needs to change for sustainable cities to be successful?

While organisations such as the TNFD are supporting standardisation, regulation remains generic and subjective. Interpretations in isolation could result in banks being called out for greenwashing, which is a genuine concern for Lock.

Context is key, and as Lock advised, what is missing from this area is “the space for dialogue, learning and experimentation as an industry.” In the same way, the understanding that one organisation cannot succeed alone, and partnerships pave the way for increased sustainability because each company can hold each other accountable with KPIs, is equally crucial.

Using a rhino bond, where the return was an increase in a specific type of rhino population in a specific area of South Africa, as an example, Lock described how conservationists worked with financial services. “Conservationists on the ground tracking mechanisms to see whether the growth was indeed taking place, and looked at other kinds of capabilities or ecosystems that were necessary to harness that growth. I think we need to look at products and opportunities a little bit differently. This is a slight tension, but I think still relevant.”

Exploring India as a sustainable country, Lock also commented that the concept of a circular economy is not new. “If you really want to build new cities, especially in emerging economies, such as India, where we have a lot of new cities being built, new and special economic zones being created to promote employment or promote opportunities, we need to take some of those old technologies and capabilities and invest in them and that's where the investment comes in. Create new innovative products to scale some of those age-old practices and have the right KPIs to measure usability of it, so that you are powering these cities through some of that circularity that existed decades ago.”

Bringing the benefits of sustainable cities to improved mental health into the discussion, Gandy added this should also be taken into consideration when in the design phase, because of potential economic gain. “It can be a tricky thing to quantify mental health benefits compared to physical health, it's even more immaterial. But that should be taken into consideration when designing the cities, as the amount of potential economic gain from having healthier, happier citizens that are part of those cities, is tremendous.”

While the world does have a balance sheet, Gandy also added that “in principle, this is a step in the right direction. We were constantly developing and building a lot of the time on top of nature, rather than into it. It’s one of several different kinds of policies that has turned into political football.” Referencing the suggested restrictions on property developers and incentives for offsetting biodiversity, Gandy explored how governments are attempting to mitigate some of the negative effects that human development has on habitats, but more needs to be done.

It could also be argued that more needs to be done around the perception of success and as Gandy expanded on land abandonment in various parts of Europe where large swathes of land are rewilding, his view is that this progress needs to be more proactive. “Some people have the view that rewilding is where you fence off a large area of nature, take all the humans out and just let it go. That's not how it works. It can be not interfering with the ecosystem and letting natural dynamics push things along, but humans are often an integral part of rewilding projects, particularly in the early stages to push things in the right ecological direction. And obviously, there's got to be an economic incentive, as well.”

As a final comment on this topic, Lock added that financial institutions must have a fuller understanding of what data they currently have access to and can purchase. “Understanding what data we have and what our client base is, is critical, which to be honest, not all banks have, in context of sustainability. I've known banks that have gone and bought data for clients that is completely different to they serve.”

Facing facts, Sharif added that looking back at the last three years, the TNFD was merely a though and because of accelerated regulatory guidance and frameworks being released, a concrete narrative around these issues has been set.

“Investment decision making, including nature has changed beyond all recognition. And we've been doing this for the last three years, so where we are today is unprecedented regarding the engagement from the finance sector, and they're buying data. That hasn't happened until now, this quarter.”