Resilience Dispatch #40: Nature’s Investment Frontier

INTRODUCTION: NATURE’S INVESTMENT FRONTIER 

Dear friends,

Biodiversity-based investment themes are suddenly in the spotlight, after years of feeling like a bit of an understudy to the carbon market. Given a ballooning finance gap for nature, and the obvious materiality of nature risk to business, there is renewed interest in economic instruments that can drive private investment toward interventions to avert biodiversity loss or restore degraded ecosystems, and in doing so generate attractive cash flows.

Hopes are high for new economic growth models based on restoration and regeneration—a whole “restoration economy,” with jobs that would be difficult to outsource, roboticize, or replace with AI (although new technology can certainly drive better results at scale). This is already happening in the United States, where ecological restoration now employs more people than coal mining.

It’s a future worth pursuing. The current capitalist economic system is one of the most powerful human achievements. Without it, our modern world wouldn’t exist. But it has a potentially fatal flaw: it’s blind to the older operating system that runs life on Earth—the interconnected web of living systems in forests, coral reefs, wetlands, and all ecosystems. This “NatureOS” makes life possible. Yet, unless nature’s products become “natural resources” (wood, food, minerals), our “EconomyOS” doesn’t consider them valuable.

This report offers some perspectives from experts in biodiversity and nature finance on what the forward path looks like to reconnect these systems, and specifically to drive more private investment into nature and biodiversity. It begins with a look back on what we’ve learned. After all, these economic instruments have been around for decades. The first habitat credit banks appeared in the United States in the early 1980s.

There are sizeable opportunities on the horizon, connected to a wave of new infrastructure investment globally to expand that model to new geographies, as Mariana Sarmiento, Charles Bedford, and Dr. Timothy Male argue. But a reality check is due on what is likely to really attract demand, Ben Guillon and I argue. A “Field of Dreams” mentality (“If you build it, they will come”) is likely to get entrepreneurs in trouble.

On the demand side, biodiversity credits and other conservation assets offer a path to not simply fix the damage, but go “nature positive” by creating more nature than there was before. These ambitions need to be grounded in the mitigation hierarchy, or credits could be used for greenwashing, warn Martine Maron, Fabien Quétier, and Amrei von Hase.

Biodiversity might lend itself well to being “stacked” with or “stapled on” to other investments in carbon and value chains. Julia McCarthy and Ryan Sarsfield (“Beetles in a pay stack,” page 33) offer a useful framework for thinking about how to do this effectively.

This report is ultimately a set of perspectives from people with a collective century’s worth of experience in biodiversity markets. It offers no “silver bullet” solutions, and you may not agree with all of it; I doubt all of the authors agree with one another on some of the issues raised. We hope you’ll find it thought-provoking, and more importantly, useful in doing good work. A special thanks to Ecosystem Marketplace’s Advisory Group (Ricardo Bayon, Kate Hamilton, Yuejia Peng, and David Tepper) for their support on this work.

Michael Jenkins and Genevieve Bennett

THE MITIGATION HIERARCHY

When a development project is likely to have negative impacts on biodiversity, project designers and regulators can follow these steps to avoid, minimize, and rehabilitate negative impacts, and then offset or compensate for any remaining damage. Although development projects with net-negative impacts to biodiversity might still be approved if there is overriding public interest, the idea is to divert development from places that are more biologically valuable and encourage development in places where impacts are relatively low.

Offsets should be used only as a last resort. They refer to actions taken to compensate for quantified residual adverse impacts to species, habitat quality, ecological function, and/or ecosystem services that cannot be avoided, minimized, and/or rehabilitated. Offsets might take the form of restoration of degraded ecosystems, creation of new ecosystems or habitats, or protecting existing high-quality ecosystems at risk of degradation or loss (also known as an “averted risk” approach).

Like offsets, credits are a measurable unit of biodiversity outcome which is both durable and additional. However, they refer to purely positive outcomes: there is no explicit connection to a negative impact somewhere in the world requiring compensation. As a result, the equivalence (“like for like”) requirement we find in biodiversity offsetting best practices doesn’t apply. Credits should enter the picture only in the context of the process the mitigation hierarchy sets out.