Now is the time for regulation to hold the financial sector to account on nature loss, and tools like biodiversity credits and patient capital can catalyse action, according to a Switzerland-based NGO.

NatureFinance released an extended version of a report earlier this week that identified what now needs to happen to reset the global financial system.

The report takes a broad view of how nature might be accounted for across the financial system and covers aspects including reworking food commodity markets, tackling nature crime, and increasing economic rewards for “nature’s stewards”.

New and improved markets like biodiversity and carbon credits might aim to reward Indigenous Peoples and Local Communities for nature conservation, but the current market scale and lack of regulation will limit its ultimate impact, according to Hiba Larsson, principal investment officer at NatureFinance.

“The voluntary carbon market isn’t moving the needle at a $2 billion valuation, but if done the right way nature credits, including biodiversity credits, are so important just to catalyse how we view nature,” Larsson told Carbon Pulse.

“We need to change the whole plumbing of the financial architecture for this to work. If we don’t, I just think it will be disjointed, and we won’t have the real sort of impact that we need, including equitable outcomes.”

Larsson said biodiversity credits can also be a signal to stimulate the finance sector.

However, their role may be comparatively small scale in terms of financial flows that make up the Global Biodiversity Framework target of $200 bln.

NATURE’S PRICE

Biodiversity credits and other nature-related markets can help governments value and put a price on nature, which Larsson said is the ultimate goal.

“Nature isn’t even accounted for, it’s not even visible. It took ages for the financial system to grapple with the EU taxonomy, and then to propose to investors and corporates to disclose the right metrics, some financial institutions are still on that pathway.”

Larsson said the Taskforce for Nature-related Financial Disclosures provides a solid starting point as a set of tools, but governments now need to mandate disclosure requirements and really make use of their considerable leverage.

“I think there’s no other way, it really needs to come from government and financial regulators. Those are the two models, sort of macro drivers. The change we need is not going to come fast enough from consumer pressure or citizen action.”

Larsson contends that regulation alone is also not enough, it must allow for transition plans to be put in place in order to ensure an orderly move to new financial and corporate paradigms.

INTERNATIONAL ALIGNMENT

Biodiversity is often said to be a local problem.

However, a major challenge that NatureFinance highlighted in its report is the need for international alignment on the issue.

When national regulation is implemented to address the international drivers of biodiversity loss beyond borders, it then risks being isolated and bringing major challenges to globalised supply chains, Larsson told Carbon Pulse.

“Take the EU Commission when they implemented the anti-deforestation law, the intention was right, but if you think that through, it could have really bad consequences on the ground.”

Larsson pointed to potential impacts the newly-passed legislation could have on dumping production and producer communities’ income being affected where monopolies dominate, due to no transition plan being in place to anchor the process.

Countries in the Global South are now starting to raise their voice in the conversation on unilateral adoption of regulations such as the EU’s deforestation regulation.

“What we’re now seeing is a sort of OPEC-like coalition by the nature-rich countries, which I think is a positive.”

This grouping, led by the likes of Brazil and other tropical nations, is likely to have a strong voice at the upcoming COP28 UN climate negotiations. Larsson expects the G20 in Brazil next year to be a major meeting, where the voice of nature-rich countries becomes increasingly prominent, due to the country’s role as a major commodity producer and Amazon rainforest stakeholder.

CAPITAL IDEAS

Beyond the regulatory process, there are other aspects of rebuilding the financial plumbing that need to be addressed.

Fast-moving capital, like that of venture capitalists, are now moving into the biodiversity space, but Larsson highlighted that there is a need for other funding streams and partnerships to reset existing financial paradigms.

NatureFinance itself is now taking positions in companies, having obtained a cornerstone investor including the MAVA Foundation, which provided upfront capital through a pre-seed to Series A fund.

“It’s mission-oriented … we’re not looking for these ridiculous returns because we recognise we need to be more patient to support the right initiatives. And it’s really about finding and creating tools.”

The NGO has already identified its early investments, including a university spin-out that is developing a biodiversity complexity index, as a new way of measuring the state of nature to equip financial institutions with the right metrics, Larsson told Carbon Pulse.

“We are also looking at different platforms and financial innovations that unlock capital at scale into nature … not just projects, but really to set up the financial engineering with clever solutions.”

The organisation expects to begin raising additional funds for further investments early next year.

By Tom Woolnough – tom@carbon-pulse.com

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