Climate risk has already exposed the fragility of our global supply chains.
Take semiconductors, for example: Their production requires vast amounts of water, and droughts in Taiwan have already threatened manufacturing that impacts the electronics industry worldwide. These challenges are not isolated. Similar vulnerabilities exist across agriculture, textiles and logistics, where disruption ripples through entire supply chains.
At the same time, our physical assets are losing value as climate risks mount, operating costs are climbing, and investors are demanding far greater resilience. These nature-based risks result in interconnected risks and require interconnected solutions.
Nature-based risk is financial risk
For the business world, nature-based risk is financial risk, and this impacts businesses of all sizes.
In fact, small and medium-sized enterprises (SMEs) are likely to be most affected given their prevalence, particularly in Asean where they make up more than 99 per cent of firms in the region. SMEs play a vital role in these economies, but they are also the most vulnerable – projected to lose US$237.5 billion in revenue if they fail to keep up with the green agenda.
While this signals the urgent need for solutions, SMEs also face the added complexity of budget and scale. But before solutions can be implemented, there must be awareness of the issues at hand. Helping SMEs adapt is the single biggest lever we have for building resilient economies.
The awareness gap is also prevalent among stewards of capital – particularly around what mitigating nature-based risks mean for their portfolios.
Also Read: Investors bet on algorithms and insurance to tame Asia’s climate-health crisis
Large asset allocators and institutional investors have made constructive progress in steering away from financing the brown economy (such as coal, oil and gas) to focusing on the green and also the emerging blue economy (oceans and marine life), which is projected to have the highest returns in the long term.
But there is still a need for ongoing education and purposeful integration of these values in their day-to-day investment decisions as investors continue to question the performance of such investments, particularly in volatile markets. Beyond this, investors are also in search of solutions that are capable of unlocking long-term returns as part of their decarbonisation investment strategy.
The best solutions are nature-based
All of these risks stem from nature itself, and one thing is clear – the best solutions too are nature-based.
Nature-based solutions are actions to protect, sustainably manage, and restore natural and modified ecosystems that address societal challenges effectively and adaptively, simultaneously benefiting people and nature. But these solutions are currently underfunded, and innovation across the investment value chain to support these solutions has to be accelerated.
The World Economic Forum projects that the world needs about US$2.7 trillion worth of investments per year until 2030 to build a nature-positive economy. For businesses and investors, investments and innovations in nature-based solutions hold the key to enhancing resilience against financial risks linked to climate change.
For investors, the growth of nature-based solutions as an asset class warrants a look. There is increasing demand to align investment portfolios and targets with disclosure frameworks, such as Taskforce on Nature-related Financial Disclosure recommendations.
Large asset owners are also keen to increase their stewardship and engagement in this asset class. A third of investors surveyed earlier this year by the Asia Investor Group on Climate Change have already adopted biodiversity-related disclosures and/or strategies.
The vibrant landscape of climate tech solutions for the blue economy for ocean restoration and preservation of coral reefs, among others, are also key financing opportunities for investors to realise long-term value and impact.
Also Read: Unlocking climate x health capital: A data-driven blueprint for smarter impact investing
For SMEs and businesses, the implementation of nature-based solutions must be practical, scalable and affordable. We must also consider innovation as a key driver.
For example, we have seen the rise of artificial intelligence (AI)-enabled climate risk modelling and innovative insurance products like parametric insurance. But AI is a double-edged sword; while it has great potential to deliver intelligence and advice at scale and at a low-price point, it is not environmentally-friendly, and we must ensure that our use of tools to protect our businesses is balanced with the impact of the tools themselves.
An interconnected response is needed now
Interconnected risk requires an interconnected response. There is a synergistic relationship to be explored between investors who are looking for opportunities and SMEs who are seeking solutions. Financing this gap and allocating capital to nature-based solutions are the key to future-proofing economies.
Whatever the solution, we must move beyond risk-mapping and take tangible action to build resilience. After all, awareness of risks does not protect our businesses, people and livelihoods. These actionable solutions must be implemented now, as the climate risks we face are already substantial and intensifying year on year.
Climate resilience is built upon preparedness. This is not a challenge to be met in isolation, but a systemic shift requiring leaders to unite, innovate and catalyse action across borders, supply chains and industries.
Nature-based solutions, and by extension climate tech, are not the next frontier, they are the present frontier.
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