This post is by Dr Rhian-Mari Thomas, chief executive of the Green Finance Institute
Climate risk is increasingly being recognised as financial risk and this is a positive development. But climate risk is not the only risk in town.
The release of the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) report last year informed us, for example, that one million animal and plant species are now threatened with extinction due to land use change, pollution and climate change. It also highlighted a heightened risk of flood, drought and climate change due to biodiversity loss.
Biodiversity loss and natural resource depletion are financial risks
It is time for us to ensure that our current understanding of the environmental risks posed to the financial system also includes biodiversity loss and the depletion of natural resources. We need to start recognising climate and nature as two sides of the same coin.
At a local level here in the UK we are bearing witness to this interconnectedness between climate and nature. Recent research from Rewilding Britain shows we are heating up at a rapid rate and our wildlife cannot keep up, largely because we have replaced natural corridors with agricultural land, housing, roads and railways.
We have failed to give nature a value, as the Dasgupta Review released soon will surely confirm, and as a result we have witnessed decades of disinvestment. The UK now finds itself ranked 189th out of 218 countries for biodiversity ‘intactness’.
We know the actions to take, the targets are laid out in the 25 year environment plan. What we don’t have, however, is a plan to finance it.
Public spending and the generosity of conservationists and foundations cannot alone provide the billions of pounds needed. We have to mobilise private capital.
In terms of a national framework that would support nature-based green finance, we need disclosures and reporting standards, so that financial institutions – and those they lend to or invest in – assess and communicate their dependencies (or risks) and impacts on nature, moving beyond climate and carbon alone. At a global level, this work has commenced with the development of the Task Force for Nature-related Financial Disclosures (TNFD) and should be further supported by the findings of the Dasgupta Review.
A new ecosystem of metrics and data is needed
This regulatory framework should encourage the development of an underlying ecosystem of providers of metrics, methodologies and, above all, decision-useful data.
To see a reallocation of capital towards nature-positive investments, we also need to complement this top down approach with on the ground financial solutions such as scaled and liquid markets for the buying and selling of carbon credits, biodiversity credits, phosphorous and nitrogen credits, and stormwater retention credits, as well as a supply of nature-based investment products for retail customers, impact investors and pension funds.
Positively, some of these developments are already happening in the UK. NGOs, wildlife trusts and local authorities are working with data providers to assess carbon and biodiversity credit inventories. Water utilities are working with farmers around nutrient reductions. UK-based companies are exploring the possibility of paying for ecosystem services. Policy makers are examining potential levers to support project developers. Our academic institutions are embedding biodiversity within sustainable finance curricula, and banks, investors and intermediaries are determining the commercial viability and investment opportunity that nature presents.
There are, however, barriers that we need to overcome. The first is fragmentation. While the UK is alive with different projects and participants, there is a lack of connectivity and we risk a duplication of efforts and a lack of scale. We need to turn local projects into regional and national projects by working together.
There’s no project pipeline
The second barrier is the lack of a pipeline that can see projects through the journey from receiving grant funding for the technical scoping of ideas and exploration of potential revenue streams, through to investment readiness and all the way to capital investment. We need to ensure there is funding available for each phase so that, as investor appetite grows, there will be a large supply of projects to greet those investors and meet their risk and return requirements.
Inherent in this pipeline development is patient or concessionary capital that can help derisk some of these projects. Nature-based projects are unfamiliar and typically come with little track record. This is anathema to any lender or investor that has a fiduciary duty to its own clients to assess risk. Therefore, financial support mechanisms are needed to build in comfort for private investors, such as government guarantees. Nature should be afforded the same support as other emerging green sectors like offshore wind and green hydrogen. There is an opportunity, for example, for the recently announced National Infrastructure Bank to play a role in mobilising capital into nature-based solutions.
Finally, there are barriers, in the form of policy issues that have to be overcome for revenue streams to be developed, and to instil confidence and support the establishment of nature-based markets.
All of these barriers can be unlocked, but they have to be looked at together. This needs businesses, finance, government and environmental NGOs to collaborate on the creation of a coherent strategy.
Now is the time for the UK to show leadership not just on one side of the coin, but on both.
