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Biodiversity Outlook – What to expect for biodiversity in 2024?

We are anticipating increased focus in 2024 on biodiversity disclosure within corporate reporting.  This is in line with increased global action, legal reforms, shifts in mindset towards biodiversity conservation and nature-positive outcomes that we’re seeing at the moment.

Figure 1: Summary of global developments in the landscape of corporate biodiversity disclosures

The corporate reporting and regulatory landscape are undergoing significant changes, ushering in a new era of nature-related corporate disclosures. The Global Reporting Initiative (GRI) has introduced GRI 101: Biodiversity 2024, an updated reporting standard aimed at enhancing transparency on organisations’ biodiversity impacts. This update closely follows the release of the Taskforce on Nature-related Financial Disclosures (TNFD) late last year, which is a disclosure framework with over 320 organisations, including banks, asset managers and owners, financial institutions, publicly listed companies, and market intermediaries, committing to early adoption by fiscal year 2025.

The European Union (EU) is at the forefront of mandatory biodiversity reporting, with the establishment of the European Sustainability Reporting Standards (ESRS) E4 standards by the European Financial Reporting Advisory Group (EFRAG), that requires EU companies to report on biodiversity risks, opportunities, targets, and action plans.

Other upcoming developments to expect, include the emerging International Financial Reporting Standards (IFRS) developed by the International Sustainability Standards Board (ISSB). The ISSB has announced that there will be enhancements to their disclosure standards to include topics on biodiversity, like natural ecosystems, deforestation, and just transition.

Growing awareness within the investor and financial sectors highlights the significant reputational and legal risks associated with biodiversity loss in investment portfolios. This has led to a shift towards financial instruments prioritising biodiversity to achieve nature-positive outcomes and mitigate financial risks. The financial sector is anticipated to continue driving reporting and regulatory requirements for biodiversity disclosures to meet the increasing demand for transparency, credibility, and the prevention of greenwashing risks.

The intricate interconnectedness of nature and biodiversity can present a daunting challenge for companies to integrate these considerations into their business strategies. Recognising this initial trepidation, a shift is gaining momentum within the corporate landscape, evidenced by the proliferation of frameworks and guidance specifically designed to support a transition towards nature-positive outcomes. Furthermore, leading organisations like Business for Nature Coalition, World Business Council for Sustainable Development (WBCSD) and World Wildlife Fund (WWF) are spearheading the development of practical tools tailored to specific industries, and equipping businesses with the tools and knowledge needed to implement effective nature-positive strategies.

Adding further impetus to this positive trajectory is the burgeoning field of science-based Targets for Nature (SBTN). Leveraging SBTN will empower companies to establish quantifiable, achievable, and time-bound nature-related targets, grounded in science, that aligns with planetary boundaries and societal sustainability aspirations. In May 2023, 17 pioneering companies have piloted the first-ever science-based targets for nature, marking a significant advancement in understanding and implementing such targets, ahead of opening the target validation process later this year. As the pilot program will conclude in May 2024, the forthcoming report will offer valuable guidance and insights gleaned from participant companies’ successes and challenges in setting science-based targets.

Despite progress made, there remains a significant gap between rhetoric and reality. It is paramount to recognize that integrating biodiversity considerations within business strategies is not solely a matter of environmental responsibility; it holds tangible benefits. By embracing nature-positive practices, entities can unlock novel opportunities for growth and contribute meaningfully to the construction of a more sustainable future for all. We must seize the momentum generated by UN Biodiversity Conference (COP 15) and UN Climate Change Conference (COP 28), translating ambitious targets into concrete actions on the ground. Ultimately, collective action from governments, businesses, and individuals is essential to protect our planet’s biodiversity and ensure a prosperous future for all.

For 20 years, Paia has empowered local organisations to embark on their sustainability journeys. Leveraging our expertise in the sustainability space, we drive measurable improvements across organisations, helping achieve sustainability progress across E, S and G. With TCFD strategy and implementation being one of Paia’s key service lines, and our in-house environmental expertise, we are well-placed to support our clients with getting started on managing nature-related risks and opportunities. To delve deeper into TNFD disclosure reporting, we invite you to explore our insightful article, “TNFD, Explained”.

Get in touch with Paia for more information and insights on how we can support your organisation. If you would like to learn more about how to kickstart your nature strategy, you can reach out to us via info@paiaconsulting.com.

 

 

References

[1] European Sustainability Reporting Standards (ESRS) E4 standards

[2]  GRI 101: Biodiversity 2024

[3] International Sustainability Standards Board (ISSB)

[4] Paia Insights: “TNFD, Explained”.

[5]  Science-based Targets for Nature (SBTN)

[6] Taskforce on Nature-related Financial Disclosures (TNFD)

[7] UN Biodiversity Conference (COP 15)

[8] UN Climate Change Conference

 

 

Financing Biodiversity II: A biodiversity-informed framework to evaluate business risk & opportunity

This article is part of a series of thought leadership articles by the Paia team. Read Financing Biodiversity I to find out about the complexity of putting a dollar value on nature.

How should biodiversity and ecosystem services be integrated into the evaluation of business risk and opportunity? With rapidly depleting natural resources, and an increased focus on biodiversity preservation, businesses must pay attention to nature-related considerations.

After all, all economic activity is dependent on healthy ecosystems, directly or indirectly. Including the concept of natural capital in business risk assessments enables us to better capture the benefits of ecosystem services, such as water purification and pollination, in economic terms. Biodiversity refers to the variety of life at the genetic, species, and ecosystem level, and forms the living component of natural capital stocks. The interactions between biodiversity and non-living natural resources generate most of the flows, from the provision of essential resources to climate regulation, that benefit society[i].

Biodiversity is vital to the long-term success of many businesses. For example, in the pharmaceutical industry, biodiversity is critical to drug discovery, providing molecular diversity and medicinally important organisms[ii]. In the agriculture industry, plant and animal breeders take advantage of underlying genetic diversity to improve yield and quality, enhance pest resistance, and lengthen the growing season. Biodiversity can also underpin product innovation in these two critical industries by providing natural ingredients that provide flavour, aroma, nutrition, or medicinal attributes.

But businesses may not realise their dependence and impacts on biodiversity. With over 60% of natural capital impacts embedded in supply chains[iii], biodiversity restoration and protection are critical to safeguarding the sustainable procurement of raw materials. For example, fashion apparel brands like Kering source wool, cashmere, and cotton from farms and forests across the world. Kering’s in-house environmental profit-and-loss accounting tool (EP&L) converts its natural impacts into monetary terms. It has shown that Kering’s natural impacts are highest during raw material production, specifically around land-use and biodiversity.

Even businesses with no direct relationship to natural capital stocks must consider their biodiversity dependence and impacts along their value chain. For example, banks like ING have acknowledged their business’ impact on biodiversity, through their loans to companies[iv]. Their portfolio companies may be affected by biodiversity loss, which in turn exposes ING to biodiversity risks as a financier.

The global momentum for biodiversity protection is accelerating. Being nature-positive is becoming a key element of net zero emissions; governments and financial institutions around the world are connecting climate and nature. Recognition worldwide that nature loss poses financial, and even existential, risks to businesses is also growing. The Taskforce on Nature-related Financial Disclosures (TNFD) guidelines, complementary to the Taskforce on Climate-relate Financial Disclosures (TCFD) [v], is an upcoming framework that seeks to better understand the financial risks and opportunities posed by biodiversity on businesses. With TCFD becoming a regulatory response for governments around the world[vi], businesses can expect tightening biodiversity regulations if the TNFD follows the TCFD’s success. The Science Based Targets Network is also developing guidance for companies to set targets for nature, as another indicator of a global movement towards greater corporate responsibility for biodiversity.

Framework

Biodiversity - Informed Framework for Business Risk and Opportunity Infographic

In light of this global movement, the Paia team presents a biodiversity-informed framework for evaluating business risk and opportunity. The intention of the framework is not to provide answers, but to facilitate decision making and scaffold the evaluation of biodiversity-related opportunities and risks.

This framework positions biodiversity dependence at the centre of all risk and opportunity assessments, as all economic and business activity is rooted in biodiversity. Around biodiversity dependence revolve 4 interdependent pillars: Revenue, Cost, Compliance, and Capital.

There are tensions and trade-offs across each pillar. For example, revenue may be generated in the short-term through resource extraction. But unsustainable resource extraction is likely to generate higher costs in the long term, and additionally rule out opportunities for the development of new revenue streams synergised with nature.

As another example, growing recognition of our dependence on biodiversity and ecosystem services could also spur the scaling of biodiversity-related finance, lowering the cost of capital. With lower capital costs, biodiversity-related revenue opportunities could be more accessible. But access to capital is also accompanied by higher compliance requirements, which impose higher operational costs.

In this way, we can begin to imagine tensions and trade-offs across all 4 pillars. To facilitate deeper consideration, the rest of this article will expand upon the opportunities and risks of each pillar.

Revenue

Opportunities

What new revenue streams might be unlocked from biodiversity restoration and protection?

Business action for biodiversity may lead to entirely new business models. By seeking to restore and protect biodiversity, businesses may generate new services and products. For example, Unilever has begun integrating biodiversity into its supply chain management, resulting in products sourced from regenerative framing practices.

Entirely new businesses may also be created in ecosystem restoration, as these 5 startups have realised. New markets may develop or existing markets may expand – the ecotourism sector has been forecasted to grow by 10-30%, and the organic food and beverage sector by around 16%[vii]. New revenue streams may also be unlocked, in the form of payments for ecosystem services in wetlands and forests, or if novel scientific discoveries generate licensable patents in future.

Risks

Will biodiversity legislation impact revenue generation?

Companies will have to examine their revenue generation sources and predict the trends of biodiversity legislation in their target markets. For instance, a land reclamation company must be aware of the potential protections that may be legislated for coastal ecosystems, which may halt projects in those waters.

What is the impact of declining ecosystem services on the revenue stream?

Many revenue streams are directly or indirectly dependent on ecosystem services. For example, the $7 billion almond industry in California depends on US bee colonies for pollination[viii]. But honeybee populations have been rapidly declining, due to industrial agricultural methods that put biodiversity last and monoculture first[ix].

Costs

Opportunities

How can biodiversity protection reduce recurring costs?

Recurring operational costs may also be reduced by investing in measures or technology that protect ecosystems. For example, by investing in higher security for fish farms to prevent escape, companies can reduce costs incurred to replace the fish as well as prevent genetic contamination with wild stocks.

Risks

What are the potential business costs of degrading natural capital?

The continued degradation of natural capital stocks and biodiversity often results in tangible and intangible costs. These costs might include potential legal liabilities and pollution clean-up, the loss of ‘social license’ or reputation, and the costs incurred from supply chain disruptions due to emerging infectious diseases (e.g. Covid-19).

What are the potential costs of altering natural features?

The removal of certain parts of the natural environment could lead to cascading costs. For example, the Catskills watersheds in New York[x] provide a natural way to filter contaminants from water. Man-made changes to the watersheds such as road construction could reduce the water quality available to businesses and individuals, leading to an increase in costs for energy and resources needed to artificially clean the water.

Compliance

Opportunities

What opportunities could accompany compliance requirements?

Compliance requirements can facilitate the discovery of business opportunities. Mandatory climate reporting requirements have encouraged companies to undertake deeper reflection into how climate positive policies could benefit them. For example, tax benefits and subsidies could enable them to develop cleaner technologies that are more competitive in a greener market. Nature-related or biodiversity reporting could similarly translate into business opportunities.

Could compliance build internal capacity for biodiversity-related assessments?

Biodiversity risks, like climate risks, must eventually be integrated into strategic business planning. Additional compliance requirements may present an opportunity for businesses to adapt early by building up internal knowledge and familiarity with biodiversity-informed cost and benefit analyses.

Risks

What will be the operational resources committed to compliance?

Complying with the requirements of green financing is likely to necessitate certain steps by the business operation to minimise or even preserve or restore biodiversity. Such compliance would include resources needed to measure, report and verify impacts to biodiversity, and expertise needed to conduct studies to establish biodiversity baselines either revolving around the direct operations of a business, or along supply chains. Companies must question if they have the requisite expertise or whether they can outsource these changes to a third-party.

What are the financial costs of the baseline level of compliance?

The operational resources detailed above will come with a financial cost. Companies need to establish a basic understanding of how much additional costs would be added to the project’s income statement.

Capital

Opportunities

What are the current and potential opportunities for access to financial capital?

With growing investor motivation, more funds with biodiversity related objectives will be launched. Just as how investors have recognised that climate impacts present “unhedgeable risk”[xi] to investment portfolios, investors are now realising that long-term value creation is dependent on biodiversity protection and restoration. The Finance for Biodiversity Pledge, a coalition of 26 asset managers, insurers and banks formed in 2020, is a strong indication of investors’ shifting perception towards the importance of being nature-positive[xii]. As another harbinger of funding opportunities to come, AXA launched a climate & biodiversity fund in 2019[xiii].

As momentum for biodiversity-related financing builds, companies could also consider engaging with a wider set of financiers. With more private sector financing options, there may be more opportunities for public funds to cushion biodiversity financing through blended financing.

Risks

What is the future cost of capital?

Cost of capital could increase if funds begin to divest from assets that do not take care of biodiversity, similarly to how the availability of capital for fossil-fuel related stocks is shrinking. Just as for any other investment, companies can consider the extent of capital increments depending on whether the capital was obtained from debt investors or equity investors, both of which have different risk and return expectations. Current access to capital may also be at risk of being withdrawn. Although legislation may not mandate certain actions, institutional investors and banks tend to be quick to respond to the demands of the collective pool of investors that finance them. These financial institutions may hence shed investments in companies deemed to be laggards in biodiversity protection, raising the cost of capital for companies.

What would be the impact of violating sustainable finance requirements?

Access to financial capital for biodiversity-related projects can come with onerous requirements. Businesses must consider carefully if they can keep up with the requirements throughout the lifespan of the project, and the consequences of being unable to comply.

Conclusion

The concept of natural capital allows us to frame our dependence and impact on nature in economic terms – and the connection between biodiversity and financial flows has never been more salient. Economic development can no longer be segregated from ecosystem services, and growing recognition will spur legislative and capital shifts. As your business learns to navigate the integration of biodiversity considerations into their evaluation of business risks and opportunities, the Paia team hopes this framework constructively facilitates your reflection.

Stay tuned for Financing Biodiversity IIII, our final article in this series, where we will reflect more deeply on biodiversity as an asset.

If you are ready to embark on your nature-positive journey, contact us today.

References

[i] Biodiversity and natural capital, Cambridge Conservation Initiative: https://www.cambridgeconservation.org/project/biodiversity-and-natural-capital/

[ii] Biodiversity, drug discovery, and the future of global health: Introducing the biodiversity to biomedicine consortium, a call to action, Journal of Global Health: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5735771/

[iii] Biodiversity, and a Conservation Hierarchy for Kering S.A,  Bull, J, P. Addison, M. Burgass & S. Sinclair.

[iv] Biodiversity, ING: https://www.ing.com/Sustainability/Our-Stance/Biodiversity.htm

[v] https://tnfd.info/about/

[vi] Companies, investors face new pressure from compulsory disclosure of climate risk, S&P Global:  https://www.spglobal.com/esg/insights/companies-investors-face-new-pressure-from-compulsory-disclosure-of-climate-risk

[vii] Biodiversity: Finance and the Economic and Business Case for Action. OECD: https://www.oecd.org/environment/resources/biodiversity/G7-report-Biodiversity-Finance-and-the-Economic-and-Business-Case-for-Action.pdf

[viii] Business benefits of biodiversity in agriculture, BCG: https://www.bcg.com/publications/2020/business-benefits-of-biodiversity-in-agriculture

[ix] California’s almond trade is exploiting one of nature’s most essential workers, IFIS: https://www.ifis.org/blog/californias-almond-trade-exploiting-bee-population

[x] A billion Dollar Investment in New York’s Water, New York Times:  https://www.nytimes.com/2018/01/18/nyregion/new-york-city-water-filtration.html

[xi] The Business Case, Climate Action 100+: https://www.climateaction100.org/business-case/

[xii] Finance for Biodiversity Pledge: https://www.financeforbiodiversity.org/

[xiii] AXA & Biodiversity, AXA: https://www.axa.com/en/about-us/axa-and-biodiversity#tab=axa-and-biodiversity-strategy

Accelerating action for biodiversity what the built environment sector needs to doPhoto by michal dziekonski on Unsplash

Accelerating action for biodiversity: what the built environment sector needs to do

The built environment sector needs to protect biodiversity. Why? Because the sector not only depends on the raw materials provided by the natural environment, but it indirectly depends on the regulation of ecosystems, and the health and aesthetical benefits of the natural environment.

If you can protect biodiversity, you can attract buyers and tenants. You will have seen that advertisements for residential properties in particular commonly feature green spaces and nature areas as an attraction point or an amenity (think “surrounded by lush greenery” or “just a few minutes away from the sea”).

However, despite depending so heavily on nature, the sector is one of the top-three sectors threatening global biodiversity, according to the World Economic Forum (WEF). As one of the top three sectors, the built environment contributes significantly to depleted food and raw material supplies, incidences of extreme weather events and the collapse of ecosystems.

WEF’s The Future of Nature and Business report provides 5 key reminders on what we, the built environment sector, need to do to protect biodiversity.

 

What do we need to do to protect biodiversity, and why?

1. By compacting, not sprawling

We need to make cities and developments compact so that we avoid encroaching on natural areas at all. The rapid expansion of cities and urban areas, made worse by poor land planning and lack of biodiversity/environmental impact assessments, often leads to the loss of biodiverse natural areas and in extreme cases, the extinction of species and collapse of an ecosystem. As a result, the built environment sector is responsible for nearly 30% of biodiversity loss globally (World Economic Forum, 2020).

Compacting our cities and developments helps to make space for biodiverse natural areas that would otherwise have to be converted into other land use types. Globally, 60% of all urban space is sparsely populated (World Economic Forum, 2020). We can obtain inspiration from cities like Hong Kong and Singapore which have efficient planning of dense urban areas and allocated spaces for nature areas despite limited land areas. Denser areas can bring workplaces and services closer to homes which in turn reduce the cost, time and pollution associated with transportation.

2. By considering impacts to biodiversity before development

Before locating an infrastructure or building, we should consider our impact on surrounding biodiversity from the construction to management stage. Developers can include biodiversity considerations in impact assessments to find out whether a site provides habitats for important or threatened species. This helps to facilitate the process of sustainable site selection and the evaluation of alternative options (such as brownfield sites). A biodiversity or ecosystem impact assessment should be a standard procedure for developers to establish a baseline to identify the extent of impact and avoid and mitigate damage to areas with high biodiversity value.

We can also be more innovative in leveraging nature in our planning, design and retrofitting of buildings and infrastructure. These includes designing spaces that benefit both humans and biodiversity – for example, setting aside green spaces that provide restorative benefits to people but are also habitats for vulnerable species of animals. City Development Limited’s The Rainforest in Singapore was conceptualised as a “nature reserve” for threatened plant species, with nearly 50 native species of trees, palms, shrubs and groundcover (Lim, 2017). This particular example also reminds us to use native species and to consider the “diversity” in “biodiversity” – using native instead of exotic species and having a variety of species are key to recreating or restoring a healthy local ecosystem     .

3. By preventing pollution and providing clean energy alternatives

We should not forget that preventing pollution and providing clean energy is just as important for biodiversity protection. As urban areas expand, utilities will also need to keep up. Sanitation, waste disposal and clean energy are essential services that need to be scaled up in many parts of the world to meet growing demands. Over 80% of global wastewater is discharged into biodiversity-rich freshwater and coastal ecosystems without proper treatment (World Economic Forum, 2020). The built environment sector can help to prevent these by setting up effective management systems for solid waste and wastewater. For example, we can reuse wastewater onsite, such as graywater and condensate water, with existing water treatment solutions. We can also provide clean energy solutions such as solar lamps to replace kerosene, candles and firewood to reduce carbon emissions and deforestation. This not only protects biodiversity but also improves the standard of living of the community.

4. By harnessing natural ecosystems as infrastructure

We can harness nature’s benefits by incorporating naturally functioning ecosystems into the planning and design of the built environment. This is increasingly important for climate change and disaster adaptation. A commonly used example is mangrove forests. Mangroves are important and diverse ecosystems that effectively sequester carbon and protect coastal areas from storms. They also support livelihoods for coastal communities and framing natural ecosystems such as mangroves as assets, incentivises broader interest in protecting and cultivating them. There is growing consensus that incorporating natural ecosystems can be cost-effective in the long run, especially when combined with human-engineered solutions (Seddon, 2000). Furthermore, the natural ecosystem’s ability to regenerate means      lower maintenance costs compared to man-made structures. Another example is to maintain or restore healthy vegetation to prevent land erosion and/or improve water drainage. With climate change, these ecosystem services are becoming more important, especially when more intense storms due to climate change increases the risks of landslides and flash floods inland.

5. By planning infrastructure networks with biodiversity in mind

We should also plan for the wider infrastructure network, such as roads, railroads and pipelines, with biodiversity in mind. Such infrastructure can have as much, or even bigger, impact on biodiversity as the main infrastructure. Time and distance may be compromised, but it could be crucial in preventing habitat fragmentation and protecting vulnerable species which has more dire consequences.

 

Why haven’t we been doing enough for biodiversity?

We haven’t been doing enough for biodiversity, because the indirect benefits of biodiversity are often not captured by the sector’s financial accounting in a way which influences management decisions. The complexity of quantifying the risks and opportunities of biodiversity impacts means that financing projects with the aim of protecting biodiversity is currently not mainstream. As a result, we are currently not doing enough for biodiversity. However, this is about to change, with increasing expectations by investors and regulators on nature-related financial disclosures and action.

We should not wait to comply with regulations. Being responsible for nearly 30% of biodiversity loss globally, the built environment sector needs to urgently become more biodiversity-conscious in the way we develop, construct and operate. We need to prevent the catastrophic impact of ecosystem collapse – before it is too late.

 

References

Lim, Y. (2017, May 14). Property: Natural landscaping an important aspect for new condo buyers. Retrieved from News: https://www.homeanddecor.com.sg/gallery/property-natural-landscaping-an-important-aspect-for-new-condo-buyers/

Seddon, N. C. (2000). Understanding the value and limits of nature-based solutions to climate change and other global challenges. Philosophical Transactions of The Royal Society B Biological Sciences.

World Economic Forum, A. (2020). New Nature Economy Report II The Future Of Nature and Business. Geneva: World Economic Forum.

Financing Biodiversity

Financing Biodiversity

Biodiversity, which refers to the variety of life within an ecosystem, is crucial for the flourishing of all life on earth. We frequently draw upon nature for inspiration or new substances based on the characteristics of plants and animals. Diversity in genetic material also strengthens the resilience of the population against emerging threats of disease or climate change. The removal of certain organisms could have an unintended effect on the populations of other species that people depend on.

However, biodiversity is in danger of being neglected while climate change receives more attention. For instance, carbon offset programmes to mitigate climate change often involves the reforestation of a single species of trees[i], which is unable to provide the ecological functions of a forest ecosystem with many different species of trees. Human activities, such as the expanding demand for agricultural land, also continue to threaten natural habitats.

The need to balance climate change mitigation, human activity and biodiversity preservation is known as the triple challenge[ii]. Improvements or deteriorations to any of these three aspects can reverberate across to the others. It is therefore necessary to pay attention to the issues plaguing each of the three aspects.

In a series of articles, the Paia team will discuss the implications of biodiversity protection and loss for the private sector. This article will present an overview of biodiversity financing, while the second will lay out a potential framework with which the value of biodiversity can be better accounted for. The third article will cover means in which biodiversity can be viewed as an asset to promote conservation. Together, our articles will demonstrate why businesses today must consider the value of biodiversity alongside other ESG concerns.

 

The complexity of putting a dollar value on nature

Markets for climate financing have developed rapidly over the past few decades. While there is still a long road to go, there are liquid markets in many regions for the trading of carbon credits. The global Carbon Trade Exchange, the Shanghai Environment & Energy Exchange in China and Singapore’s upcoming Climate Impact X exchange are but some examples. The same cannot be said for markets in biodiversity, where financing solutions that seek to mitigate the impact of human development are scant. However, to ensure that efforts to improve biodiversity are self-sustaining and not dependent on continuous activism, such solutions are vital.

In this article, we will lay out:

1) Why biodiversity financing is more complex than carbon financing

2) Current solutions in biodiversity financing

3) Potential pitfalls in designing these financial instruments

 

Why is biodiversity financing more complex than climate financing?

Although the issues of climate change and biodiversity are very much intertwined, the complexity of linking financial instruments to biodiversity benchmarks is greater than for its climate change counterparts.

Firstly, the impact on biodiversity from human activities is often non-linear and unpredictable. Unlike climate change which can be modelled based on the level of carbon emissions, the interconnectedness of ecosystems often leads to cascading effects when their equilibriums are disturbed. The loss of certain species can lead to unpredictable, yet devastating consequences. Financing structures often need a quantified metric with which they can base the expected rate of return upon. It is hence also difficult to price in the negative externalities generated by firms. An inability to set the value of biodiversity in quantified terms hence hinders the development of financing solutions.

Secondly, biodiversity impact is more difficult to trade from one area to another, and similar offset programmes cannot be applied to seek out arbitrage across large distances. As the removal of organisms from one ecosystem will have implications on other species that depend on them, damage is highly localized and cannot be compensated for by interventions in another area.  Thus, unlike carbon emissions, biodiversity impact cannot be as easily mitigated through the application of the Coase Theorem[iii]. The Coase Theorem refers to the concept that efficient outcomes can be achieved through bargaining to reflect the true value of property rights. Carbon permits find a pareto efficient outcome through the trade of allowances to emit, made possible since the generation of 1kg of CO2 in, for example, the United Kingdom can be offset by the removal of 1kg of CO2 in, for example, China. This brings down the overall opportunity cost of reducing emissions. The highly localized nature of biodiversity impact does not allow for a similar system.

 

Current Solutions

Efforts to protect biodiversity in a self-sustaining way have sprung up. These complement regulatory action that require constant enforcement, such as poaching and logging bans.

Some areas of conservation apply the Coase Theorem to mitigate the impact of human activity on conservation. For example, farmers can be compensated for livestock loss from wild predators, preventing the farmers from retaliating. Compensation can be drawn from the tourism revenue generated by these predators, forming a self-sustaining loop. However, such schemes are often supplanted by assistance from the government or NGOs, indicating that the value of tourism is insufficient to support the costs of conservation.

In another example, the preservation of fisheries is now often facilitated by Individual Transfer Quotas (ITQs)[iv], which cap the number of fish that can be captured and allow fishermen to trade these ITQs. Hunting permits work in the same way, auctioning off the right to hunt a limited number of animals.

Other solutions combine carbon and biodiversity. Also, Australia’s Carbon + Biodiversity Pilot[v] rewards farmers who improve both climate and biodiversity performance. Under the pilot programme, farmers who plant native trees will receive payments for biodiversity outcomes, which adds on to payments from carbon abatement projects

 

Potential Pitfalls

While commendable for slowing the decline in biodiversity, these measures are often reliant on enforcement against illicit behaviour.

The solution involves the design of financial instruments that reframe biodiversity as an asset to the owners of the land, instead of a nice-to-have. An asset is a financial instrument that is expected to bring economic benefit. To place a value on biodiversity and pave the way for quantified incentives in its conservation, methods to determine the present value of the cash flows from biodiversity have to be constructed. This metaphor can be extended to the way in which assets are depreciated through use over time as well as impaired from improper use; the benefits brought about by biodiversity declines as resources are extracted and careless treatment leads to an unnecessary decline in value.

The Dasgupta Review[vi], a report commissioned by the UK government on the economics of biodiversity, suggests that nature be regarded as a portfolio of assets that has thus far been “mismanaged”. He advocates that the full impact of human activity should be demonstrated by the agglomeration of not only human and produced capital, but also natural capital Dasgupta also cautions against solely using a pricing strategy to resolve the tragedy of the commons issue, since the difficulty in determining nature’s value creates barriers against developing an optimal price. The tendency to underestimate the value of nature could hence give rise to overconsumption deemed efficient. In addition, having a price tag attached to the exploitation of nature could then remove the psychological barriers of people to do so, much in the same way that parents tend to be later in picking up their kids if a small fine is imposed[vii]. Finally, a system that seeks to allocate resources requires a robust system of property rights which may deprive indigenous communities of resouces they have traditionally relied on. The initial allocation of property rights may also strike some as being unfair, especially to those who believe that nature is a part of the commons and unowned by humanity. Yet, property rights are necessary for such a system because only property owners have an incentive to defend against exploitation, negating the Tragedy of the Commons.

Nonetheless, while it is important to realise that any pricing strategy would potentially undervalue the true contribution of nature to humanity, it is vital to start somewhere. These schemes can be tweaked and improved incrementally so that they tend towards a reflection of the true value of nature.

Biodiversity financing is complex, and current solutions have their pitfalls – but it has never been more essential for businesses to keep in view. In the next article, we will cover how businesses can consider the impact of such schemes and the conservation of biodiversity in general on their operations.

 

References:

[i] Is planting trees as good for the Earth as everyone says? – https://news.mongabay.com/2021/05/is-planting-trees-as-good-for-the-earth-as-everyone-says/
[ii] The Triple Challenge – WWF – https://www.wwf.org.uk/triple-challenge
[iii] George Stigler, the First Apostle of the “Coase Theorem”- https://link.springer.com/chapter/10.1057/978-1-137-56815-1_15
[iv] Ensuring individual transferable quotas benefit fisheries and the environment – https://oceans.ubc.ca/2019/03/22/ensuring-itq-benefits/
[v] Carbon + Biodiversity Pilot – https://www.agriculture.gov.au/ag-farm-food/natural-resources/landcare/sustaining-future-australian-farming/carbon-biodiversity-pilot
[vi] Final Report – The Economics of Biodiversity: The Dasgupta Review – https://www.gov.uk/government/publications/final-report-the-economics-of-biodiversity-the-dasgupta-review
[vii] A Fine Is A Price – https://rady.ucsd.edu/faculty/directory/gneezy/pub/docs/fine.pdf

Photo by Mark Stoop on Unsplash