Last month, I wrote about recent challenges that have arisen from the terminology of sustainable finance – the legal and political consequences of the sometimes careless ways that terms like ESG, ethics, risks and impact have been interchanged depending on audience and public mood.

This month, we explore the recent boom in investor interest around natural capital; and it’s clear that getting the language right here will be important too.

How to define natural capital and greenwashing

Already, a buzzword is emerging: biodiversity. It’s being used as the catchall term for all engagement with nature-related issues, for obvious reasons – it is familiar, easy to grasp, and it comes with the added bonus of conjuring up images of brightly-coloured animals and coral reefs. 

An internet search for ‘biodiversity’ produces endless photos of turtles and toucans and other creatures that would be at home on a David Attenborough documentary. This makes biodiversity a great word for marketing all the efforts that are taking off in the finance world.

Google ‘natural capital’, on the other hand, and you get lots of text-heavy charts, and images of plants sprouting out of stacks of coins.

But natural capital is the more accurate term for the work that is being done on this issue, because it covers both biodiversity and ecosystems. It acknowledges the need for investors to address the loss of plants and wildlife, but – often more importantly for portfolios – it leaves room to address risks like water scarcity or the destruction of carbon sinks, and acknowledges the deep interconnections between the natural world and the financial system.

The industry would do well to embed the most honest descriptions of its burgeoning work on natural capital into the lingo from the beginning, to avoid repeating the mistakes of the past.

And it is not the only ESG topic where there is a need to establish clearer delineations. Greenwashing requires a similar, and perhaps more urgent, debate – but this time by regulators.

In January, the European Supervisory Authorities (ESAs) closed a ‘call for evidence’ through which they gathered public and industry opinion on the seriousness of the region’s greenwashing problem. That consultation will feed into a broader project on the subject, which comes in response to a request from the European Commission.

The ESAs are mandated to provide their overall conclusions by summer 2024.

There is a widely-held assumption that all these investigations will lay the groundwork for the EU to develop regulatory definitions for greenwashing, to support its efforts to clamp down on the practice.

If this does happen, it will spook the many asset managers and companies operating in the bloc that play fast and loose with their sustainability claims. 

But even the more credible players may find reason to be nervous. If future definitions do not distinguish between intentional and unintentional greenwashing, there is the potential for well-meaning investors to face the same level of enforcement action as those who knowingly mislead clients.

Clear and accurate definitions will be essential for the future of sustainable finance, and natural capital and greenwashing should be focus areas for those keen to achieve that clarity.

Sophie Robinson-Tillett
Contributing Editor, ESG