28 Jul 2020 Why we need global Biodiversity Finance

Posted at 08:43h in Biodiversity, ESG by

Biodiversity depletion is an environmental disaster deteriorating faster than climate change. Environmental risks will adversely affect the macroeconomic performance of various sectors and financial markets. Moving sustainable finance into mainstream practices is key. Evidence shows that nature-based solutions can be readily turned into cash flows and in the past decade, funds that incorporate ESG have outperformed non-ESG funds.

Biodiversity is the infrastructure that supports all life on Earth. Our ecosystems thrive upon biodiversity and our natural capital is largely dependent on it. The unprecedented Holocene extinction, on a par with global warming, has led to a planetary emergency. Biodiversity depletion is an environmental disaster that is deteriorating at a faster speed than climate change, with the latter exacerbating the former. It is astonishing to note that the current rate of biodiversity loss is estimated to be 1000 times higher than the natural extinction rate.

The challenge we face with biodiversity loss is intractable for the roots of biodiversity loss are multifaceted. Production of food and fuel crops, livestock farming, aquaculture, industrial pollution, system perturbations are all critical factors that represent biodiversity threats. According to the IPBES report in 2020, three-quarters of the land-based environment and about 66% of the marine environment have been significantly altered by human actions. Plastic pollution has increased tenfold since 1980. Meanwhile, the South Pole is warming at three times the global rate. As early as 2035, the deforestation of the Amazon rainforest will turn it from a repository of carbon to an emitter, making it extraordinarily challenging to restabilize our ecosystem. We are consuming the underpinning bedrock of our economies, livelihoods, and quality of life worldwide. If no proactive and transformative action will be taken, we will soon pass the tipping point after which the damage will be irrecoverable.

Governments, businesses, and the finance sector have started to realize how such global environmental risks will adversely affect the macroeconomic performance of distinct sectors and financial markets. However, it is still not too late to take action. Biodiversity finance plays a gigantic role in restoring the balance of our ecosystems and conserve biodiversity.

The financing gap and the urgent need of a paradigm shift in investing

Before the tipping point is passed, we have fortunately seen a turning point as investors have started to understand that business factors rely hugely on natural capital, just like climate change was identified in 2015. However, the finance gap as well as the gap in our vision and actual policies remain utterly huge. The current global biodiversity finance is estimated at USD 78 – 91 billion per year (2015-2017 average). Meanwhile, our governments spend approximately USD 500 billion per year in support that is potentially harmful to biodiversity. Another gap lies in the discrepancy in our global investment needed annually to protect the biodiversity with an estimate of USD 400 billion, and the current track of solely USD 52 billion as of 2019, according to BIOFIN. The lack of sufficient financial resources has thus become a predominant barrier to fulfill the objectives of CBD (Convention on Biological Diversity).

To fill such gaps, a paradigm shift and a systemic change are needed to move sustainable finance into mainstream practices. Our investment community has the capacity and the responsibility to mobilize finance at scale to facilitate nature-based solutions. This includes funding innovative business models such as agroecology, ecotourism, and green infrastructure. Moreover, investment in carbon and biodiversity offsets and compensation projects is growing. There is also a rising trend that companies’ dependency on natural capital and related environmental risks are now crucial factors in the investment decisions of various mainstream asset owners, such as pension funds and insurance companies. That being said, there are still multiple factors that hamper such a new paradigm shift.

Many investors are deterred by the difficulty in finding projects of a suitable scale, a lack of data and mechanism to measure impact, and a high level of uncertainty or project risk. Efforts have been made to tackle such issues. The UNDP-led BIOFIN (Biodiversity Finance Initiative) facilitates detailed national-level assessments to develop a biodiversity finance plan as well as to implement evidence-based finance solutions. The TNFD(Task Force for Nature-related Financial Disclosures), which is expected to launch in 2021, will complement the TCFD (Task Force on Climate-related Financial Disclosures) and formulate a new reporting mechanism on risks posed by biodiversity loss. AXA, BNP Paribas, DBS Bank, IFC, and World Bank are among a group of ten major banks that back this new initiative. International agreements such as the Convention on Biological Diversity also strive to encourage good practices and specifically, promote multi-stakeholder partnerships to conserve biodiversity by highlighting the importance of the private sector.

What will biodiversity finance bring to investors?

Evidence shows that nature-based solutions can be readily turned into solid financial cash flows. Suffice to say, economic activities ultimately depend on services provided by nature. The majority of companies depend on nature either directly through their operations or indirectly through supply chains. Many sectors such as agribusiness and hydropower that harm biodiversity are simultaneously harmed by its loss. Depleted biodiversity will adversely impact financial returns, as activities relying on them would become less profitable. As a result, investors are exposed to huge financial risks stemming from the environmental disruption of an investee’s operations. This, however, is not limited to possible negative externalities but also on how legal, regulatory, and reputational issues are addressed by the investee. On the other hand, there is increasing certainty that adopting sustainable principles such as ESG makes good financial sense. In the course of the past decade, funds that incorporate ESG have outperformed non-ESG funds. In the first four months of 2020, the S&P 500 ESG index in the U.S. has surpassed the standard S&P 500, and similar ESG indices in emerging markets have outperformed as well. Therefore, investors need to conduct a robust assessment of risks as well as opportunities into their investment analysis and redirect investment to firms contributing to resolving biodiversity depletion.

Is biodiversity finance the panacea to halt nature’s demise?

With the advent of the turning point, increasing signs of new and innovative ways of biodiversity financing, including both market-based and non-market-based mechanisms, have emerged. However, there are still obstacles that exist which hinder the recording and the scaling up for biodiversity finance to flourish and become mainstream practices. Biodiversity finance is our arrow in the quiver that serves as a powerful instrument to preserve our ecosystem which we ultimately rely on. In the foreseeable future, such power will be recognized, replicated, and developed on a global scale as global efforts are needed to turn the tide.

In the words of Yann Wherling, the French Ambassador for the Environment:

Protecting nature is the best financial investment for our future economies

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