Financing biodiversity: What we Need to Do
Biodiversity deserves scrutiny. We are now losing species at 1000 times the natural rate. The financing of biodiversity is falling far behind. But the world is starting to recognize the value of nature, as reflected in a number of influential reports. Matthew Phan takes a closer look at the reports to pull together crucial takeaways we all have to pay attention to.
The world is starting to recognize the economic value of nature.
Recent publications, such as the UK government’s Dasgupta Review on the Economics of Biodiversity, major reports on financing mechanisms for biodiversity and nature from Global Canopy and the Paulson Institute and the launch of a global Task Force for Nature-related Financial Disclosures, styled after the existing one for Climate-related disclosures, reflect this momentum.
Biodiversity is also getting attention, though it tends to get bound up in the catch-all ‘nature’ term, and linked via the idea of eco-system services. It deserves its own headlines. Scientists estimate that we are now losing species at 1000 times the natural rate of one to five per year, according to the Paulson Institute’s Financing Nature report.
What do current financing flows to projects related to biodiversity – or nature, more broadly – look like? North Star Transition reviewed the reports and came away with the following takeaways.
1) Nature is an ‘externality’ and that’s not going to change.
Nature is a critical ‘enabling asset’, but its benefits are communal and difficult to reflect in the price of economic transactions. The Dasgupta review takes pains to show how humans engage with and draw from nature but also shows why it falls through the gaps. Nature is “silent”, “mobile”, “invisible”, it is impossible to establish private property rights on eco-system process, and outcomes of degradation are “non-linear”. As such, nature’s processes “do not satisfy… technical conditions that are required for markets to function”. Economically speaking, nature will always be an externality from the viewpoint of any individual actor. See Olivier Boutellis’s posts on externalities here and here.
So, instead of arguing for a purely economic solution, the review asks humans to simply recognize the root problem: We cannot do without nature, and our demands impose a cost on it, but Nature is finite and damageable. Therefore, we must tailor what we ask of it, and rebuild nature’s capacity to give us what we want. To get over the narrow point of view of any single economic actor, we need poly-centric institutions – overlapping organizations that together can capture the various aspects of a decision that might be “external” to the viewpoint of any one entity, and thereby together develop solutions that benefit all. Such an approach feels quite familiar to us at North Star Transition. In the Wales Transition Lab, we bring together folks from farming, food retail, health, water, engineering, conservation and finance.
Supporting this, the Dasgupta review asks us to change how we measure “economic success”, and also to change our institutions, in particular our financial and education systems. The choice of finance and education is instructive. Education is named perhaps because of the limited reach of economics – where markets fail, we need inspiration, not just incentives. Finance is named, on the other hand, because we must also work with the version of shareholder capitalism we currently have. Finance determines how we reward or punish the allocation of financial capital to various human endeavours, and is a key design centre for the incentive structure underlying our entire economic system.
2) Current solutions for financing nature do not solve the ‘externality’ problem. Funding sources fall hugely short of funding needs.
Between US$722-967 billion of funding is needed each year global biodiversity conservation but only US$123-143 billion is actually supplied. Most of these funding mechanisms reflect, and do not solve, the ‘externality’ problem.
Figure 1: Global biodiversity conservation funding needs (in US$ billions per year)
Taken from: Financing Nature, Paulson Institute, The Nature Conservancy, Cornell Atkinson Center for Sustainability
Only a small proportion is invested in activities where restoring, protecting or nurturing nature is a direct part of a single entity’s value creation process and directly generates positive revenue or reduces costs. For example, eco-tourism is an example where a business owner can directly charge for access to nature. Regenerative agriculture that uses soil as a carbon sink and engages with carbon markets is another way to translate an indirect benefit of building natural capital into revenues.
But a significant proportion of existing financial flows into nature are essentially funded by governments or other public sources. Some funds may pay for conservation in national parks, while other funds are invested in so-called natural infrastructure, such as forests or coastal wetlands, which provide eco-system services such as stormwater management or mitigating wave damage. This essentially recognizes that a private market solution would fail and public or philanthropic capital needs to plug the gap.
Other financial flows to nature consist of limiting or partially paying for damage. Most current green financial products and the overall ESG movement in finance might fall under this category – the focus is on the potential economic damage from extreme climate events or loss of critical services provided by nature. Hence, too, corporates’ investment in more sustainable supply chains, or buying biodiversity offsets.
3) Financial flows that hurt nature completely dwarf the financial flows that help nature.
The direct implication is that we have to cut harmful subsidies, because even if we quadruple positive fund flows to biodiversity, if subsidies are not cut all we are doing is moving (slowly) toward net neutral. Subsidies to industries where current methods of production harm biodiversity – such as fossil fuels, agriculture, fisheries and forestry – receive subsidies of some $1,030 billion annually. In some ways the focus of green activists on the energy and agriculture industries is right. These two are only part of the addressable market for positive inflows of green investment, but the biggest win here could simply be redirecting harmful subsidies.
Part of the battle here may be to address the goals that governments had in setting up these subsidies in the first place (often growth or jobs, or more cynically, supporting interest groups). Subsidies intended to support development or free trade may not inherently call for damage or exploitation of nature, but have perverse incentives and side effects because biodiversity wasn’t considered when they were designed.
4) Mainstreaming green concerns is necessary.
Given the sheer scale of harmful subsidies for activities currently undertaken by existing organisations, involving incumbent corporate actors and mainstreaming environmental concerns look essential to fighting the climate emergency. Limiting damage – either via positive flows into sustainably run projects, or reducing subsidies of harmful projects – is immensely important.
While we’re on mainstreaming: sustainability can seem a luxury good for well-off consumers in wealthy nations (sustainability is now, sadly, such a watered-down idea we prefer the ‘regenerative’ label in North Star Transition). How do we include lower income groups? Basic questions of institutional quality, social stability and strength of government crop up. There is a need to educate both consumers and producers. ‘Organic farming’ in Myanmar refers to subsistence farmers who don’t use chemicals because they can’t afford to. There is serious tension between growth and sustainability; a recent Financial Times article on Rio de Janeiro’s drugs and militia-driven crime crisis recently ended with experts noting that developing the oil and gas sector was the main economic vehicle by which the city might become viable again.
5) We need more business models where nature and biodiversity are part of the value creation process, not a non-core ‘good-to-have’ side effect.
Limiting damage and risk management are important, but regenerative business is not simply switching brown inputs to green inputs on a nature-neutral process, and thus hoping for green rather than brown outputs. Rather, it is integrating the restoration, protection, or nurturing of nature directly into the business model so that the business owner has a natural, intrinsic incentive to do so because it can increase revenues or reduce costs – allowing the owner to say, what’s good for nature is good for me. (A business can also restore nature voluntarily, but I’d call this philanthropic, not core.) A framing question for business might be “Have you built nature into your value creation process?”
This seems most natural in agriculture, where soil organic matter or water quality directly contribute to quantity and quality of produce. It may also be intuitive in green buildings and architecture, where live-ability or energy efficiency may have direct benefits on productivity. We might start to see this more on consumer goods or services, like fashion (e.g. Patagonia, or perhaps less well-known, French luxury brand Hermes) or even banking (e.g. fin-techs which attract depositors by promising to only lend to green industries) – where green practices and branding directly support revenue growth. Is it possible to do this with B2B (business-to-business) goods and services, so that green corporate branding likewise feeds into profits?
6) We need more intelligent, patient and creative investors, working hand in hand with regulators, state entities and NGOs.
How do we get business do all the above in good faith - so it’s not just greenwashing? Many of the reports cite the activities of big business and one may wonder if biodiversity finance has been coopted into CSR activities – used to offset the damage that corporate’s core activities do in other places and to acquire a veneer of environmental respectability (greenwashing at the company level). Financial institutions are guilty of this too: How sincere is ESG? One might argue this does not matter if the right actions are taken, but it does matter, because cynical behavior leads to disillusionment and disengagement.
In a way, investors play police, in rewarding or punishing businesses by allocating or denying capital. Mainstreaming green concerns in the finance community will require educating decision-makers on the ins-and-outs of assessing environmental impact. Finance may have to move a lot slower if it seriously wants to consider investments and issues from all dimensions. In a culture where time is money, this will also require generational shifts in values and mindset.
Green finance may increasingly be blended. Philanthropic money, public funds and private capital will all have a role to play, as they have different mandates and risk appetites. Investments may be increasingly structured where financing is provided by a coalition with different types of capital, and invested in a portfolio of inter-dependent assets in an eco-system, and designed hand-in-hand with regulators and policy makers.
Case Study: Australia’s Murray-Darling Basin Balanced Water Fund
William J. Ginn, former Chief Conservation Officer for The Nature Conservancy who also launched NatureVest, TNC’s investment unit, cites an example in his book Valuing Nature of how investors and regulators in Australia worked together to craft a solution to water management given extreme weather conditions. They took inspiration from wetlands, which serve a natural buffer by absorbing excess water when it rains hard and releases the water slowly when it is dry. The fund was designed to, likewise, purchase water rights at market prices when it was in surplus, then sell the rights during periods of drought when prices were high. This helped set a market price for water and to thereby coordinate agricultural activity in the region – farms with marginal productivity might sell their water use rights back to the fund during times of drought, while high-margin almond farmers might buy more water to maintain production. Farmers have the incentive to invest in water-saving irrigation devices, and sell the conserved water back to the fund at a profit. The example highlights the necessary property rights and regulation; Ginn points out it would fail in the US where the right to use water is not separated from the land but rather allocated based on land ownership.
In sum, each report has major strengths: the Dasgupta review is very focused on the why, and the others on the what and the how. Together, they point out that financing biodiversity requires not just cosmetic shifts in how and where existing financing solutions are applied, but a deeper change in the structure and nature of these solutions. We need to evolve our institutions and systems such that our economic decisions truly integrate the idea that nature is a critical asset. The immediate tasks are to consider multiple viewpoints, reduce harmful subsidies, and design business models in which nature creates value. The road ahead is fundamental redesign of our global system, the shape and process of which we are still discovering.
