Can banks make a profit by investing in the Barrier Reef?
EARLIER this month, Australia's Big Four banks copped a serve over their support of the coal and gas extraction industries, focusing attention on the ways large banks' investment decisions can put the future of the Great Barrier Reef at risk.
A study conducted by Friends of the Earth-affiliate Market Forces with global environmental group 350.org calculated Westpac, the Commonwealth Bank, ANZ and NAB have lent A$3.8 billion since 2008 for energy projects in the Great Barrier Reef World Heritage Area.
The groups called for people to "put their banks on notice" that if they "continue to fund dirty coal and gas" they will "risk losing you as a customer". But focusing on the negative consequences of coal investments is only half the story. The hard reality is that we cannot expect Australian banks to stop funding mining altogether. The question we need to be asking is - can banks make a profit by investing some of that coal money towards reef-friendly businesses?
At the same time, government and non-profit organisations spin in circles trying to find revenue for marine conservation and management, and we are missing the bigger picture.
There are a number of investment options that could prevent adverse impacts on the reef and reduce the current and future needs for marine conservation finance - while creating self-sustaining economic incentives for improving the state of the reef.
Making an impact with investment
"Impact investing" achieves environmental and social benefits while generating financial profit. It is more proactive than socially-responsible investing, which avoids negative external factors, because it requires positive and measurable benefits. Globally, the impact investing market is currently estimated at US$9 billion but investors surveyed by JP Morgan on behalf of the Global Impact Investing Network feel that the industry is "in its infancy and growing". Experts predict a US$500 billion industry globally by 2019.
In the past, the rate of return on impact investments has been lower than the market rate but, in 2013, it is expected to close to market rates of return. (Investors' expectations and actual financial returns vary widely depending on instrument and region.)
In Australia, a broad range of "first movers" are generating profit by investing in affordable housing, renewable energy, early childhood education, and most famously, a social impact bond in New South Wales.
Green or environmental bonds operate similarly to other bonds but invest in "green" companies, usually in the renewable energy sector. Seven supranational banks (such as the Asian Development Bank) issued US$4.2 billion in green bonds in 2011-2013. Most notably, in March 2013 the World Bank's International Finance Corporation issued a $US1 billion green bond.
Korea followed suit a month later by issuing US$500 million of green bonds for low carbon initiatives, with a payout of 1.75%, at 95 basis points above US Treasury bills. The bonds were highly oversubscribed, leaving high demand for similar products.
Banks in Australia could issue green bonds focused on investing in Queensland businesses which create net benefits for the reef and the community. They could fund eco-tourism that provides reef stewardship opportunities, or sustainable agriculture and other uses of land that reduce pollutants flowing to the reef from its catchments.
Revolving loan funds
Revolving loan funds mobilise capital to help businesses change their practices to be more environmentally-friendly. The costs of changing their business can often stop organisations shifting to new ways of doing things, even if there are long-term environmental and economic benefits.
For example, Verde Ventures, a partnership between Conservation International, Starbucks, and KfW Development Bank has to date invested US$23 million in sustainable enterprises and generated US$137 million in sales in addition to achieving biodiversity outcomes.
Revolving loan funds for commercial fisheries could help fund the transition to sustainable fishing. Fish 2.0, a US competition for innovative fishery business plans, uncovered a host of business strategies for sustainable seafood harvest and processing. Similar business strategies could be supported in and around the Great Barrier Reef.
Screening out, and in
A third solution is called "screening". Investment screening initially encouraged people not to invest in businesses doing unethical things, such as using child labour. The second generation of screening is positive: ensuring that a percentage of investments produce environmental and social returns in addition to financial returns.
In Australia and New Zealand, just under A$20 billion dollars is invested in "responsible investments" through screening, and the market grew 8% from 2010 to 2011. No banks have yet set up an investment product explicitly related to reef health, but current responsible investment products could be adapted to benefit the reef.
If the Big Four banks re-directed 10% or A$300 million over five years into a combination of green bonds, loan funds, and positive-screened investments, this would build momentum towards a more reef-friendly economy in Queensland. The smaller rate of financial return would be offset by conservation and community benefits, as well as protection of the A$5 billion annually flowing from reef-dependent industries.
With UNESCO considering putting the Great Barrier Reef on the "in danger" list, it is urgently necessary for banks and environmentalists come together and invest in the reef's future.
Melissa Bos receives funding from the National Environmental Research Program.
Bob Pressey does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.