Sustainable Finance Live Workshop: Fostering Biodiversity Investment
On May 11, Finextra initiated its two-day virtual event, Sustainable Finance Live, with an interactive workshop focused on constructing portfolios that bolster biodiversity, natural capital, and ecosystem services. This session convened expert investors and asset managers to delve into these increasingly vital themes.
Following insights from the initial case studies and panel discussions, a diverse group of keynote speakers from organizations such as Elastacloud, Redsand Ventures, EBRD, Cervest, Federated Hermes, Verisk Maplecroft, and Ashurst examined the obstacles and opportunities associated with biodiversity-driven investments.
Understanding Biodiversity and Natural Capital
The imperative of supporting biodiversity is paramount for any environmentally responsible investor. Richard Peers, founder of ResponsibleRisk, emphasized that biodiversity—the vast array of plant and animal life in any ecosystem—is fundamental to sustaining the planet’s natural assets like soil, air, and water. These assets, also termed natural capital, enable numerous ecosystem services critical for human existence, such as pollination, food production, and climate resilience.
Without ongoing investments in biodiversity preservation, we risk disrupting these essential ecosystem services, which could lead to significant financial liabilities in sectors such as insurance and asset management, while also jeopardizing human well-being. As Ingrid Kukuljan, head of impact and sustainable investing at Federated Hermes, stated, “Every sector relies on nature and must evolve towards a net-positive impact.”
Before meaningful progress can be achieved, investors must work with investees to meticulously define the biodiversity and natural capital impacts of their projects. In primary markets, investors have the opportunity to collaborate with companies, utilizing scientific data and analytics to allocate capital in low-risk areas. In contrast, secondary markets often require investors to rely on the assessment of others, as Peers pointed out.
Unfortunately, access to dependable data—particularly that which can accurately assess negative impacts across supply chains—remains scarce, complicating efforts to support nature-based investments. Mirova’s CEO, Philippe Zaouati, highlighted their five-year journey to creating a fund that aggregates stakeholders for their inaugural natural capital projects.
Maya Hennerkes from the European Bank for Reconstruction and Development (EBRD) emphasized the need to embed the true value of natural capital—which supports 50% of global GDP—into financial models to capture external costs accurately.
Positive developments are on the horizon, including initiatives like the Taskforce on Nature-related Financial Disclosure (TNFD), aimed at enhancing nature-related financial transparency. Launched in early 2021, the TNFD seeks to provide a framework for meaningful financial disclosures related to nature by the end of 2022.
There exists a synergy between the conservation sector, which requires funding for sustainable initiatives, and the financial sector, eager to identify viable sustainable investment opportunities. However, both sectors must ensure that the impacts and dependencies of projects on nature are quantifiable to facilitate sustainable long-term investments.
To effectively preserve biodiversity through large-scale investments, projects must present robust business cases. This involves traditional metrics such as return on investment (ROI), cost, and risk—all critical for building portfolios that support ecosystem services. As Sebastian Mynott, COO of Applied Genomics, aptly noted, “Investing in biodiversity is akin to purchasing insurance; while it’s an undesired expense, it’s essential for safeguarding against worst-case scenarios.”
Innovations in Natural Capital Credits
The second workshop featured industry leaders discussing the financial services sector’s interest in projects aimed at restoring ecosystems and sequestering carbon, emphasizing the necessity for change to be both compartmentalized and validated. The creation of tradeable units of change could benefit landowners and others generating steady revenue from land by considering natural fertility and land asset values.
However, a major issue remains: scaling ecosystem recovery—often termed “rewilding”—is challenging under current natural climate solutions. Moreover, designing business models that enable landowners to transition to viable, nature-based rewilding models linked to natural capital credits is cumbersome. Natural capital credits serve as carbon credits demonstrating joint benefits for carbon, social equity, and biodiversity.
A non-fungible token (NFT) investment model could bridge the gap between rewilding and conventional investment structures. Paul Jepson, nature recovery lead at Ecosulis, pointed to the growing market demand for natural capital credits, while highlighting the limited availability of investable projects necessary for ecosystem restoration. He suggests establishing mechanisms for “renting the right to restore ecosystems,” proposing that long-term lease structures could facilitate financial investments in these areas.
This approach could lead to a bankable asset portfolio through 30-year leases, making it more palatable for financial entities. Through this model, the ecological integrity of leased properties would be assessed over time, creating opportunities for change measurement and resultant tokenization.
Jepson further explained that instead of creating a singular token, projects could be categorized, allowing buyers to invest in portions of rewilding initiatives. NFTs could then encapsulate this data within digital art, documenting the ecosystem’s state and its changes over time.
Smart contracts linked to these tokens would furnish benefits, rights, and opportunities for resale, incentivizing organizations to invest in ecosystem restoration over 20- to 30-year horizons, aiming for climate neutrality through financially viable projects.
Toni Caradonna, CTO of the Porini Foundation, discussed the implications of digitalization on financial services, underscoring the potential disruption in intermediary roles. It’s imperative that tokenization adheres to regulatory standards to mitigate risks associated with financial crimes.
Enhancing Decision-Making with Insightful Data
The third session of Sustainable Finance Live concentrated on a pressing challenge: aiding financial institutions in navigating biodiversity loss risks. Drawing from a case study of PG&E, Frank D’Agnese, President and CFO of Earth Knowledge, facilitated discussions on potential strategies company boards could adopt in light of historical missteps.
Through a series of polls, participants addressed the significant hurdles financial firms encounter in assessing risks associated with natural capital. Using a hypothetical scenario of climatic water deficiency, the moderator pointed out that historical wildfire events are often linked to human actions, while recent data suggests a connection to climatic water shortages, urging boards to act on this information rather than dwell in indecision.
Participants highlighted the weight of reputational risk, noting that organizations are increasingly intertwining natural capital risks with their reputations. As Katie Henry, a senior manager at EY, observed, the rapid spread of information necessitates a deeper consideration of how natural capital risks influence investment decisions and lending opportunities.
Anna-Marie Slot, a global sustainability partner at Ashurst, added that strategic decision-making often occurs with incomplete information, resulting in reliance on assumptions. Ensuring access to accurate data is crucial for boards to evaluate potential costs associated with various courses of action effectively.
Alex Money, managing director at OXFORDEO, noted that the abundance of environmental data can complicate decision-making due to conflicting information. Addressing the gap between data collection and actionable insights is essential for informed governance.
Organizational barriers often impede effective decision-making, particularly when essential information resides far from boardroom discussions. David Cox, sustainability lead at Microsoft, argued for a more integrated approach to ESG considerations, cautioning against siloed analyses that neglect the interconnectedness of risks.
To promote informed decisions, it’s vital to challenge existing frameworks and foster an environment where board members critically engage with prospective strategies.
In conclusion, enhancing data translation into insightful information is essential for sound decision-making, alongside educating senior teams on the complexities involved in sustainability. This overarching understanding can significantly influence organizational strategies, ultimately driving a more sustainable future.