MOBILIZING PRIVATE FINANCE FOR NATURE A World Bank Group paper on private finance for biodiversity and ecosystem services © 2020 The World Bank Group 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org This work is a product of the staff of The World Bank Group. “The World Bank Group” refers to the legally separate organizations of the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA). While believed reliable, the World Bank Group does not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no respon- sibility or liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon. 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All queries on rights and licenses should be addressed to World Bank Publica- tions, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank. org. Cover photos: Sugba Lagoon in Siargao, Philippines: © Bisual Studio/Stocksy. Further permission required for reuse. Tea Plucker Sri Lanka: © Felix Hug/Stocksy. Further permission required for reuse. Little big worker: © Dejan Zakic/unsplash.com. Further permission required for reuse. Table of Contents Authors 3 Acknowledgments 3 Executive Summary 7 Glossary 18 Acronyms 22 1. Context 25 2. Why is Nature Important? 28 2.1. The economic importance of biodiversity and ecosystem services 28 2.2. Why is biodiversity under threat? 31 2.3. The financial materiality of biodiversity loss on the real and financial sectors 32 3. The Current State of Private Finance for Biodiversity and Ecosystem Services 39 3.1. What is private finance for biodiversity? 39 3.2. Financing green: harnessing biodiversity and ecosystem services 41 3.3. Greening finance: reducing biodiversity and ecosystem services loss 54 3.4. Barriers to scaling up biodiversity finance 59 4. The Way Forward 72 4.1. The role of public policy and financial regulation 72 4.2. Private sector adoption of risk management tools and development of financial instruments 84 4.3. Supporting implementation: the role of multilateral development banks 88 5. Conclusion 94 Annex 98 References 102 Authors Mobilizing Private Finance for Nature is the result of a collaborative effort across two World Bank Group global practices: the Environment, Natural Resources and Blue Economy Global Practice (Benoit Blarel, Giovanni Ruta, Olga Gavryliuk, and Pauline Poisson), and the Finance, Competitiveness and Innovation Global Practice (Fiona Stewart, Samantha Power, and Benjamin Guillon); and the International Finance Corporation (Irina Likhachova and Lisa Choux). Acknowledgments The report received insightful comments from many peer reviewers and colleagues within the organization, as well as from external organizations, including private sector stakeholders. The authors extend their deepest gratitude for all the contributions. Valuable guidance and strategic direction were provided by: Karin Kemper, Alzbeta Klein, and Alfonso García Mora. World Bank Group peer reviewers for this paper included: William Beloe, Timothy Brown, Raffaello Cervigni, Jonathan Coony, Marianne Fay, Ekaterina Gratcheva, Shaun Mann, Cindy Paladines, Anderson Silva, Ahmad Slaibi, Arame Tall, and Ellison Wright. Valuable feedback was also provided by: Hasita Bhammar, Tuukka Castren, Lori Anna Conzo, Juliana Castano Isaza, John Graham, Anupam Joshi, Monika Kumar, Urvashi Narain, Ruth Tiffer-Sotomayor, Iain Shuker, and Nina Zegger. The authors are grateful to Joaquim Levy and Alexandra Pinzon-Torres who served as external peer reviewers. Susan Pleming and Sonu Jain provided support on outreach and communications. The paper received financial support from the Global Program on Sustainability (GPS) and the Wealth Accounting and Valuation of Ecosystem Services (WAVES) trust funds, generously funded by the European Union and the governments of Germany, the Netherlands, and the United Kingdom. Abstract Biodiversity and ecosystem services, or nature for short, underpin many aspects of economic activity and are deteriorating at an unprecedented level, with potentially far-reaching implications for economies worldwide. Sustained ecosystem damage can trigger regime shifts and generate systemic impacts on human well-being and economies. For example, the degradation of natural ecosystems has been associated with an increase in the probability of emerging infectious diseases. The COVID-19 pandemic is likely an example of how the disturbance of ecosystems can have systemic consequences. As biodiversity is often seen as a public and therefore open access good, its conservation, restoration, and sustainable use rely heavily on scarce public sector finance. Simultaneously, governments are spending vast amounts to promote economic activities that are potentially harmful to biodiversity. This paper argues that governments and regulators, supported by financial institutions and multilateral development banks (MDBs), hold the key to mobilizing private finance at the scale needed to transform the way we build, produce, and consume in order to protect nature while fostering sustainable poverty reduction. The analysis looks at two key approaches to mobilizing private finance for biodiversity. First, it assesses opportunities for ‘financing green,’ that is, the financing of projects that contribute—or intend to contribute— to the conservation, restoration, and sustainable use of biodiversity and its services to people. Second, it looks at ‘greening finance,’ that is, directing financial flows away from projects with negative impact on biodiversity and ecosystems to projects that mitigate negative impact, or pursue positive environmental impact as a co-benefit. Despite growing innovation in both categories, significant challenges to scaling up private finance remain. These include policies that exacerbate the underpricing of biodiversity; lack of data, measurement, and reporting standards; and issues with biodiversity investment opportunities, which tend to be small scale and noncommercial—making private sector financing a challenge. The paper provides a set of recommendations for governments, regulators, companies, financial institutions, and MDBs. These are synthesized into a set of “big five” approaches to mobilize private finance for biodiversity: environmental fiscal reforms to realign incentives with sustainable practices; national biodiversity data provision and planning; the establishment of a Taskforce on Nature-related Financial Disclosures (TNFD) to support biodiversity reporting; the establishment of a ‘Nature Action 100’ to drive change in the companies whose activities most threaten biodiversity; and the provision of catalytic, concessional capital for biodiversity funds and projects. Mobilizing Private Finance for Nature 5 6 Above and below water surface, Caribbean sea, Panama: © Damsea/Shutterstock Mobilizing Private Finance for Nature Executive Summary P rivate finance can and must be harnessed to is an asset—albeit often unpriced—and it drive critical protection and management underpins many economic sectors in tangible, of biodiversity and ecosystem services. measurable ways. The World Economic Forum Governments and regulators, supported by (2020a) estimates that $44 trillion of global value financial institutions and multilateral banks, hold added, corresponding to over half of the world’s the key to mobilizing private finance at the scale GDP, is generated in industries like construction, needed to transform the way we build, produce, agriculture, and tourism that depend moderately and consume, in order to protect nature while to highly on nature and its services, particularly in fostering sustainable poverty reduction. The report certain developing economies. examines the current state of private finance for biodiversity as well as the barriers to its growth. It Nature is deteriorating at an unprecedented identifies the way forward and highlights a set of level, with potentially far-reaching implications for ‘Big Five’ ideas for actions that can be taken in the economies. A recent report from WWF reveals an short term to better integrate biodiversity risks and average decline of 68 percent in vertebrate species opportunities into private sector decisions. numbers between 1970 and 2016 (WWF, 2020). The Global Futures Project estimates that under a Why is nature important? business-as-usual scenario, the costs of biodiversity loss in some countries could be as high as 4 percent Biodiversity and ecosystem services, which are of their GDP per year by 2050 (Johnson et al., often referred to as nature, are the foundation 2020). These trends are further exacerbated by the of human well-being and economic activity. changing climate and its interaction with nature, Biodiversity1 is the attribute that makes nature which can trigger important feedback effects and resilient to change and allows it to thrive. Nature ‘tipping points.’ Nature risks can also be systemic. The COVID-19 pandemic, which is causing far- 1  Biodiversity is the variability among living organisms from all sources including, inter alia, terrestrial, marine, and other aquatic ecosystems and the ecological complexes of which they are part; this includes diversity within species, between species, and of ecosystems (Convention on Biological Diversity). Mobilizing Private Finance for Nature 7 reaching economic impacts, is a powerful reminder be scaled up. Businesses are starting to consider of the link between human health and planetary biodiversity and ecosystem services in their health: an estimated 60 percent of all known production and investment practices in response to human infectious diseases are zoonotic (Taylor et the loss of nature affecting their bottom lines. The al., 2001). financial materially of biodiversity loss is becoming increasingly clear. For example, deforestation and The 2019 landmark report of the Intergovernmental related fires in Indonesia have led to significant Science-Policy Platform on Biodiversity and market pressure to end the use of uncertified palm Ecosystem Services (IPBES) identifies five key oil in consumer goods and biofuels (Steinweg et direct drivers behind the unprecedented decline al., 2019). However, integration of biodiversity risk in biodiversity: land use and sea use change, into corporate decision making is still incipient, overexploitation, pollution, climate change, as the understanding and the measurement of and invasive species. All these drivers stem from impacts are still developing. human activity. In the past 50 years, the human population has doubled, the global economy The financial sector is also increasingly recognizing has grown fourfold, and global trade has grown the risks posed by loss of biodiversity and tenfold. Insufficient attention has been paid to the ecosystem services to the real sector projects impact of this development on the environment. and companies in which they invest. Given the financial materiality of biodiversity loss, financial This unsustainable use of natural resources is institutions are starting to use their leverage underpinned by economic policies, consumption, to push for faster change in the real sector and production practices that are not aligned with through engagement and capital allocation. For sustainable development objectives. The record example, Norway’s $1 trillion sovereign wealth economic development and poverty reduction of fund has divested from 60 investments due to the last 50 years has been made possible by an deforestation risk, including 33 investments in extractive approach to renewable natural capital palm oil plantations (Norges Bank, 2018). This and nature services. Many value chains rely heavily trend is expected to strengthen as the new on the harvesting of resources such as crops, fish, generations of investors, increasingly aware of and timber, but fail to account for the negative environment, social, and governance (ESG) issues, impact that these economic activities have on seek investments aligned with their values. the ecosystems providing these services, or their reliance on the services. The cost of environmental This report details two channels through which degradation is only partially felt by the actors private finance can be mobilized: by monetizing driving it. Economic incentive structures, by and cashflows from the provision of ecosystem large, continue to support the unsustainable services (financing green) and by driving better management of nature, resulting in distortions management of biodiversity risks (greening such as the underpricing of biodiversity risk and finance). The real and financial sectors are looking value in private investment decisions. for investment opportunities arising from the conservation, restoration, and sustainable use of The state of private finance nature—‘to finance green,’ using the language of climate finance. Investors are also trying to avoid or for biodiversity and ecosystem limit biodiversity risk associated with investments— services seeking ‘to green finance.’ Investment in this category aims to direct financial flows away from While biodiversity finance is still in the early stages projects with negative impacts on biodiversity of development, it is growing, and there are key and ecosystem services to projects that mitigate financial instruments and financing approaches negative impacts or pursue positive environmental that have been tested and have the potential to impacts as a co-benefit. Biodiversity offsets— 8 Mobilizing Private Finance for Nature one of the larger components of private finance The largest market for ecosystem services for biodiversity—doubled in volume transacted is for watershed conservation, followed by between 2011 and 2016 (Bennett and Galland, forest and land use carbon (Salzman et al., 2017). The sources of private capital are also 2018). Investments from the private sector in broadening and include foundations, impact PES are growing, but are still dominated by investors, large asset owners, corporations, and the public sector (Bennett and Ruef, 2016). retail investors. Aligning nature-based solutions structures with investor needs requires further development. Financing green: harnessing For example, capturing revenues from carbon biodiversity and ecosystem services offsets still faces significant barriers in the form of verification and other policy challenges, like Biodiversity and ecosystem services have the low level of carbon pricing. economic value which, if internalized by economic • Provisioning or material services: Ecosystems agents, has the potential to attract private finance. provide material goods that contribute to As they seek business opportunities that are everyday life and which are often traded economically viable, the real and financial sectors on markets. These include food, water, raw are increasingly identifying projects that protect materials, energy, and genetic resources. The and manage ecosystem services. These services, private sector is involved in the management which can be divided into the three categories and production of these goods. Often, below, have traditionally been underprovided, however, the original resource is an open owing to their public good nature. However, there access or public good. The role of green are informative examples of financial instruments finance, with the necessary support of enabling and approaches being explored to encourage public policies, is to identify mechanisms to private sector financing for each: direct capital toward management, reporting, and verification methods that allow for the • Cultural or nonmaterial services: Aesthetic sustainable provision of goods. Instruments inspiration, cultural identity, sense of home, like labeled bonds and transition bonds can and spiritual experience that originates in support sustainable forestry and fishing; the the existence of wildlife and ecosystems Seychelles, for example, has issued the world’s have to date been largely supported by first sovereign blue bond to support sustainable often insufficient public sector funds and marine and fisheries projects. philanthropy. This has led to clear limitations, including that biodiversity outside of public land Greening finance: reducing loss of or some community-managed conservancies is biodiversity and nature’s contributions generally not well protected. Protected areas to people are often underfunded as limited resources are channeled to other development activities. Financing tools which link the cost of capital to the Direct species conservation is beginning to seek achievement of sustainability objectives are starting access to new types of capital—as represented to be used to incentivize changes in corporate by the World Bank Wildlife Conservation Bond behavior. Instruments such as sustainability-linked project (see Box 4 for more details). loans, which link interest rates to key sustainability • Regulating services: Investments in ‘green performance indicators, are starting to be applied infrastructure’ harness biodiversity and the to incentivize companies to meet biodiversity natural functions of healthy ecosystems to targets. These products saw a 168 percent jump in complement, replace, or enhance ‘grey’ 2019 to a total volume of $122 billion (Bloomberg, infrastructure solutions. Payments for ecosystem 2020). For example, in early 2020, the Finnish services (PES) help provide economic support forest-based bioindustry company, UPM, became to the provision of nature’s regulating services. one of the first companies to link a revolving credit Mobilizing Private Finance for Nature 9 facility (RCF) to a biodiversity target. The interest Challenges to scaling up biodiversity financing fall on the €750 million RCF is tied to UPM meeting its into three categories: goal of having a net positive impact on biodiversity in the company’s forests in Finland, and a separate • Perverse economic incentives: Governments carbon reduction target (BNP Paribas, 2020). spend about $500 billion per year in economic support that is potentially harmful to Where the biodiversity impact of projects cannot biodiversity—five to six times more than the be avoided, biodiversity offsets are increasingly total spending on biodiversity (OECD, 2020b). being used. Biodiversity offsetting involves This type of economic incentive generally investing in a biodiversity conservation project to favors expansion of economic activity, and offset the unavoidable impact of a development often environmental harm, over conservation, project. Large mining and energy companies restoration, and sustainable use of nature voluntarily adopt offset standards to guide their (IPBES, 2019). risk management decisions. In the land use sector, • Paucity of data, measurement, and standards: mitigation banking is a way to facilitate the scaling Progress has been made in measuring and of private investments, that is generating financial monitoring climate risks and benefits—but returns through the sale of biodiversity offsets biodiversity measurements are more complex. to real estate developers. These funds represent For example, there is no single, high-level a significant source of potential conservation policy goal for biodiversity conservation to financing, but can be difficult to implement in work toward, similar to the 1.5°C temperature practice, requiring international standards to increase ceiling established by the Paris be strengthened and applied. Local poverty Agreement. Conserving biodiversity is a much alleviation, equity, and cultural heritage factors also more complex problem from a financial stability must be integrated. perspective than climate change, because among other reasons it is highly dependent on What are the barriers to local factors, despite having global implications (Chenet, 2019). Data on biodiversity upon scaling up private biodiversity which companies can base impact assessments financing? is still lacking at a national level. Additionally, data on the complex relationship between Efforts to engage the private sector in conserving companies and biodiversity through operations and sustainably using nature are still insufficient, and supply chains is limited. This is exacerbated and biodiversity faces a large financing gap as a by a lack of a clear taxonomy of biodiversity result. The Convention on Biological Diversity’s investments and definitions, or widely accepted Aichi target on mobilizing resources for biodiversity risk assessment and reporting frameworks. is still unmet (IPBES, 2019). Financing for biodiversity • Scale and localized nature of biodiversity is still poorly tracked, as it focuses mainly on direct projects: A key challenge with biodiversity finance for conservation activities and not so much projects is their often small scale and localized on finance to avoid negative impacts of biodiversity nature, so they will need to be aggregated in loss. The public sector provides more than two- many cases. In addition, biodiversity projects thirds of the $78–91 billion in annual global finance frequently involve no cashflow, making it labelled as ‘biodiversity finance’ (OECD, 2020a).2 difficult to attract private sector financing. Private financing for biodiversity remains niched. In Biodiversity and ecosystem services are public 2018, ‘conservation’ represented just 3 percent of goods whose true value is not reflected in the investment portfolio of impact investors (GIIN, economic transactions. Even where projects 2018). do generate some cashflow, the financial 2  Data from 2015–2017; includes domestic public expenditure, international public finance (ODA), and private expenditure. 10 Mobilizing Private Finance for Nature returns are often below market return hurdles. the private sector side, biodiversity risk, stemming Therefore, ‘blended finance’ is needed— from both impact on and dependency on nature, mixing concessional and commercial returns. can be incorporated into investment decisions Many biodiversity venture business models via risk measurement and reporting. This will would still be classified as early stage, making it encourage businesses to operate more sustainably difficult to attract a broader range of investors and prevent biodiversity loss (greening finance). In and to scale up. addition, more innovation in developing projects with sufficient cashflow and returns, as well as Mobilizing resources at scale for biodiversity financial instruments with an attractive risk-return requires a composite set of solutions involving profile, is needed (financing green). Multilateral different players. The public sector needs to create development banks (such as the World Bank a supportive enabling environment with efficient Group) can play an important role in bringing the and effective incentives, standards, and regulations, public and private sectors together—including and to provide data and concessional finance. On through de-risking and scaling projects. Leopard closeup: © Raghav Kabra/Unsplash Mobilizing Private Finance for Nature 11 risks and biodiversity degradation, as well as The Way Forward removing regulatory barriers for companies and investors to take biodiversity risk into account in Mobilizing private finance for biodiversity and their investment decisions. ecosystem services involves the dual task of developing mechanisms to increase the return or cashflow of investments and integrating Role of public policy and financial biodiversity risks into financial decisions. The regulation stylized framework (Figure 2) presents these two Through planning and policy development, dimensions, which underpin the recommendations governments drive the way economies build provided in this report. To scale up financing green, infrastructure, and produce and consume goods the ability of projects to generate cash flows needs and services—this power can be harnessed in the to be improved and track records for new business stimulus plans being crafted in response to the models need to be established. Governments can pandemic-induced global economic downturn. support the development, scaling, and innovative Transformative change can be best achieved by application of financial instruments which blend mainstreaming biodiversity considerations at the commercial and concessional finance and create strategic level in sector-wide planning and stimulus investment opportunities. This will involve improving development. To ensure recovery efforts are the financial returns and biodiversity impact of inclusive, sustainable, and resilient, it is important projects. For greening finance, governments that projects supported by stimulus packages are can drive better measurement and management assessed not only on their short-term stimulus and of biodiversity risk so that it is integrated into job creation contributions, but also their long- business and investing decisions, particularly in term sustainability—including contributions to the financial sector. This requires improving the decarbonization and the protection of biodiversity recognition of the link between financially material Figure 1. Key Actions by Stakeholder Group Actors Public Sector Private Sector MDBs For the real sector: Incorporating Supporting Policies to level the risks implementation in Actions playing field & address the public & externalities Developing & private sectors structuring investment For the financial sector: opportunities Providing credit Policies, data provision, enhancement through regulation, & supervision blended finance Foundation for Success Enforceability, resources, Transparency, capacity, Innovation & global & capacity & compliance coordination Source: Authors. 12 Mobilizing Private Finance for Nature Figure 2. The Two Dimensions of Mobilizing Private Sector Finance for Biodiversity and Ecosystem Services (BES) Financing Green Increase return by better monetizing ecosystem services Positive Conservation project Conservation project Project where BES impact Impact on biodiversity and ecosystem services without cashflow which using program-related are monetized, or on BES requires grant funding or investment or blended co-benefits are public support; finance created through Development project with business activities biodiversity component No impact Development project with Development project Project with on BES negative cashflow, which using program-related proper risk does not affect BES with investment or blended mitigation Greening proper risk mitigation finance with proper risk practices or Finance practices mitigation practices biodiversity offset* Increase positive impact Negative Development project Development project Traditional by better impact without proper risk using program-related investment internalizing on BES mitigation practices** investment or blended without proper environmental finance without proper risk mitigation and social risks risk mitigation practices** practices and benefits Negative Below Market Rate Market Rate Concessional Commercial Risk-Adjusted Return Source: Authors. Notes: The figure assumes that projects comply with national environmental regulations. Standards refer to IFC Performance Standards or other widely accepted market standards. *The creation of an offset should compensate for any negative/residual impacts on biodiversity generated by the project. **Negative impacts on BES are commonly addressed by projects financed by MDBs through their own compliance mechanisms and compliance with national regulations. and ecosystem services. Many programs— domestic real sector investment in conservation such as land restoration—can score high on all and sustainable industry. dimensions, with the achievement of climate and biodiversity goals increasingly recognized as To address the double materiality3 of nature loss interlinked. Reforming harmful incentives through and degradation, government response needs stimulus packages has the potential to create to cover both the real and financial sectors. significant biodiversity impact—for example, Recommendations for governments, financial by repurposing unsustainable subsidies. While regulators, and supervisors can be organized politically challenging, the current ‘reform window’ into two key areas of intervention: (i) policies and may provide opportunities, particularly if savings regulations to level the playing field in the real are used to fund a ‘just transition’. In addition, sector, and (ii) policies, data provision, regulation, stimulus packages can include the financing of new and supervision to drive integration of biodiversity investments, for example in ‘green’ infrastructure. criteria in financial decision making and market Debt for nature swaps are one instrument development. These two sets of policies work which could help countries fund economic and together to help a country transition to a nature- conservation projects, blending finance to mobilize smart economy. 3  See double materiality definition in glossary. Mobilizing Private Finance for Nature 13 Real sector policies drive the behavior of firms governments, this means implementing natural operating in sectors such as agriculture, food and capital accounting (NCA) practices at the highest beverages, textiles, construction, energy, and level. Eighty countries are already implementing mining, and their success depends on how well the the UN’s System of Environmental Economic political economy is managed. Environmental Fiscal Accounting (SEEA). COVID-19 has revealed the Reform (EFR) has so far focused predominantly need for coordinated monitoring of planetary on climate change, but can also be applied to health metrics alongside measures such as GDP— biodiversity and ecosystem services. Reforming one example is China’s Gross Ecosystem Product perverse subsidies in agriculture, forestry, fisheries, (GEP), currently being tested.4 Governments can energy, and mining (OECD, 2020a) would reorient also invest in technology that can improve data incentives, increase efficiency, and effectively quality and availability. conserve the natural asset base on which production relies. It would also produce impact Supervisors and regulators have a major role in at scale by leveraging private sector resources, as supporting better management of biodiversity- shown by Brazil’s Low-Carbon Agriculture (ABC) related risks across the financial sector through Plan (Lopes and Lowery, 2015). Taxation is another risk assessment, standards, and reporting. For important component of fiscal reforms. Real sector financial institutions to fulfill their role of effectively policies can have adverse impacts on the welfare managing and distributing risks and allocating of powerful lobbies, farmers, or low-income resources to productive uses, governments and populations, so the design of reforms needs financial sector regulators will need to take steps to be mindful of the winners and losers, and be to better enable the integration of biodiversity implemented through smooth transitions that use criteria into economic and financial decisions. A list the resources freed up by the reform intelligently, of recommended regulatory and supervisory tools inclusively, and equitably (OECD, 2017). is provided in Table 1. Green financial sector policies can focus Table 1. Regulatory and Supervisory Tools on expanding national planning to include and Approaches biodiversity issues. National roadmaps or strategies for greening the financial sector can help set an overarching framework. Several Taxonomies countries, including the UK, have implemented strategies, policies, and instruments with this aim (Van Ackerand Mancini, 2020). While several of Labeling these strategies include biodiversity criteria, it is crucial that biodiversity considerations are central Supervisory risk assessment to the strategy, on par with climate. Governments can further mobilize private finance for biodiversity Regulatory risk assessment through including a role for the private sector in their National Biodiversity Strategies and Action Plans (NBSAPs). Disclosure Beyond ensuring that policies and incentives are Solvency and capital regulations aligned with biodiversity goals, governments can provide knowledge and data that real and financial International networks sector firms will need to build biodiversity into their risk analysis and investment decisions. For 4  IUCN. 2020. Gross Ecosystem Product (GEP). Accessed on May 19, 2020. Available at: www.IUCN.org 14 Mobilizing Private Finance for Nature Risk management and financial the biodiversity financing field is being activated instruments to crowd in more private financing into this space. Innovative business models and project structures The financial sector does not have to wait for can be standardized which can help replicate and regulation and can continue to develop its own expand pilots—a service the Coalition for Private standards and good practices for incorporating Investment in Conservation (CPIC) blueprints aim biodiversity risk into investment decisions. The to provide. While many of these instruments are financial sector can support and coordinate replicable, they are applicable mostly to smaller, current industry initiatives and provide capacity local projects, making it difficult for them to be building for implementation. As the Bank of scaled up to shift significant amounts of capital. As International Settlements’ ‘Green Swan’ report a result, aggregation will be key. Figure 3 provides (Bolton et al., 2020) points out, risk assessment a qualitative assessment of the potential feasibility techniques have been largely backward looking, and scalability of instruments reviewed, for which with forward looking scenario-based analyses feasibility in emerging markets was scored as high. requiring further development by the financial sector and by governments and regulators. As with Supporting implementation: the role of climate change, engagement has the potential to multilateral development banks be an impactful tool for investors in pushing the real sector to better manage biodiversity risk. Multilateral Development Banks (MDBs) have a The Climate Action 100+ initiative, which targets key role to play in helping bridge the gap between systemically important greenhouse gas emitters, the public and private sectors in biodiversity offers a template for broader, more strategic financing. MDBs can apply instruments such as engagement with key companies on biodiversity concessionary finance, loan guarantees, policy risk. This model could be replicated via a ‘Nature insurance, foreign exchange liquidity facilities, Action 100’ approach. pledge funds, and subordinated equity to reduce the risk to the private sector of investing in nature. Though innovative biodiversity financing tools are While new tools and blending approaches have being developed, the outstanding question is how been used extensively to mobilize climate finance, many of these are scalable? Financial innovation in many could be similarly applied to biodiversity Figure 3. Top 10 Investment Instruments with High Feasibility in Emerging Markets Scored According to Potential Corporate sustainable timber bonds Green commodity PE/real asset fund Biodiversity/sustainability linked loans Sustainable TIMOs/PE Corporate green commodity debt fund Private debt fund for conservation businesses (SMEs) Fisheries debt fund Conservation PE fund Ecotourism debt fund Ecosystem-based carbon offset funds 0 2 4 6 8 10 12 14 16 18 20 Replicable Scalable Potential biodiversity impact Potential to attract capital From 1 (very low) to 5 (very high) in each category (qualitative analysis); Source: Authors. Mobilizing Private Finance for Nature 15 investments. To meet biodiversity targets, donors represent; and the management, mitigation, and and multilateral institutions could increase the analytical tools and policy instruments that could use of Overseas Development Assistance (ODA) be used in response. Many lessons learned in funds to jointly target poverty reduction and long- climate finance can inform biodiversity financing. It term management of biodiversity and reprioritize is also increasingly recognized that these risks are how the funds are granted and utilized. Finally, linked and that climate and biodiversity goals must MDBs can support governments to improve their be pursued in coordination. enabling environments for biodiversity financing. Yet biodiversity financing has important differences Conclusions from climate, requiring a different approach and emphasis. While climate finance has made Although awareness of the importance of great progress through ‘financing green’—i.e., biodiversity and nature is growing, pervasive investment opportunities, particularly in renewable market and policy failures create hurdles to this energy, and incorporating climate risk into financial awareness becoming action. Failure to account balance sheets—‘greening finance’  has been for the social and environmental externalities slower. Biodiversity financing is likely to take the associated with biodiversity loss results in opposite route. Financing biodiversity projects underpricing of biodiversity risk and misinformed is difficult because of their local nature, small investment and policy decisions. Biodiversity and scale, and lack of monetizable cashflows. Putting ecosystem services are public goods whose true a price on something historically seen as a public value is not reflected in economic transactions. good is challenging. Given these circumstances, Nature has a value but not a price, and as a result, integrating biodiversity risk into risk management the implied price is zero.5 Until policies are aligned more broadly (including through greening supply with biodiversity goals and economic incentives chains) is likely to have a larger impact.  are redirected for positive, rather than negative impact, markets will not efficiently distribute risks The COVID-19 pandemic is a stark reminder that and allocate resources. planetary health and human health are deeply intertwined. Stimulus plans being developed in Many lessons learned in climate finance can inform response to the global economic downturn caused biodiversity finance, including the importance by the pandemic should include nature-smart of the use of blended finance approaches and economic activities, recognizing that economies disclosure of physical and transition risks. Climate can only thrive on a healthy planet. These plans finance has benefited from substantial sums of provide an opportunity for governments to dedicated concessional finance, which has helped transform the way economies build infrastructure to scale renewable energy technologies and allow and produce and consume goods and services. them to compete with fossil fuels.6 Networks of regulators, alongside private sector initiatives, Of the many policy ideas and innovative have begun to mainstream climate risk analysis applications of financing mechanisms showcased into corporate reporting and financial sector risk in this paper, the following ‘Big Five’ (Box 1) offer analysis. Global commitments and measurable the greatest potential in meeting the urgent targets have provided an overall framework. There challenges of biodiversity loss. are important similarities between climate and biodiversity risk—notably the systemic risk they 5  “When people talk about natural capital not being assigned a value, it’s not true. We have put a price on nature. And that price is zero,” Ed Barbier, Colorado State University (Avery, 2019a). 6  According to Bloomberg New Energy Finance, “more than two-thirds of the global population today live in countries where solar or wind, if not both, are the cheapest source of new electricity generation. Just five years ago, coal and gas dominated that picture. By 2030, new wind and solar ultimately get cheaper than running existing coal or gas plants almost everywhere” (BNEF 2019). 16 Mobilizing Private Finance for Nature BOX 1 Five Big Ideas to Mobilize Private Finance for Biodiversity 1. Environmental Fiscal Reforms (EFR) Governments could include EFR as part of crisis recovery plans. The current design of stimulus plans opens a potential ‘reform window’ in which to tackle these difficult issues. Reforming agricultural subsidies and land ownership has the largest potential impact of the recommendations in this paper, and can be complemented with investment in social, development, and job creation programs. 2. National Data Provision and Planning Governments can support the integration of biodiversity criteria in financial sector decision making by adopting natural capital accounting (NCA) practices and providing relevant data as a public good. Governments can also mobilize private investment for biodiversity by including a role for the private sector in their National Biodiversity Strategies and Action Plans (NBSAPs). 3. Establishment of a Taskforce on Nature-related Financial Disclosures (TNFD) The initiative to establish a Taskforce for Nature-related Financial Disclosure (TNFD) can be supported by both private and public sector stakeholders. The initiative, which can be built on or be part of the Taskforce on Climate-related Financial Disclosures (TCFD), will provide a framework and guidance for reg- ulating and supporting biodiversity reporting and risk assessment by real and financial sector firms. A TNFD framework can help avoid excessive additional requirements for real and financial sector firms and fragmentation of reporting standards. 4. Establishment of a ‘Nature Action 100’ Investors could come together to identify the top 100 companies with the greatest negative impact on nature and establish an equivalent of the ‘Climate 100’, to drive changes in real sector corporate behavior—including greening of supply chains. 5. Providing catalytical capital MDBs and governments can mobilize private investment for biodiversity goals by serving as cornerstone investors and providing catalytic capital to funds and other financial instruments that aggregate projects. Mobilizing Private Finance for Nature 17 Glossary Biodiversity is the variability among living organisms from all sources including, inter alia, terrestrial, marine, and other aquatic ecosystems and the ecological complexes of which they are part; this includes diversity within species, between species, and of ecosystems. (Convention on Biological Diversity) Biodiversity finance is finance that contributes - or intends to contribute to, activities that conserve, restore, or avoid a negative footprint on biodiversity and ecosystem services. (adapted from OECD) Biodiversity loss is the reduction of any aspect of biological diversity (i.e., diversity at the genetic, species, and ecosystem levels) that is lost in a particular area through death (including extinction), destruction, or manual removal; it can refer to many scales, from global extinctions to population extinctions, resulting in decreased total diversity at the same scale. (IPBES) Biodiversity offsets are measurable conservation outcomes resulting from actions designed to compensate for significant residual adverse biodiversity impacts arising from project development and persisting after appropriate avoidance, minimization, and restoration measures have been taken. (International Finance Corporation) Biosphere is the sum of all the ecosystems of the world. It is both the collection of organisms living on the Earth and the space that they occupy on part of the Earth’s crust (the lithosphere), in the oceans (the hydrosphere), and in the atmosphere. The biosphere is all the planet’s ecosystems. (IPBES) Blended finance is the use of catalytic capital from public or philanthropic sources to increase private sector investment in sustainable development. (Convergence) More specifically, it is the use of concessional donor funds to mitigate specific investment risks and help rebalance risk-reward profiles of pioneering, high-impact investments so that they have the potential to become commercially viable over time. (International Finance Corporation) Brown finance is the financing of activities that do not sufficiently consider biodiversity risk or impact. Carbon sequestration is the long-term storage of carbon in plants, soils, geologic formations, and the ocean. Carbon sequestration occurs both naturally and as a result of anthropogenic activities and typically refers to the storage of carbon that has the immediate potential to become carbon dioxide gas. (IPBES) Catalytic/concessional capital accepts disproportionate risk and/or concessionary return to generate positive impact and enable third-party investment that otherwise would not be possible. (Convergence) Climate change is change of climate which is attributed directly or indirectly to human activity that alters the composition of the global atmosphere and which is, in addition to natural climate variability, observed over comparable time periods. (UNFCCC) 18 Mobilizing Private Finance for Nature Climate finance is the local, national or transnational financing—drawn from public, private, and alternative sources of financing—that seeks to support mitigation and adaptation actions that will address climate change. (UNFCCC) Drivers of change, in the context of IPBES and this report, are all the factors that, directly or indirectly, cause changes in nature, anthropogenic assets, nature’s contributions to people, and a good quality of life. Drivers have direct physical (mechanical, chemical, noise, light, etc.) and behavior-affecting impacts on nature. They include, inter alia, climate change, pollution, different types of land or sea use change, invasive alien species and zoonoses, and exploitation. Indirect drivers are drivers that operate diffusely by altering and influencing direct drivers, as well as other indirect drivers. They do not impact nature directly. Rather, they do it by affecting the level, direction, or rate of direct drivers. Global indirect drivers include economic, demographic, governance, technological, and cultural ones. (adapted from IPBES) Double materiality is a two-dimensional perspective on materiality (see below) adopted by the Non- Financial Reporting Directive of the European Commission in the context of climate change. It involves: (i) The reference to the company’s “development, performance [and] position” indicates financial materiality, in the broad sense of affecting the value of the company. Climate-related information should be reported if it is necessary for an understanding of the development, performance and position of the company. This perspective is typically of most interest to investors,” and (ii) The reference to “impact of [the company’s] activities” indicates environmental and social materiality. Climate-related information should be reported if it is necessary for an understanding of the external impacts of the company. This perspective is typically of most interest to citizens, consumers, employees, business partners, communities, and civil society organizations. However, an increasing number of investors also need to know about the climate impacts of investee companies in order to better understand and measure the climate impacts of their investment portfolios. (European Commission) Ecosystem is a dynamic complex of plant, animal, and micro-organism communities and their non-living environment interacting as a functional unit. (IPBES) Ecosystem services (also referred to as nature’s contributions to people) are the benefits people obtain from nature (Millennium Ecosystem Assessment). Ecosystem services are organized into four types: (i) provisioning services, which are the products people obtain from ecosystems and which may include food, freshwater, timbers, fibers, and medicinal plants; (ii) regulating services, which are the benefits people obtain from the regulation of ecosystem processes and which may include surface water purification, carbon storage and sequestration, climate regulation, and protection from natural hazards; (iii) cultural services, which are the nonmaterial benefits people obtain from ecosystems and which may include natural areas that are sacred sites and areas of importance for recreations and aesthetic enjoyment; and (iv) supporting services, which are the natural processes that maintain the other services and which may include soil formation, nutrient cycling, and primary production. (World Bank) Note: The paper focuses on the three categories of ecosystem services that people derive measurable benefits from—provisioning, regulating and cultural services—and which tend to attract investment and generate cashflows in projects. In contrast, the fourth category, the supporting ecosystem services, is of less relevance in the context of private finance for biodiversity and thus will not be the focus of the paper. Financial sector is the set of institutions, instruments, and the regulatory framework that permit transactions to be made by incurring and settling debts; that is, by extending credit. (OECD) Mobilizing Private Finance for Nature 19 Financing green is increasing financial flows to projects that contribute—or intend to contribute—to the conservation, sustainable use, and restoration of biodiversity and ecosystems and their services to people. Greening Finance is directing financial flows away from projects with negative impacts on biodiversity and ecosystems to projects that mitigate negative impact and/or pursue positive environmental impacts as a co-benefit. Green Swans, inspired by the concept of the ‘black swan’, are potentially extremely financially disruptive events, attributable to environmental crises, that could be behind the next systemic financial crisis. Namely, climate-or biodiversity-related physical and transition risks involve interacting, nonlinear and fundamentally unpredictable environmental, social, economic, and geopolitical dynamics that can be irreversibly transformed by the growing concentration of greenhouse gases in the atmosphere and large- scale loss of biodiversity and ecosystem services. (adapted from Bolton et al., 2020) Impact assessment is a formal, evidence-based procedure that assesses the economic, social, and environmental effects of public policy or of any human activity. (IPBES) Impact investments are investments that seek to generate positive social and environmental outcomes, alongside financial returns. (Global Impact Investing Network) Land use is the human use of a specific area for a certain purpose (such as residential, agricultural, recreational, industrial, etc.), influenced by, but not synonymous with, land cover. Land use change refers to a change in the use or management of land by humans, which may lead to a change in land cover. (IPBES) Mainstreaming, in the context of biodiversity, means integrating actions or policies related to biodiversity into broader development processes or policies, such as those aimed at poverty reduction or tackling climate change. (IPBES) Market return is the return on the market portfolio, a portfolio consisting of all assets available to investors, with each asset held in proportion to its market value relative to the total market value of all assets. (NASDAQ) Materiality refers to the significance of a matter in relation to a set of financial or performance information. If a matter is material to the set of information, then it is likely to be of significance to a user of that information. (OECD) Materiality is rarely determinable by a bare quantitative equation; rather, it requires an assessment of whether a reasonable investor would consider the information relevant to its decision of whether or not to invest in a company. That assessment may require consideration of both quantitative and qualitative factors. (Commonwealth Climate and Law Initiative) Mitigation hierarchy is a tool that guides users toward limiting as far as possible the negative impacts on biodiversity from development projects (The Biodiversity Consultancy). It consists of four sequential steps that must be taken throughout the project’s life cycle to limit any negative impact on biodiversity: (a) anticipate and avoid risks and impacts; (b) where avoidance is not possible, minimize or reduce risks and impacts to acceptable levels; (c) once risks and impacts have been minimized or reduced, mitigate; and (d) where significant residual impacts remain, compensate for or offset them, where technically and financially feasible. (World Bank) 20 Mobilizing Private Finance for Nature National Biodiversity Strategy and Action Plan (NBSAP) is a policy document, developed and adopted by Parties to the Convention on Biological Diversity, in line with the requirements of the Aichi Biodiversity Target 17. (Convention on Biological Diversity) Nature, in the context of this report, refers to the natural world, with an emphasis on biodiversity. Within the context of science, it includes categories such as biodiversity, ecosystems, ecosystem functioning, evolution, the biosphere, humankind’s shared evolutionary heritage, and biocultural diversity. Within the context of other knowledge systems, it includes categories such as Mother Earth and systems of life. Other components of nature, such as deep aquifers, mineral and fossil reserves, and wind, solar, geothermal and wave power, are not the focus of the report. Nature contributes to societies through the provision of contributions to people. (adapted from IPBES) Nature-based solutions (NBS) are actions to protect, sustainably manage, and restore natural or modified ecosystems that address societal challenges effectively and adaptively, simultaneously providing human well-being and biodiversity benefits. (IUCN) Nature’s contributions to people (please see ‘Ecosystem services’) Paris Agreement or, in full, the Paris Agreement under the United Nations Framework Convention on Climate Change (UNFCCC), was adopted on December 2015 in Paris, France, at the 21st session of the Conference of Parties (COP) to the UNFCCC. One of the goals of the Paris Agreement is ‘Holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels’, recognizing that this would significantly reduce the risks and impacts of climate change. Additionally, the Agreement aims to strengthen the ability of countries to deal with the impacts of climate change. (adapted from IPCC) Private sector is the part of the national economy that is not under direct government control. This includes both the real and financial sectors. Real economy/sector is the part of the economy that produces goods and services, rather than the part that consists of financial institutions and services. Taxonomy refers to a classification system for investments, particularly as they relate to a government’s environmental goals (scientific taxonomies are not discussed in this paper). Tipping point is a set of conditions of an ecological or social system where further perturbation will cause rapid change and prevent the system from returning to its former state. (IPBES) Zoonotic diseases (or zoonosis) is any disease or infection that is naturally transmissible from vertebrate animals to humans. (WHO) Mobilizing Private Finance for Nature 21 Acronyms Assets Under Management AUM German Federal Financial Supervisory Authority BaFin Business and Biodiversity Offset Program BBOP Biodiversity and Ecosystem Services BES British Petroleum BP Convention on Biological Diversity CBD Caisse des Depots et Consignations CDC Carbon Disclosure Project CDP Conference of Parties COP Coalition for Private Investment in Conservation CPIC Coastal Zone Management Trust CZMT District of Columbia DC Environmental & Social E&S Ecotrust Forest Management EFM Environmental Fiscal Reform EFR European Investment Bank EIB Exploring Natural Capital Opportunities, Risks, and Exposure ENCORE Environmental, Social, & Governance ESG Environmental and Social Impact Assessment ESIA Exchange Traded Fund ETF European Union EU Food and Agriculture Organization FAO Financial Stability Board FSB Group of 20 G20 Gross Domestic Product GDP Global Environment Facility GEF Gross Ecosystem Product GEP Greenhouse Gas GHG Global Impact Investing Network GIIN World Bank Global Program on Sustainability GPS Her Majesty’s Treasury (UK) HMT High Net Worth Individual HWNI Integrated Biodiversity Assessment Tool IBAT International Bank for Reconstruction and Development IBRD International Capital Markets Association ICMA International Energy Agency IEA International Financial Corporation IFC 22 Mobilizing Private Finance for Nature International Financial Institution IFI International Monetary Fund IMF Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services IPBES Independent Power Producers IPPs International Union for the Conservation of Nature IUCN German Development Bank (Kreditanstalt für Wiederaufbau) KfW Kolberg, Kravis, and Roberts KKR Louis Dreyfus Company LDC Multilateral Development Bank MDB Middle East Respiratory Syndrome MERS Marine Protected Area MPA Mongolian Sustainable Finance Association MSFA Nature-Based Solutions NBS National Biodiversity Strategies and Action Plans NBSAPs Natural Capital Accounting NCA Network for Greening the Financial System NGFS Overseas Development Assistance ODA Organisation for Economic Co-operation and Development OECD World Organization for Animal Health OIE Partnership for Biodiversity Accounting Financials PBAF Payments for Ecosystem Services PES Public-Private Partnership PPP Price Waterhouse Coopers PwC Revolving Credit Facility RCF Real Estate Investment Trust REIT Reef Rescue Initiative RRI Severe Acute Respiratory Syndrome SARS Sustainable Development Goals SDGs Seychelles Conservation and Climate Adaptation Trust SeyCCAT Taskforce on Climate-related Financial Disclosure TCFD Timberland Investment Management Organization TIMO The Nature Conservancy TNC Taskforce on Nature-related Financial Disclosure TNFD United Kingdom UK United Nations Conference on Trade and Development UNCTAD United Nations Development Program UNDP United Nations Environment Program UNEP United Nations Framework Convention on Climate Change UNFCCC United States US US Agency for International Development USAID World Business Council on Sustainable Development WBCSD World Bank Group WBG Wildlife Conservation Bond WCB World Economic Forum WEF World Health Organization WHO World Wildlife Fund WWF Mobilizing Private Finance for Nature 23 Aerial view of Okavango delta river: © Ingrid Heres/Shutterstock Chapter 1 Context T he loss and fragmentation of ecosystems governments and financial regulators could take represent an unrecognized risk for business, to facilitate financing. In doing so, the paper seeks financial systems, and people worldwide. to contribute to the policy dialogue on resource Our economies are embedded in the natural world mobilization, particularly in the context of the and constantly rely on the services provided by preparation for the 15th Conference of the Parties ecosystems. Yet, the world is experiencing levels of (COP-15) of the Convention on Biological Diversity biodiversity loss that are unprecedented in human (CBD), and the post-2020 global biodiversity history. Meanwhile, efforts to conserve, sustainably framework. It also seeks to provide the analytical use, restore, and avoid irreversible damages to underpinnings to support national development nature, including finance, are still very small. strategies, including the National Biodiversity Strategies and Action Plans (NBSAPs), which are The objective of this World Bank Group (WBG) the key implementation mechanism of the CBD.7 paper is to contribute to the current debate on mobilizing private finance for biodiversity and Changing the course of action hinges on policy ecosystem services. The paper examines the making, with governments and financial regulators obstacles to scaling private finance for biodiversity holding the key to ‘moving the needle’ of private and ecosystem services—the market failures and finance. Finance for biodiversity and ecosystem lack of an enabling environment for greater private services, that is, finance that contributes—or sector engagement,—and assesses the steps that intends to contribute—to activities that conserve, 7  This piece fits into broader work of the WBG on the road to COP-15 in Kunming, China. The paper is part of a series of WBG knowledge and analytical products, which includes a WBG position paper on biodiversity and ecosystem services that identifies the relevance of sustainable management of biodiversity and ecosystems for development and the role the WBG can play in supporting its member countries to pursue the goals of ending extreme poverty and promoting shared prosperity in a sustainable way. It also includes the ongoing integrated ecosystem and macroeconomic modeling work that will estimate the impact that ecosystem services loss could have on the global economic outlook and assess the potential effectiveness of alternative policy responses. This paper also builds on the outcomes of the workshop on private finance for biodiversity that was held in Beijing in 2019, organized by the China’s Ministry of Ecology and Environment (MEE) and the Foreign Environmental Cooperation Center (FECO)and the World Bank, to examine the key obstacles to and the enabling environment required for, private sector investment, and showcase innovative solutions. Mobilizing Private Finance for Nature 25 sustainably use, restore, or avoid a negative The paper is organized into four parts. Section footprint on biodiversity and ecosystem services, 2 provides the context and the justification for continues to be dominated by the public sector, mobilizing greater private sector investment in while private finance remains niche. Multiple the conservation and sustainable use of nature. entry points for private investment in nature are Section 3 gives an overview of the current status emerging, including impact investing, thematic of finance for biodiversity and ecosystem services, bonds (e.g., green blue, and conservation bonds), and identifies the motives for the private sector to and voluntary standards and initiatives such as the engage, namely risk management and opportunity, Equator Principles and corporate sustainability and the obstacles to overcome. In turn, Section 4 commitments. This is a new frontier in the financial discusses the role of governments and regulators, markets, however, and it represents only a small private sector and multilateral development banks portion of green finance, which continues to be going forward: the levers and policy options that focused on climate finance. While progress has could help real and financial sector actors better been made in understanding the financial risks integrate biodiversity risk and opportunities into related to climate change and aligning global decision making. Please note that unless otherwise financial flows with the climate change mitigation stated, all currency amounts in this report are objectives in the past decade, the same cannot provided in US dollars ($). be said about biodiversity and ecosystem services loss, and this is the space the paper seeks to contribute to. 26 Mobilizing Private Finance for Nature Asia Fishermen on boat fishing at lake: © SantiPhotoSS/Shutterstock Chapter 2 Why Is Nature Important? and inspiration (cultural/‘non-material’ services). The economic importance of Underpinning these are the supporting natural biodiversity and ecosystem processes such as soil formation, nutrient cycling, services and primary production. N ature’s health and human prosperity follow At the foundation of ecosystem services is the same path. Nature—the ensemble of biodiversity.8 This basic building block, an essential living organisms, ecosystems, and biomes attribute of nature, may be understood as the on Earth, also known as the biosphere—is the variability of genes, species, and ecosystems that foundation of economic activity and human well- exist in the biosphere. Biodiversity supports the being. The symbiosis between living organisms provision of vital services as detailed above, and and the physical and chemical environment gives it makes ecosystems more productive and more rise to ecosystems that control fluxes of energy, resilient to shocks, thus sustaining and maximizing nutrients, and organic matter on Earth. These these services. Ecosystems that are more biodiverse services in turn support every aspect of our have a greater capacity to regenerate and respond existence and economic activity (see Figure 4). to change such as extreme events, climate change, Ecosystem services, also referred to as Nature’s and degradation (Dasgupta, 2020). Put simply, contributions to people, include the provision biodiversity allows nature to thrive and creates of food, fresh water, timber, and fuelwood an environment in which people, communities, (provisioning/’material’ services); the regulation of firms, and economies can be productive, and can climate and extreme weather; control of diseases prosper. For this reason, the paper talks about and removal of toxic pollution (regulating services); finance for biodiversity and ecosystem services, and a basis for spirituality, personal enjoyment, and finance for nature in an interchangeable way. 8  The Convention on Biological Diversity defines biodiversity as the variability among living organisms from all sources including, inter alia, terrestrial, marine, and other aquatic ecosystems and the ecological complexes of which they are part; this includes diversity within species, between species, and of ecosystems. (Convention on Biological Diversity). 28 Mobilizing Private Finance for Nature Figure 4. Biodiversity and Ecosystem Services are the Foundations of Economies Source: Stockholm Resilience Centre, Stockholm University. Biodiversity and ecosystem services underpin ranges from $235 billion to $577 billion (IPBES, many economic sectors in tangible, measurable 2016). Another example is the tourism sector that ways. The World Economic Forum (2020a) with all its linkages to the services and primary estimates that $44 trillion of global value added industries generates one in ten jobs worldwide. (corresponding to over half of the world’s GDP) Natural landscapes and biodiversity are what is generated in industries that are either highly makes many tourism destinations attractive. Coral dependent ($13 trillion) or moderately dependent reefs alone, for example, provide $36 billion a year ($31 trillion) on nature and its services.9 Among in economic value through tourism, generated the highly dependent sectors are construction, directly through ‘on-reef’ activities such as diving agriculture, and the food and beverage industries. and wildlife watching or tourism in reef-related These sectors rely both on the direct extraction of areas, which attract visitors with their ocean views, resources from forests or oceans, and on supporting beaches, and local seafood (Spalding, 2017). ecosystem services such as soil productivity, clean water, stable climate, and animal pollination. For In some countries and regions, the dependence example, pollination supports 75 percent of global of economies on nature is especially pronounced. food crop types, including fruits and vegetables, The World Bank’s comprehensive wealth estimates and some of the most important cash crops such show that natural capital makes up nearly half of the as coffee, cocoa, and almonds. The annual market wealth in low-income countries. This suggests that value of crops dependent on animal pollination more efficient, long-term management of natural 9  The WEF has analyzed the nature dependency of 163 sectors and their supply chains across a range of ecosystem services, which include, inter alia, bioremediation, climate regulation, disease control, fibers and other materials, filtration, flood and storm protection, mass stabilization and erosion control, genetic materials, soil quality, and pollination. Source: WEF, 2020a (please see Appendix A). Mobilizing Private Finance for Nature 29 resources is key to sustainable development (Lange increased the intensity and frequency of extreme et al., 2018). The agriculture, food and beverage, weather events, such as floods, droughts, and and construction sectors all rely very heavily on fires, and is having widespread impacts on species nature services; some countries, in turn, rely on and ecosystems, affecting species distribution, such sectors for employment and value added. phenology, population dynamics, and ecosystem For example, one-third of the GDP of India and function. Even under a 1.5–2°C global warming Indonesia is generated in sectors that are highly scenario, the majority of terrestrial species ranges dependent on nature. In absolute terms, China, are projected to shrink profoundly (IPBES, 2019). the EU, and the US head the list of countries with Conversely, the loss of nature contributes to the highest absolute amount of GDP derived from climate change. Terrestrial and marine ecosystems sectors dependent on nature, at over $7 trillion sequester 60 percent of gross annual anthropogenic (World Economic Forum, 2020a). The greater the carbon emissions (IPBES, 2019); their degradation dependencies, the greater the exposure to risks results in the release of carbon and a reduction of related to environmental degradation. their capacity to sequester carbon. This can trigger potentially disruptive and irreversible ‘tipping Biodiversity is deteriorating at an unprecedented points’—from the collapse of ice sheets that can rate, with potentially far-reaching implications for unleash self-reinforcing global warming, to the economies. Both the indicators of nature’s health disappearance of coral reefs, and to self-amplified and the indicators of the services it provides to forest loss in the Amazon (Zemp et al., 2017). While people are showing negative trends. Biodiversity there is uncertainty about the critical thresholds across marine, freshwater, and terrestrial beyond which such large-scale degradation can ecosystems is diminishing at a rate previously unravel, it is clear that under the current trends, the unrecorded in human history. A recent report from continued stability and resilience of nature and the WWF reveals an average decline of 68 percent in climate system are threatened. vertebrate species numbers between 1970 and 2016 (WWF, 2020). One million of the estimated As the physical risks of biodiversity loss 8 million plant and animal species on the planet materialize, they affect the relative productivity are now threatened with extinction (IPBES, of economic activities, sectors, and geographic 2019). Unsurprisingly, 14 of the 18 categories of areas. The Global Futures Project by WWF-UK nature’s services that were assessed in 2019 have and the University of Minnesota estimates that also deteriorated since 1970 (IPBES, 2019). The under a business-as-usual scenario, the costs of increased consumption of provisioning services— biodiversity loss in some countries, notably in East including the harvesting of fish, bioenergy, and and West Africa, Central Asia, and parts of South agricultural production—has pushed some of these America, could be in the order of 4 percent of GDP resources to the limits and coincided with a decline per year by 2050 (Johnson et al., 2020).11 Some in critical regulating ecosystem services that of these are export-oriented economies that are support economies, such as pollination, control of highly dependent on sectors such as agriculture diseases, coastal protection, and climate regulation. and fishing, or sensitive to changes in commodity prices, making them vulnerable to the degradation Biodiversity loss and climate change are two of ecosystems that underpin the productivity of sides of the same coin, and their interactions can key sectors and value chains. This is just the tip of drive the Earth to dangerous feedback loops and the iceberg. The case will be made in subsequent ‘tipping points’10 (IPCC, 2018). The ~1.0°C rise in sections that no economy is immune to the global temperatures over the past 30 years has systemic risks that nature loss and its interactions 10  Tipping points refer to critical thresholds in a system that, when exceeded, can lead to a significant change in the state of the system, often with an understanding that the change is irreversible (IPCC, 2018). 11  It is worth noting that this is a permanent decline in GDP, hence capable of cumulating to much higher numbers over time. The estimate is conservative in that only six ecosystem services are considered, that is, pollination, water yield, timber provision, coastal protection, fishery production, and carbon sequestration. It is assumed that no tipping points or regime shifts are reached. 30 Mobilizing Private Finance for Nature BOX 2 A Case in Point: COVID-19 and the Global Pandemic The COVID-19 pandemic, which is producing far-reaching economic impacts, is a powerful reminder of the link between human health and planetary health. An estimated 60 percent of all known human infectious diseases, and 75 percent of emerging infectious diseases, are zoonotic (Taylor et al., 2001). In the past half century, we have faced several deadly disease outbreaks caused by novel viruses of animal origin, such as COVID-19, Ebola, HIV, avian influenza, West Nile virus, Rift Valley fever, and the SARS and MERS coronaviruses (WHO, FAO and OIE, 2004; Gebreyes et al., 2014). The rate of zoonotic disease emergence has increased markedly since the 1940s (Jones et al., 2008). Science suggests that habitat loss is a key trigger of the spillover of zoonotic diseases to humans. The pathogens behind such outbreaks have wildlife “reservoirs,” with natural habitats acting as natural barriers, limiting human exposure to and the impact of many pathogens through a buffering effect (Cunningham et al., 2017). However, the ability of nature to act as a shield is compromised by habitat destruction, unregulated wildlife trade, and climate change. Almost half of the new zoonotic diseases after 1940 resulted from land use change, agricultural intensification, and other food production practices or wildlife “bushmeat” hunting (Johnson et al., 2020; Keesing et al., 2010). Illegal wildlife trade is also fueling cross-species transmission (Karesh et al., 2005), and climate change is further accelerating nature’s degradation and modifying the patterns of infectious diseases. The cost of such outbreaks to human lives and economies can be devastating. In a recent example, the economic cost of the 2002 SARS outbreak was estimated at $41.5 billion, with 8,000 confirmed infections (UNEP, 2016). The West Africa Ebola epidemic of 2014–16 claimed over 11,000 lives and had pronounced socioeconomic impacts, including substantial losses in investment, private sector growth, agricultural production, and cross-border trade. In 2015 alone, it cost Guinea, Liberia, and Sierra Leone an estimated $2.8 billion in GDP or $125 in GDP per capita (GPMB, 2019). In Sierra Leone, the 20 percent drop in GDP that year wiped out five years of development. The current COVID-19 crisis is overwhelming even these numbers, and is doing so on a global scale. It has already shut down large swathes of the global economy and may deeply affect certain sectors such as travel and tourism for years to come. The baseline forecast envisions a 5.2 percent contraction in global GDP in 2020, the deepest recession in decades, and longer-lasting impacts such as lower investment, an erosion of human capital through lost work and schooling, and potential ruptures of global trade and supply linkages may be expected (World Bank, 2020b). with climate change represent. An immediate in its conservation and sustainable use. In the example of the close links between planetary past 50 years, human population has doubled, the health and human prosperity is provided by the global economy has grown fourfold, and global COVID-19 pandemic (see Box 2). trade has grown tenfold. Insufficient attention has been paid to the impact of this development on the environment: the record growth coincided Why is biodiversity under with a loss of 85 percent of wetlands, alteration threat? of 75 percent of land surface, and some degree of impact on 66 percent of ocean area (Table 2). Development over the past five decades has Taking land use as an example, over 100 million been associated with rapid transformation of hectares of tropical forests were lost from 1980– the natural world and insufficient investment 2000, mostly as a result of the expansion of cattle Mobilizing Private Finance for Nature 31 ranching in Latin America and plantations in South- the actors driving it. Firstly, much of biodiversity East Asia (IPBES, 2019). Human activity is also using and most ecosystem services are a public good the biosphere as a sink for unprecedented amounts and are free or virtually so, accessible, and open of waste, including toxic waste, which becomes air, to all. Externalities, information asymmetries and soil, and water pollution that damages and reduces public goods are some of the market failures biodiversity (Dasgupta, 2020). The 2019 landmark that misalign the private and social costs, and report of the Intergovernmental Science-Policy benefits of the use of nature, encouraging its use Platform on Biodiversity and Ecosystem Services beyond a level that is socially optimal. Secondly, (IPBES) identifies five key direct drivers behind the certain policies, such as agricultural policies that unprecedented decline in biodiversity: land use, subsidize unsustainable farming practices, also and sea use change, overexploitation, pollution, aggravate the problem. At many levels, policy has climate change, and invasive species (Table 3). moved slowly to better incorporate the values of biodiversity and ecosystem services into policies The unsustainable use of natural resources is and incentives. Finally, economic incentive underpinned by market failures, governance structures continue by and large to support the failures, economic policies, and consumption unsustainable management of nature, resulting in and production practices that are not aligned distortions—including underpricing of biodiversity with sustainable development goals. The record risk and value in private investment decisions. economic development and poverty reduction of the last 50 years has been made possible by The financial materiality of a heavy reliance on an extractive approach to renewable natural capital and nature services. biodiversity loss on the real and Many value chains depend on the exploitation of financial sectors resources such as crops, fish, and timber, but fail to account for this reliance or their impact on the The existence of direct and indirect drivers of ecosystems providing these services. The cost of nature loss gives rise to a double materiality issue environmental degradation is only partially felt by that can only be resolved by aligning incentives for Table 2. The Direct Drivers of Biodiversity Loss: an Assessment by IPBES Land use Over- Invasive Pollution Climate change exploitation species 75 percent of land 33 percent of marine Marine plastic pollu- GHG emissions Cumulative surface altered fish stocks harvested un- tion up tenfold since doubled since records of 85 percent of wet- sustainably; 60 percent 1980 1980 alien species lands lost maximally sustainably 80 percent of waste- Average global increased by 40 fished water discharged temperatures percent since Urban areas dou- 1980 bled since 1992 37 countries currently untreated raised by ~1 facing “extremely high” 115 million tons of degree Celsius 100 million hectares levels of water stress by 2017 relative of tropical forest mineral nitrogen fer- Land degradation; lost tilizers applied each to preindustrial lost from 1980– levels 2000 productivity of 23 per- year to crops cent of terrestrial areas 300–400 million tons of industrial toxic waste, heavy metals are discharged into waterways annually Sources: IPBES (2019); Gassert et al. (2013). 32 Mobilizing Private Finance for Nature Figure 5. Representation of Double Materiality DOUBLE MATERIALITY Financial Materiality Environmental Materiality The impact of biodiversity on a The impact of a company’s company’s development, activities on biodiversity performance, and position Companies’ impact on biodiversity can be financially material and systemic: Green Swans Source: Figure adapted from EU Non-Financial Reporting Directive, European Commission, 2019. the private sector with environmental objectives. Due to these double materiality impacts, real sector The concept of double materiality,12 introduced firms are starting to consider biodiversity in their by the European Commission in the context of business practices. For example, deforestation and climate change, stresses two major perspectives related fires in Indonesia have led to significant on the importance of environmental sustainability pressure to end the use of uncertified palm oil in issues for companies and the business sector. consumer goods and biofuels (Steinweg et al., The first perspective is predominantly financial 2019). In the case of the BP Deepwater Horizon in nature, and it encompasses the possible oil spill, the direct damages sustained by BP and impacts of environmental risks and opportunities its partners—such as the loss of the platform and on the performance and financial position of a the loss in production—were dwarfed by the costs company. The second perspective is biophysical or of the environmental cleanup and the subsequent environmental in nature, and it encompasses the legal settlement with the US federal and state impacts a company has on the environment and governments, amounting to more than $67 billion through that on society, including consumers, civil as of 2019 (Ward, 2018). society, citizens, and even investors. Environmentally material risks can be financially material; in the Drivers for firms to recognize the financial worst cases compounding risks become systemic materiality of biodiversity and ecosystem services and affect an entire value chain or even economy loss include: (Figure 5). This can be the case when unlikely but large-scale events, termed Green Swans by • Regulations and incentives. Changes in the Bolton et al. (2020), occur. Dealing with double regulatory environment are forcing firms to materiality issues can be challenging unless various consider the negative impact their business can instruments are combined and used in concert. have on nature, and to adjust their practices 12  An issue is material when it can have a substantial impact on the economic, financial, reputational, and legal position of a firm or business, as well as on its network of stakeholders. Mobilizing Private Finance for Nature 33 accordingly. Additionally, market instruments— However, the management of the financially such as taxes and subsidies—can incentivize material impacts of biodiversity loss is still incipient, firms to change their practices, by raising the as the understanding and the measurement of cost of doing business as usual, or lowering impacts are still being developed. Opportunities the cost of the transition to more sustainable exist for businesses to participate in biodiversity practices. conservation, sustainable use, and restoration, • Productivity gains. Factors such as changes in and potentially improve their financial bottom the quality and quantity of key inputs, or supply line by doing so. Some companies are able to chain disruptions, could force companies to directly point to key benefits that they derive change their production practices and re- from biodiversity and without which their business design their supply chains. Firms can also operations would be impacted.17 However, in most be proactive by implementing sustainable cases, dependencies on biodiversity are more practices encompassing custodianship of difficult to identify, either because they are hidden nature in order to realize productivity gains within the supply chain, or because they are linked and market opportunities—for example, by to emergent risks that are not well understood or charging a premium for sustainable products. studied—an example of this is the link between The most advanced companies in this respect global pandemics and deforestation or poaching. incorporate natural capital into their strategy and operations, through the use of environmental The financial sector is also increasingly recognizing profit and loss statements.13 Others choose to the risks posed by the loss of natural biodiversity certify their products and supply chains through and ecosystem services to the real sector projects organizations such as the Rain Forest Alliance14 and companies in which they invest. Over the past or the Wildlife Friendly Enterprise Network.15 several years, the awareness of biodiversity risk • Corporate sustainability. Firms seeking has greatly increased and this trend is expected to conserve and restore nature—and their to continue, especially following the COVID-19 corporate reputation—are responding to pandemic. In early 2020, more than 750 global increasing consumer and public pressure to experts and decision makers responded to the consider their broader environmental impact, World Economic Forum’s ‘Global Risk Perception looking beyond their financial bottom line.16 Survey’ (World Economic Forum, 2020b) and • Cost of capital. International financial ranked the risks related to biodiversity loss higher institutions and many commercial banks have than cyber-attacks or asset bubbles both in terms explicit standards addressing risk mitigation and of impact and of likelihood (see Figure 6). management for biodiversity and ecosystem services. To access finance at a viable cost, Like the real sector, the financial sector is realizing companies working in emerging markets are that biodiversity risk is financially material, albeit increasingly considering biodiversity in risk difficult to measure. The distinction between assessment and management. financial and environmental and social returns is • Insurance. Companies may face higher breaking down. Investors are realizing the need to insurance costs, and certain risks or even entire measure and account for the externalities which operations may become uninsurable. the loss of biodiversity and ecosystem services 13  One example is the use of Environmental Profit and Loss Accounts by the luxury group Kering (Kering, 2020). 14  Rainforest Alliance. 2020. What Does Rainforest Alliance Certified™ Mean? May 18, 2020. Accessed on May 18, 2020. Available from: https://www.rainforest-alliance.org/faqs/what-does-rainforest-alliance-certified-mean 15  Wildlife Friendly Enterprise Network. c2015. Standards. Accessed on May 18, 2020. Available from: http://wildlifefriendly.org/ standards/ 16  According to Nielsen, a marketing research firm, nearly half (48 percent) of U.S. consumers say they would definitely or probably change their consumption habits to reduce their impact on the environment. (The Nielsen Company, 2018). https://www.nielsen.com/us/en/insights/article/2018/was-2018-the-year-of-the-influential-sustainable-consumer/ 17  For example, growers of fruit tree and nut tree orchards in California have recognized the importance of pollination by bees and other insects. Faced with declining pollinator populations, farmers have to rent the service of apiculturists who travel hundreds of miles to bring their hives to orchards that need pollination. Likewise, cocoa farmers have come to realize that shade makes for a more productive crop and have begun to replant trees on their farms. 34 Mobilizing Private Finance for Nature Figure 6. The Global Risks Landscape 2020 and the Evolution of Biodiversity Loss Risk in the Past Three Years 4.0 Climate Weapons of action failure mass destruction Water crises Biodiversity loss 2020 Extreme weather Biodiversity Natural disasters Informationloss 2019 Cyber-attacks infrastructure breakdown Human-made Infectious diseases Interstate environmental damage conflict Food crises Biodiversity loss 2018 3.5 Fiscal crises Global governance failure Financial failure Involuntaty migration 3.47 Unemployement Data fraud/theft average Asset bubbles Critical infrastructure failure Social instability National governance failure Terrorist attacks State collapse Adverse technological advances plotted area Energy price shock Unmanageable inflation 3.0 Failure of urban planning Deflation Impact Illicit trade 2.5 3.0 3.5 4.0 3.32 Likelihood average Source: World Economic Forum Global Risks Perception Survey 2019–2020 (World Economic Forum, 2020b). represents. They are also grappling with how to need not prevent these actors from recognizing the achieve this, and to correct the market failure to interdependence of the sustainable management include these externalities in financing costs. As of nature, a healthy human population, and a with the real sector, the relationship between the sustainable global economy. According to the financial sector and biodiversity cuts both ways. As Commonwealth Climate and Law Initiative and laid out in the EU Non-Financial Report Directive the TCFD, “Materiality is rarely determinable and framework, double materiality indicates that by bare quantitative equation: rather, it requires “sustainability issues are firstly a risk and/or an an assessment of whether a reasonable investor opportunity for the financial sector, and, secondly would consider the information relevant to its that financial flows either positively or negatively decision whether or not to invest in a company. influence climate change and biodiversity” (WWF That assessment may require consideration of both and PwC, 2020). quantitative and qualitative factors.” (Staker et al., 2017) (more information on this in Box 3). While considerable progress has been made, many financial sector actors continue to cite data As understanding of the financial materiality of availability, standardization, comprehension, biodiversity and ecosystem loss increases, financial and quality as barriers to assessing the financial institutions are starting to use their leverage materiality of biodiversity risk. Yet the lack of data to push for change in the real sector. Financial Mobilizing Private Finance for Nature 35 BOX 3 Definitions of Materiality in the Financial Sector Two questions often come up when discussing private finance for biodiversity. The first relates to materiality, the second to timeframe. Question 1: Is biodiversity risk financially material? This question has led to an analysis that tries to separate out the contribution of biodiversity to a national economy or a corporation’s revenue. In this analysis, the attempt is often then made to quantify the relationship between natural capital management and changes in asset prices, the cost of capital, or credit ratings. The flaw in this analysis is that investors and credit rating agencies have not traditionally included assessments of biodiversity risk in their own analysis. As a result, historical financial markets data are unlikely to show a significant relationship between management of biodiversity and financial indicators. Even climate risk models are limited in their incorporation of biodiversity risk and the feedback loops between climate and biodiversity. However, as is being recognized in the field of climate change, risks thought to be financially immaterial in the past are quickly becoming material. Climate change analysis shows that financial markets are not efficient when there are significant externalities, such as the impact of greenhouse gas emissions and biodiversity loss on societies and the global economy. Financial sector actors seeking to get ahead of the curve should consider what they expect to be material in the future, as actors in the public and private sectors work together globally and locally to create more efficient markets for sustainable investment, rather than merely what they can prove to have been financially material under inefficient markets. One category of risks that merits special attention is systemic risk, described by the Green Swan’ report (Bolton et al., 2020) as “potentially extremely financially- disruptive events that could be behind the next systemic financial crisis.” Question 2: Is biodiversity risk material in the timeframe that investors care about? Timeframes play an important role in investors’ action or inaction on biodiversity risk and opportunities. Investors that are focused on reporting quarterly earnings or demonstrating quarterly performance against a benchmark are much less likely to view the integration of biodiversity criteria into their risk management and decision making as a priority—the so called ‘tragedy of the horizon’. Impacts of biodiversity protection or destruction accrue over longer periods of time than many investors are mandated to pay attention to. Incentive structures for investors can be better aligned with the efficient and sustainable allocation of capital. If current timeframes driving investors are incentivizing the disregard of crucially important economic criteria related to climate and biodiversity, then these timeframes are not contributing to efficient markets or healthy economies. Supervisors and regulators thus have a role in lengthening them, when appropriate, especially in the case of public assets. institutions are increasingly aware of biodiversity and board member selection), and capital risk, and of the risks that mismanagement of allocation. Recently, investors have taken steps to biodiversity can pose to the financial performance engage with governments, which is a significant of their investment portfolios. As illustrated in development. A group of 29 leading institutional Figure 7 below, investors have two main channels investors managing $3.7 trillion in assets for influencing the strategies and behavior of succeeded in persuading the Brazilian government companies: engagement (through proxy vote to commit to implementing a 120-day halt to 36 Mobilizing Private Finance for Nature Figure 7. Investor and Company Impact Investor Impact Company Impact Mechanisms: Investor 1 Engagement Company activity World activity a) Change of level Change in relevant 2 Capital allocation b) Change of quality parameter 3 Indirect impacts Source: 2 Degrees Investing Initiative, 2020. fires in the Amazon in July 2020. Some firms are putting additional investments in Brazil on hold or threatening to divest if the government does not act (Paraguassu and Spring, 2020). In July 2020, Nordea Asset Management, which holds $270 billion of assets under management, committed to divesting $45 million from Brazilian meat producer JBS, over its ties to farms involved in Amazon deforestation (Freitas and Adghirni, 2020). Examples of divestment related to biodiversity or deforestation risk are still rare, however, the Norwegian Government Pension Fund Global (GPFG), valued at more than $1 trillion, has divested from more than 60 companies because of deforestation risk, including 33 companies involved in palm oil production (Rainforest Foundation Norway, 2019).18 Investor engagement and capital allocation in response to these issues are likely to become more common as new generations of investors seek investments aligned with their values. 18  It is important to note, however, that these decisions are often driven by a variety of factors, of which biodiversity conservation is one among many. For example, this fund is highly dependent on the sale of oil, and therefore depends on forests as carbon sinks. The key point is that investing in nature is often aligned with other financial objectives and this can be used as a channel for leveraging private finance. Mobilizing Private Finance for Nature 37 Panther Creek Falls, Carson, United States: © Tanya Nevidoma/Unsplash Chapter 3 The Current State of Private Finance for Biodiversity and Ecosystem Services negative impacts on biodiversity and ecosystem What is private finance for services, and towards projects that mitigate biodiversity? negative impact or pursue positive environmental P impacts as a co-benefit. rivate finance for biodiversity (or private finance for nature) is the raising, provision, or management of private capital to Figure 8. Categories of Sustainable Finance conserve, restore, sustainably use, or avoid a negative footprint on biodiversity and ecosystem services. Such financing aims to support businesses able Finan and projects that have a positive impact or reduce ustain ce S a negative impact on biodiversity and ecosystem services, and sustain the services these systems Green Finance provide. Given this paper’s focus on the private sector, this financing may be deployed in support of businesses and projects that generate a positive financial return and are designed to achieve a Climate Biodiversity Finance Finance biodiversity outcome. There are two dimensions to private finance for biodiversity. Firstly, investors are looking for investment opportunities arising from the conservation, restoration, and sustainable use of nature—to use the language of climate finance, to ‘finance green’. Secondly, investors are trying to direct financial flows away from projects with Mobilizing Private Finance for Nature 39 Figure 9. Estimated Finance Flows for Biodiversity (annual average between 2015–2017) Source Amount in USD million Year Domestic public expenditure $67,800 Annual average 2015–1017 Bilateral flows $3,541–8,407 Annual average 2015–1017 Multilateral flows $327–922 Annual average 2015–1017 Total public flows i $71,668–77,129 Conservation NGOs $1,200–2,300 2017 Philanthropic foundations $222–380 2017 Total NGO/philanthropic flows $1,422–2,680 Biodiversity offsets ii $2,600–7,300 2016 Sustainable commodities $2,300–2,800 2016 Private finance mobilized by DAC countries' $200–510 2018 (proxy for 2017) official development finance interventions Private finance leveraged by GEF $41–155 Annual average 2015–2017 Forest and land use carbon finance $30–116 2016 Water quality trading and offsets iii $32 2016 Payments for ecosystem services for watersheds $15 2016 (from the private sector) iv Total private sector flows $5,218–10,928 Source: OECD. 2020a. A Comprehensive Overview of Global Biodiversity Finance. April 2020. i. Bilateral estimates cover Development Assistance Committee (DAC) members (including EU Institutions) and other official providers that reported biodiversity-related activities to the Common Reporting Standard. Multilateral estimates include reporting from the Global Environment Facility, Inter-American Development Bank, United Nations Development Program and the World Bank Group. Reporting on biodiversity-related activities by multilateral agencies is not yet comprehensive or consistent across year ii. There is potentially a small overlap with public expenditure data. iii. Assumption made that the majority is private sector finance. iv. The estimate for payments for ecosystem services (PES) includes the value of just 10 large private programs. Several of the public funding categories may include PES. Efforts to engage the private sector in avoiding Biodiversity finance remains niche, imperfectly negative impacts, and conserving, restoring, tracked, and dominated by public finance. Due and sustainably using nature are falling short of to a lack of data and the absence of investment the needs, and this space faces a large financing taxonomies, biodiversity finance tracking systems gap. While a range of efforts aimed at slowing currently mostly track investments in natural assets biodiversity loss and ecosystem degradation (i.e., ‘financing green’ projects or programs). This are underway, transforming the way firms and conceals a greater problem: the lack of alignment businesses operate has proven difficult. Global of broader financial flows with biodiversity goals efforts to coordinate conservation, restoration, and the subsequent lack of private investment in and sustainable use of biodiversity date back to curbing the drivers of nature loss (i.e., ‘greening the 1992 Convention on Biological Diversity—yet finance’). Figure 9 provides OECD data on the only four out of twenty Aichi Targets, under the best-available estimates of average annual global Strategic Plan for Biodiversity 2011–2020, show finance explicitly labeled ‘biodiversity finance’19 significant progress (IPBES, 2019). The target for (OECD, 2020a).20 Domestic public investment is mobilizing resources for biodiversity is one of the by far the largest source of biodiversity finance unmet objectives. that is tracked. Private investment is still limited, 19  Biodiversity finance is defined as “expenditure that contributes—or intends to contribute—to the conservation, sustainable use, and restoration of biodiversity” (OECD, 2020a). 20  OECD cautions that adding these numbers could lead to double counting. Public biodiversity funds are not included in these estimates, nor are private equity or debt for biodiversity. 40 Mobilizing Private Finance for Nature but interest is growing. Of the private investment to biodiversity each year than total spending for tracked, a significant proportion comes from biodiversity (OECD, 2020a), and the total volume biodiversity offsets—mainly wetland and stream of ‘brown finance’ that undermines biodiversity mitigation banks and conservation banks in the goals is likely to be many times larger. United States (OECD, 2020a). However, the range of funders and financiers Although the overall sustainable finance market is providing biodiversity finance—notably from the growing fast, biodiversity finance remains a small private sector—is broadening, increasing the percentage of the total—representing a missed pool of available capital. Traditional sources of opportunity. Sustainable investing21 assets were philanthropic finance, such as family offices and estimated at $30.7 trillion in 2018—up 34 percent high net-worth individuals, are being joined by in just two years—representing 18–63 percent of new and growing sources of philanthropic capital, all professionally managed assets across five major including foundations. Additionally, impact financial markets22 (GSIA, 2019). However, despite investors are expanding their biodiversity-relevant this overall growth and interest in sustainable investments. Large ‘universal’ asset owners, finance, in the same year, 2018, the Global Survey such as public pension funds and university of Impact Investors found that investments in endowments, are also seeking to deploy capital ‘conservation’ represented only 3 percent of the into investments that combine financial return investment portfolio of the respondents (GIIN, with measurable social and environmental impact, 2018). Likewise, just 4 percent of green bond including through contributions to SDG targets proceeds in 2019 went toward funding projects (GIIN, 2020).24 Corporations are also a potentially in areas that favor the integration of nature major source of private funding for biodiversity considerations in productive sectors—,such as investments, which may be deployed for purposes sustainable agriculture, fisheries, forestry, and including corporate sustainability or to fulfill ecosystem conservation (CBI, 2020).23 Part of the carbon offset targets. Finally, retail investors explanation for this lies in the fact that the impacts looking for impact investing products have also on and risks related to biodiversity and ecosystems only just begun to be tapped. are often not explicitly reported on in sustainability reports or included in ESG frameworks (Convention Financing green: harnessing on Biological Diversity, 2018). Unsurprisingly, then, biodiversity is not a prominent theme in green biodiversity and ecosystem finance and impact investing. services Despite this growing awareness, biodiversity Over and above physical, traded commodities, finance continues to be overshadowed by the real and financial sectors are financing projects financial flows that are harmful to biodiversity. that rely on ecosystem services. The drivers Governments alone spend five to six times more for these investments are the ‘services’25 which in economic support that is potentially harmful biodiversity provides. These are: 21  Sustainable investment is defined by the Global Sustainable Investment Alliance (GSIA) as “investment that considers environmental, social and governance (ESG) factors in portfolio selection and management” (GSIA, 2019). 22  The analysis considers: Europe, United States, Canada, Australian/New Zealand and Japan. Proportion of sustainable investing relative to total managed assets in 2018: (i) Europe—48.8 percent; (ii) United States—25.7 percent; (iii) Canada—50.6 percent; Australia/New Zealand—63.2 percent; (v) Japan—18.3 percent (GSIA, 2019). 23  Even this funding may not have used a biodiversity lens. 24  An estimated 33 percent of the $715 billion impact investing market is willing to accept a below market-rate return for significant impact (GIIN 2020). 25  The paper focuses on the three categories of ecosystem services that people derive direct, measurable benefits from— provisioning, regulating, and cultural services—and which tend to attract investment and generate cashflows in projects. In contrast, the fourth category, the supporting ecosystem services (i.e., the underlying ecosystem functions and biophysical processes that enable the other three types of ecosystem services) is of less relevance in the context of private finance for biodiversity and will not be the focus of this paper as a result. Mobilizing Private Finance for Nature 41 • Cultural or nonmaterial services: Nature led to clear limitations including the fact that conservation provides opportunities for learning that biodiversity outside of public land or some and inspiration, and physical and psychological community-managed conservancies is generally experiences, and supports a sense of identity. not well protected. Protected areas are often • Regulating services: Nature can provide underfunded as limited resources are channeled solutions to regulate the climate and absorb to other development activities. Additionally, carbon, assist in adaptation to the impacts of governments often face pressure from various climate change, and protect against extreme stakeholders and political groups whose interests events. It is responsible for the production of conflict with conservation goals. Consequently, a pollination services, the regulation of freshwater large funding gap remains. and coastal water quality, and the control of pathogens. Conservation and financial markets specialists • Provisioning or material services: These are the are currently exploring innovative financial goods which nature produces, including food mechanisms to support conservation initiatives. and feed, bioenergy resources, construction For example, the Global Environment Facility materials, and medicines. (GEF)-funded Wildlife Conservation Bond (WCB) project, currently under preparation, is exploring These different types of services are characterized the potential to structure a bond for institutional by varying degrees of market failure. The most investors to help fund conservation and to transfer important failures are caused by the presence the risk of failing to achieve conservation results of a public good (e.g., carbon sequestration by from traditional donors to investors. The proposed natural forests); common access to resources (e.g., WCB project (see Box 4) builds on the preparatory fisheries); and externalities (e.g., water pollution). work done under the Rhino Impact Investment These challenges tend to be most pressing in Project (RIIP). The RIIP was a four-year, $4.5 million the case of nonmaterial services (such as the very project funded by the GEF, The Royal Foundation, existence of lemurs) and regulating services (such UK Aid, and the Zoological Society of London (GEF, as ‘green’ infrastructure), which tend to be more 2019). The World Bank, as a GEF implementing at risk as a result, and less attractive to private agency, is currently working with various partners finance. These market failures mean that these to structure and launch the WCB.26 services often have no price attached to them, and there is no revenue to finance projects. Financial The WCB aims to create an outcome-driven instruments are being applied in innovative ways structured bond that channels private sector to overcome these challenges. funds to increase black rhino populations in target protected areas in South Africa. The proposed WCB Investments in conservation and cultural project integrates three key elements: (i) tapping or nonmaterial services institutional investors as a new source of funding for conservation; (ii) applying a private sector Nonmaterial services are those provided by the approach to delivering conservation activities; conservation of ecosystems and wildlife, which and (iii) payment by donors for independently to date have been largely funded by scarce and verified conservation achievements. Under the often insufficient public and philanthropic funds. WCB structure, the payments to investors would Biodiversity conservation has historically mostly come from the GEF and potentially from another been within the purview of the public sector outcome payer. This innovative bond structure and of philanthropic entities. However, this has could help test investor appetite for a conservation- 26  The WCB financing mechanism uses a World Bank, IBRD AAA-rated bond to channel new financial resources to wildlife conservation. WCB investors forego the bond coupon payments, which are used to fund rhino conservation management at the two project sites. At the conclusion of the project, if the rhino populations at these sites have grown to pre-defined rates, the bond holders receive a conservation success payment paid by the outcome payers. As of August 2020, the WCB project is still under preparation and is subject to changes. 42 Mobilizing Private Finance for Nature BOX 4 Financing Mechanism 1: Pay for Performance— Conservation Bonds Environmental Impact Bonds (EIBs) could be used to transition from traditional philanthropy to pay-for-results schemes. Traditional philanthropy is practice-based, meaning that supported organizations receive grants based on their pledge to implement specific activities. These grants are not tied to the achievement of specific outcomes—if outcomes are not achieved, the donors face underperformance. A conservation impact bond allows a donor to target specific conservation outcomes and to pay only if they are achieved (Nicola, 2013). The Wildlife Conservation Bond (WCB) project is focused on addressing major challenges for financing conservation, and proposes an innovative financial product that combines private, public, and philanthropic resources to unlock private finance for the conservation of the black rhino in South Africa. The project builds on existing conservation efforts in two priority sites and product development under the $4.5 million Rhino Impact Investment Project funded by the GEF, The Royal Foundation, UK Aid, and the Zoological Society of London. The WBG is considering the issuance of a bond (amount to be determined based on market conditions) where investors—both private and institutional—agree to forego all annual coupon payments, which will be used to finance conservation initiatives in the two identified South African parks. The bond investors hence become direct co-financiers of conservation efforts in the parks, and in return, they can be compensated with a “conservation success payment” if the rhino populations meet specified targets at the two parks, according to independently verified results. GEF Non- Grant Instrument funding will serve as the source of the contingent success payment for the bond holders. The project aims to improve the management of more than 150,000 hectares of terrestrial protected areas for conservation, and increase the black rhino population by a 5 percent average annual growth rate over a five year period in these parks (equivalent to 1.9 percent of the current global black rhino population). Beyond the project-level results, this pilot conservation bond could pave the way to mobilize institutional investment for financing conservation. A conservation impact bond allows donors to pay for certain pre-agreed conservation outcomes instead of specific conservation activities, as is the case with a typical grant. This shifts the risk of not achieving conservation results to investors who have more experience making risk-adjusted investments. In addition, because the funding is now focused on outcomes rather than input activities, the recipients have more flexibility to experiment with new approaches and to adapt to changing conditions. For these reasons, there is a growing interest in using this model to protect other charismatic species and ecosystems. The model also brings together a range of actors from the finance, conservation, and donor communities. However, in its current design, this model contains an inherent limitation in that in many cases no direct cash flow or revenue generated from the species and habitats protected is used to reward investors. Therefore, this model relies on philanthropy or international donors to compensate investors for the risk they take on, until a market that facilitates compensation for conservation impact is developed, as has been done for carbon. Mobilizing Private Finance for Nature 43 linked investment that generates a market return. ecological goals. The current pandemic has shown Other similar projects are attempting to improve that downturns in tourism can be catastrophic for the connection between the payment source and communities that had fully relied on this revenue. the species or ecosystems being protected. For It has also proven detrimental to protected areas example, in the case of The Lion’s Share Fund the that finance their monitoring and enforcement funding for conservation would come from a share activities with tourism revenue (Lindsay et al., of the budget for advertisement that uses images 2020). During the lockdown, local communities of endangered wildlife (The Lion’s Share Fund, were often the only partners available to care for 2019). protected areas. Empowering them to sustain themselves while caring for land and wildlife is Another innovative approach for investing in crucial to successful conservation. An example of nonmaterial services is the use of public-private an initiative that leverages revenue generation and partnerships (PPP) that blend conservation efforts conservation is the African Parks program, which with other commercial nature-based activities. uses a delegated management PPP model, and has One example is the two-phase World Bank been effective in places where governments have Mozambique Conservation Areas for Biodiversity faced limitations in financial resources to achieve and Development (MozBio Phase I)27 project. It conservation outcomes (see Box 5). African Parks has supported five co-management agreements depends on income from three sources: gross between the government and nonprofits, as well as park revenue; grant funding from donors; and private organizations, to manage five conservation endowment income. In addition to PPPs, private areas and to finance anti-poaching activities. It models that are hybrid for-profit/not-for-profit also regularized eight private tourism concessions have also demonstrated efficacy in the application in the Bazaruto Archipelago National Park and of an integrated land management approach to facilitated a successful joint venture between a conservation. The Ol Pejeta conservancy in Kenya local community and a private operator. The PPP operates according to such a diversified model, structures applied leveraged significant private where the commercial part of the organization and philanthropic investments in excess of $600 relies both on tourism and agriculture (Ol Pejeta million,28 and Phase I of the project created nearly Conservancy, 2019). Another example is Gorongosa 1,800 tourism jobs. The model is being replicated Coffee,29 a company that invests all profits from the across the country—PPPs are at the center of sale of locally produced coffee in the community Mozambique’s strategy to attract investment and in Gorongosa National Park. in rural areas, develop the tourism sector, and conserve biodiversity and ecosystem services. The Several initiatives have been developed to financial sector is also stepping up: the country’s increase the flow of capital to conservation. largest bank, Millenium BIM Bank, has established These include the Coalition on Private Investment a $50 million line of credit for investors interested in Conservation and the Conservation Finance in nature-based tourism, particularly in and around Alliance.30 Such initiatives link conservation with conservation areas. diverse commercial revenue streams, such as tourism projects and sustainable agriculture—often It is often difficult for conservation and tourism working with local communities. Conservation alone to sustain a community, hence investments Capital’s Umiliki Investments fund, for example, in other economic activities are crucial to meeting takes an innovative approach, buying into existing 27  Mozambique Conservation Areas for Biodiversity and Development project page: https://projects.worldbank.org/en/projects- operations/project-detail/P131965?lang=en 28  The amount includes select funding pledges only. (World Bank, 2018.) Leveraging PPPs in Mozambique to scale conservation and promote economic development. Blog. July 18, 2018. Available at: https://blogs.worldbank.org/ppps/leveraging-ppps-mozambique- scale-conservation-and-promote-economic-development 29  Gorongosa Coffee. Accessed on July 6, 2020. Available at: https://gorongosacoffee.com/ 30  Coalition for Private Investment in Conservation. Accessed on June 15, 2020. Available at: CPICfinance.org and Conservation Finance Alliance. Accessed on June 15, 2020. Available at: conservationfinancealliance.org 44 Mobilizing Private Finance for Nature BOX 5 Financing Mechanism 2: Conservation PPPs—African Parks In 2000, African Parks (AP) pioneered the delegated management Public-Private Partnership (PPP) model for protected area management, and has since expanded to running 17 parks in 11 countries, with over 13.3 million hectares under management. The AP model is designed “to restore and protect wild areas for the benefit of people and wildlife, while achieving long-term sustainability.” Under this model, the organization assumes full responsibility for all park management functions, and is accountable to the government, who remains the owner. The government determines the policy for the landscape through mandates and resource allocation. Various legal entities are created within a single park to serve various functions. The components of the AP model are biodiversity conservation, community development, tourism and enterprise, management and infrastructure, and law enforcement. AP aims to provide ecological, sociopolitical, and economic benefits for people living in and around the parks. The program works to manage the parks together with local communities, and invests in the development of a wide range of economic activities that vary according to the landscape (African Parks, 2020). In 2019, AP paid a total of $13.7 million in salaries to its staff, 95 percent of whom are locals. Tourism to the parks contributed $6.3 million to parks and communities, covering 10 percent of the overall African Parks budget. $493,000 was generated from social enterprises, including community guides, honey production, fisheries, and moringa projects. AP makes a variety of investments to support local communities, including in schools, health care, infrastructure, agriculture, and other local economic activities. Some of the parks have damage insurance schemes that pay farmers if wildlife damages crops, and some have built infrastructure that helps prevent wildlife from wandering onto local farms. businesses on behalf of local communities.31 While spill. The biodiversity that underpins ecosystems many other examples exist, most are small in scale, can be permanently lost if appropriate restoration and are, therefore, not suitable for many traditional actions are not taken in a certain period of time investors to support.32 (see Box 6 for example). However, funds needed for emergency restoration work, whether from Where a large enough company or group of public agencies or from philanthropies, may companies is exposed to biodiversity risk, as take months to become available. Instead of in the case of tourism, the insurance sector the payout based on a lengthy claim adjustment is starting to apply innovative financing process, the payout from parametric insurance mechanisms to pay for conservation. Parametric is agreed upon in advance and triggered by a insurance for conservation allows funds to be physical parameter reaching a pre-agreed target, made available to restore ecosystems within days such as wind speed, occurrence of a drought, or after a disaster, such as a hurricane, a fire, or an oil a fire. When the parameter reaches the target, it 31  Umiliki Investments. Conservation Capital. https://www.conservation-capital.com 32  Another example of creative generation of revenues is the Cumberland Forest Project of NatureVest—the impact investment arm at TNC, developed in collaboration with JP Morgan. This involved a $131 million investment to conserve 102,000 ha of critical biodiversity hotspots and protect key water supplies in the Central Appalachian region, sequester 5 million tons of CO2e emissions and support the transition to more sustainable jobs for local communities that traditionally relied on the coal industry for employment. The project phased out coal activities and created four alternative income streams, from the sale of certified timber and carbon credits, the sale of hunting licenses, and land appreciation (TNC, 2019c). Mobilizing Private Finance for Nature 45 BOX 6 Financing Mechanism 3: Parametric Coral Reef Insurance Policy in Quintana Roo, Mexico In 2018, the Mexican state of Quintana Roo and various stakeholders, including hotel owners, The Nature Conservancy (TNC), and The National Parks Commission, launched a program to purchase a parametric insurance policy for part of the Mesoamerican Reef—a key piece of ‘infrastructure’ for the region as it attracts thousands of tourists each year, generating $10 billion in revenue, and protects coastal infrastructure from hurricane damage. Hurricanes are the biggest driver of short-term losses in reef structure, with 20—60 percent of live coral cover lost after a category 4 to 5 hurricane, compared to an annual decrease of 2—6 percent from other causes. Without targeted investment, this trend is likely to worsen. Repair is one of the most cost-effective options for protecting beaches, but quick response is required, as damaged parts of the reef can die within 45 days. TNC estimates that using the first- response diving team to quickly repair the hardest-hit portions of the national park’s 17 miles of reef after a hurricane will cost between $50,000 and $150,000, compared with the roughly $1 million hotels would pay to install half a mile of sea wall or other artificial protection (Smith, 2018). However, public and donor funds may take months to reach the impacted site. The parametric policy, developed by SwissRe, is the first-ever insurance policy for a coral reef. It will speed up fund disbursement and restoration actions, maintenance of the reef and beaches, and training of a group of volunteer divers that stand at the ready to restore the reef after the next hurricane. Should wind speeds in excess of 100 knots hit a predefined area, an insurance payout will be made within days. The premium is paid by Quintana Roo’s Coastal Zone Management Trust (CZMT). The CZMT, established by the provincial government, was designed to collect funds from an existing fee paid by beachfront property owners, among other private and public sources, and to manage these funds for reef maintenance and repair. The Trust has paid for the training of Quintana Roo’s Guardians of the Reef—a group of volunteer divers who are working to rehabilitate the reef, and are prepared to respond in the aftermath of a storm (TNC, 2019b). TNC provided a grant to help the government of Quintana Roo pay the initial premium for the policy. The state government indicated that it would direct tax revenue to the trust to pay for the premium in following years; however, this has not materialized and the insurance policy lapsed in mid-2020. The Mesoamerican Reef Fund’s Reef Rescue Initiative (RRI) provides an example of a mechanism with a similar mandate, but one that relies primarily on an endowment which provides both emergency funds and continuous support for reef restoration and rehabilitation in the region. The same model could be used where the response to an ecological disaster requires a rapid deployment of funds, such as for a forest fire or droughts in national parks. triggers an immediate payout to the beneficiary, experience with the instruments to date, and who can start restoration activities immediately. systemic risks from climate or nature loss that may The InsuResilience Global Partnership notes great not be insurable (Beck et al., 2019). The “Global potential for this type of funding to increase, Ecosystem Resilience Facility” is one initiative while detailing challenges still to be overcome, actively promoting the development of the market including the quantification of payouts, limited for these products.33 33  The GERF seeks to help public and private organizations understand the true value of ecosystems and put in place effective protection measures for their conservation. In particular, the GERF focuses on ocean ecosystems, which have previously received 46 Mobilizing Private Finance for Nature In summary, the financing of nonmaterial services • Green urban infrastructure—to capture storm of biodiversity is increasing in terms of innovation water and to reduce flooding through green and efficiency, but the challenge of scale still walls and roofs and increases in permeable remains. Private sector stakeholders are working ground surface; and with traditional public sector managers to devise • Conservation or rehabilitation of mangroves, new sources of revenue to support conservation reefs, and wetlands—to capture carbon; projects and manage them more effectively. reduce flooding, coastal and soil erosion, and Innovative financing mechanisms, including water salination, and purify water. performance-based bonds, PPPs, and insurance can be used to broaden the investor base, but projects Many of these solutions carry important climate remain localized and scale is still a challenge, with co-benefits. Reforestation and afforestation, the absence of monetizable revenue being the and the conservation of terrestrial, wetland, and most important impediment to scaling up. marine ecosystems, increase the capture and sequestration of carbon, and act as a buffer against Investments in green infrastructure and extreme weather and climate fluctuations that regulating services damage physical assets and affect livelihoods. This makes these investments central to climate change Investments in ‘green infrastructure’ harness mitigation and adaptation efforts. For example, the regulating services34 of healthy ecosystems, NBS are estimated to be able to deliver 37 percent often to complement or replace traditional of the cost-effective climate mitigation needed ‘grey’ infrastructure solutions. They fall under the through 2030 (Griscom et al., 2017). Potential umbrella of ‘Nature-Based Solutions,’ which help NBS opportunities allow for the achievement protect ecosystems and enhance biodiversity, of synergies between biodiversity and climate and also provide numerous financial, economic, investments and optimization, simultaneously and social benefits to a broad range of public addressing challenges in both fields. and private stakeholders. For example, global water infrastructure investment35 currently largely The financing of these projects is evolving. Green flows to ‘grey’ improvements such as dams, infrastructure can generate a return on investment pipelines, and treatment plants. Economic analysis in at least three different ways: (i) avoided costs; has demonstrated that in some cases, natural (ii) generation of an additional cash flow for the infrastructure can supply the same quantity entity; and (iii) economic growth for the area and quality of water at lower costs and, where benefiting from the green infrastructure. An investment is involved, generate a higher return example of avoided cost is the use of rain gardens, (e.g., Jaffe et al., 2010). The types of solution being green roofs, and permeable pavements by the City explored and adopted include: of Washington, DC, eliminating the need for the construction of a large stormwater management • Reforestation and forest restoration with tunnel under the city (see Box 7) (DC Water, 2017). native species—to capture carbon, protect the However, avoided costs can be particularly difficult watershed, improve water supply (including to evaluate ex ante and, in the case of the DC Water predictability and quality), and support drought EIB, the implementation of green infrastructure has management; proven more expensive than anticipated, leading less in the way of practical risk management and mitigation measures, to support the blue economy. Risk pools and mutual insurance are in development as key risk management tools for communities and ecosystems. Alternative risk transfer solutions, such as catastrophe bonds, are also a focus and, when up-front capital investment is required, the structuring of a resilience bond can be explored. See https://www.willistowerswatson.com/en-US/Insights/trending-topics/csp-global-ecosystem-resilience-facility 34  Regulating services may include: habitat creation and maintenance; pollination and dispersal of seeds and other propagules; regulation and air quality; regulation of climate; regulation of ocean acidification; regulation of freshwater quantity, location, and timing; regulation of freshwater and coastal water quality; formation, protection, and decontamination of soils and sediments; regulation of hazards and extreme events; and regulation of detrimental organisms and biological processes (IPBES, 2019). 35  Needs are estimated to be $500 billion annually (Woetzel et al., 2017). Mobilizing Private Finance for Nature 47 the city to cancel a planned expansion of the watershed protection were estimated to be $23.7 project (DC Water, 2020). The water quality markets billion in 2015 (Bennett and Ruef, 2016). Examples in North Carolina provide a good example of green of biodiversity and watershed PES programs are infrastructure designed to generate a positive cash included in Box 8. flow. The state has developed a scheme where entities can restore riparian wetlands and riparian A recent global assessment of market instruments forests that are proven to improve water quality. In for conservation,39 released in 2018, found that the exchange,36 they are granted water quality credits rapid growth in PES and other market instruments that can be sold at a profit to developers who are for watersheds can be partially explained by the obliged under state regulations to manage their local connection between land management in water quality impacts.37 Finally, the last type of watersheds and beneficiaries of flood protection return on investment from green infrastructure is and water purification services (Salzman et al., economic growth at the local level, usually linked 2018). Watershed payments from all market-based to added revenues from ecotourism. An example instruments grew from $6.7 billion in 2009 to $24.4 of this may be found in the City of Athens, Ohio, billion in 2015. While the private sector participates which is currently designing an environmental in these market mechanisms, public sector support impact bond, the proceeds of which will be used to is still crucial. In several countries, the public sector create a series of mountain biking trails to increase collects funds to pay for these programs through nature tourism revenues.38 water utilities or taxes. Private payments for ecosystem services (PES) Forests provide important carbon sequestration offer a promising source of finance for green services, and the forest carbon markets infrastructure and regulating services. These represent a growing pool of private finance that payments allow users of an ecosystem service, such can potentially contribute to conservation and as clean drinking water, to contribute financially sustainable use of biodiversity. After the oceans, to compensate the economic benefit forgone by trees are the best-known ‘technology’ for capturing actors whose choices determine the availability and sequestrating carbon emissions. While the of the service—for example, maintaining forest voluntary carbon offset market is relatively small, cover in a watershed, rather than clearing the recent surges in corporate climate pledges have land for agriculture. These contributions allow for led to an increase in demand for carbon offsets, the correction of an externality and are directed creating what has been called a ‘new gold rush’ toward conservation activities. PES thus adopts a (Cavendish, 2019). Demand for voluntary forest- market-based approach to conservation financing. related carbon offsets has grown 140-fold in a User-driven watershed investments from the decade (2008–2018) to $295.7 million in 2018, private sector were estimated to be $15.4 million according to Forest Trends (Hamrick and Gallant, in 2015 (Bennett and Ruef, 2016). The payers were 2018). The list of corporations that have promised predominantly food and beverage companies, to calculate the emissions generated from certain finance and insurance companies, private water business activities, and purchase carbon credits utilities, and energy generation firms. The total from projects that remove equivalent emissions amount of payments for watershed services is elsewhere, is seeing steep growth. This growing much higher, however, as the majority of payments pool of capital, if used strategically, could have a come from the public sector. Public subsidies for significant conservation and restoration impact. 36  North Carolina Department of Environmental Quality. Nutrient Practices and Crediting. Accessed on May 19, 2020. Available at: https://deq.nc.gov/about/divisions/water-resources/planning/nonpoint-source-management/nutrient-offset-information 37  Resource Environmental Solutions, 2020. Projects. Accessed on May 19, 2020. Available at: https://res.us/places/find- projects/?solutions=stormwater-management-nutrient-reduction 38  Quantified Ventures. 2019. Outdoor Recreation Environmental Impact Bond. Accessed on: May 19, 2020. Available from: https://www.quantifiedventures.com/outdoor-recreation-environmental-impact-bond 39  This includes public, private, and nonprofit financing and voluntary and compliance mechanisms. Please note that the most widely used definition of PES only includes voluntary transactions (Wunder, 2005). 48 Mobilizing Private Finance for Nature BOX 7 Financing Mechanism 4: Pay for Performance Bonds— Infrastructure Environmental Impact Bonds (EIB) are an outcomes-based financing mechanism that has been successfully used to mobilize private investment in green infrastructure and Nature-Based Solutions. Unlike green bonds, that are based on ‘use of proceeds’ (Nicola, 2013), the payout of an EIB is tied to the ecological performance of the projects that were financed by the bond. In order to structure the EIB, the issuer needs to define in advance conservation outcomes to be achieved, and establish probabilities of achieving the different levels of outcomes. The return on the bond then varies based on the achievement of those outcomes. If the projects outperform the target, the investors will receive a premium on the base rate. If the targets are missed, the investors will accept a discount on the base rate, and in some cases could accept to lose some or all of the loan principal. EIBs are typically issued for public sector projects, financed by municipalities and local authorities, and could be traded in the municipal bonds market. The private sector is showing growing appetite in performance-tied investment in nature-based solutions, especially those issued by public sector entities. The world’s first EIB was issued in 2016 by the DC Water and Sewer Authority (DC Water, 2017), the water utility of the District of Columbia in the United States (North and Gong, 2017). DC Water was facing mounting pression from the US Environmental Protection Agency because, during heavy rain events, stormwater would overwhelm the sewer system and cause raw sewage and stormwater to be directly released in the waterways. DC Water was faced with the choice of upgrading its existing sewage system or of using green infrastructure, such as rain gardens, green roofs, and permeable pavements, to mimic the natural infiltration of rainwater. Issuing an EIB allowed DC Water to share some of that performance risk with investors. Under the $25 million bond structure, investors (The Calvert Foundation and Goldman Sachs) receive a bi-annual interest payment of 3.43 percent for five years. An additional, contingent payment may be made at Year 5 based on a pre-agreed target performance of the green infrastructure. If the runoff reduction of between 18.6 percent and 41.3 percent is achieved, no extra payment is due. However, if the green infrastructure does not meet performance expectation, investors will pay DC Water $3.3 million. Conversely, if the green infrastructure exceeds the performance target, DC Water would pay investors $3.3 million. DC Water then would pass the cost of the bond to rate payers through their monthly bills. DC Water was expecting that the use of green infrastructure would be cheaper than the equivalent grey infrastructure, and would help it manage the rising costs of providing clean, safe water. However, a cost assessment three years after the start of the program showed that the net present value of the costs of green infrastructure over 30 years was almost double the cost of grey infrastructure. This disappointing result comes from the high costs of implementing green infrastructure in dense urban areas, and from the absence of revenues from co-benefits such as environmental health or urban biodiversity. However, because of these added benefits, and of the positive impact of green infrastructure on job creation, the city decided to implement a hybrid approach, incorporating both green and grey infrastructure. Similar bonds for green infrastructures are in development in the United States in Atlanta, Georgia and Buffalo, New York. It is worth noting that Atlanta’s EIB will be the first publicly-traded EIB (Quantified Ventures, 2019), as most EIBs are privately placed debt. Beyond stormwater management, companies and public agencies are exploring the use of EIB for coastal resilience, forest fire management, and ecotourism development. Mobilizing Private Finance for Nature 49 BOX 8 Financing Mechanism 5: Biodiversity and Watershed Payment for Services Programs Water quality protection represents one of the most important sources of payment for ecosystem services schemes. Private sector examples often involve the beverage industry. For example, Perrier- Vittel, the world’s largest bottler of mineral water, entered into a land management agreement with farmers upstream from its water source to safeguard water quality (Perrot-Maître, 2006). Because of changes in agricultural practices, the company was facing water pollution risk. Perrier contracted with landowners to increase the use of agroforestry practices that would contribute to improved water quality. These programs remain difficult to invest in because they tend to be tailored to the specific needs of a single company and are not easily scaled up—the Perrier-Vittel project covers only 1,000 ha. However, replication and aggregation may be possible. Biodiversity-focused payments for ecosystem services are still not very common. Conservation easements constitute a specific example. These are legal agreements between a landowner and a beneficiary interested in the conservation value of the land that restrict future activities on the land. These schemes can be financed by private foundations, NGOs or governments, for example by incentivizing farmers to leave land fallow rather than subsidizing crop or livestock outputs. In the United States, several investment managers are realizing significant financial returns through federal programs involving conservation easements and agricultural incentives. Institutional mechanisms such as dedicated funds are usually developed to facilitate replication of initiatives that bring suppliers of services and beneficiaries together, providing standards, and enabling monitoring and verification. For example, The Nature Conservancy (TNC) has established a series of water funds across Latin America that allow diverse public and private downstream water users to pay for investments in watershed protection upstream. The Water Fund in Quito, Ecuador, set up by the government with the support of TNC, started with an investment of $21,000 and now has $9 million in capital to invest in watershed protection and improvements in agricultural practices across upstream communities, which serve as stewards and providers of watershed services. The model is being replicated across Latin America (Calvache et al., 2012). Verification, however, remains a challenge for offsets grows, so does the risk of fraud or double these markets. Emissions reductions from projects counting (Cavendish, 2019). Greater transparency, that claim to reduce deforestation or reforest are standardization, accountability, and auditing will be especially difficult to verify. This is even more of needed. This is one nature-based solution which a concern when projects take place on another has the potential to scale, but is not without its continent, and may have happened anyway.40 challenges—not least the pricing of carbon—which Methodologies which aim to assure the integrity warrant extensive discussion beyond the bounds of the carbon offset process include the Climate, of this report. Box 9 provides an example of an Community, and Biodiversity (CCB) Standards; the innovative approach to carbon offsets. WWF Gold Standard; and the American Carbon Registry, but only a limited proportion of projects are In response to growing markets for ecosystem covered by these standards. As demand for carbon services, some landowners and land managers 40  A 2016 study found that 73 percent of carbon credits provided little or no environmental gain, as they supported projects that would have happened anyway (Institute for Applied Energy, 2016). 50 Mobilizing Private Finance for Nature BOX 9 Financing Mechanism 6: Carbon Offset Forest Funds In 2012, New Forests, an Australian sustainable Timberland Investment Management Organization (TIMO), launched Forest Carbon Partners,i a subsidiary dedicated to developing forest carbon projects in cooperation with large landowners, such as native tribes or industrial landowners. Forest Carbon Partners does not own or manage forestland, but instead uses its organizational resources to identify and develop forest carbon projects, and to market and sell carbon credits in the California market. Since 2012, the company has amassed a portfolio of 15 projects across the continental United States and Alaska. Ecotrust Forest Management (EFM) is a TIMO located in Oregon that owns and operates forestland with a focus on climate mitigation. It pursues several goals in parallel: offering a better risk-adjusted financial return to investors by diversifying financial returns through environmental markets, including carbon markets; improving the sequestration of carbon in the forest it manages; reducing the risk of forest fire; and creating economic opportunities in communities near their holdings. After a decade of operation, EFM has $190 million under management and advisement, and operates across 100,000 acres.ii Another example is Wildlife Works, a company operating in Africa and Asia that seeks to protect local ecosystems from impact by local communities through the creation of new, biodiversity-friendly economic opportunities. In addition to producing branded apparel, Wildlife Works generates carbon credits from Reducing Emissions from Deforestation and Forest Degradation (REDD). The credits are also certified by the Community and Biodiversity Standard for their positive biodiversity impact. When companies purchase those carbon credits, they also directly contribute to biodiversity conservation and local livelihood (Responsible Investor, 2018). i. New Forests. Accessed on June 1, 2020. Available at: https://newforests.com.au/forests-carbon-partners/ ii. EFM. Climate-smart forestry for a carbon-constrained future. Accessed on May 19, 2020. Available from: https://efmi. com/ have taken steps to monetize multiple ecosystem water quality benefits, instead of simply planting services payments from a single parcel of land. a vegetative buffer (Cooley and Olander, 2012). This approach, a practice known as ‘stacking,’ can In some cases, companies stack payments for provide multiple revenue streams for landowners, ecosystem services with revenue from the sale of encouraging them to take an integrated approach goods; the Native-owned corporation, Sealaska, to land management, better aligning economic provides an example of this (see Box 10). incentives with ecosystem health. A single market or payment may not pay landowners enough to In summary, innovations in nature-based make projects cost-effective. However, multiple solutions are increasing and have the potential programs providing payment streams could cover to expand—but are not without challenges. the opportunity cost to landowners of forgoing a Projects trialing the replacement of ‘grey’ with more extractive or destructive activity. Stacking ‘green’ infrastructure are increasing, and new can also incentivize landowners to develop higher financing mechanisms to support these initiatives quality projects, such as restoring a wetland for are being explored. A 2019 World Bank and Mobilizing Private Finance for Nature 51 BOX 10 The Role of Carbon Markets and Integrated Land Management—The Case of Sealaska Sealaska, a Native-owned corporation in Alaska is using an integrated land management approach for its old-growth forest concession in the Tongass National Forest.i Traditionally, Sealaska relied heavily on income from logging. As logging expanded, the impacts affected the health of the ecosystem, with significant effects on the salmon populationii—an important source of income and sustenance for the local population. In 2015, Sealaska gained access to California’s carbon markets, providing a way for the company to diversify its activities, including through selling carbon credits to British Petroleum (BP). After economic analysis that included natural capital valuation, going beyond assessing the simple substitution of timber revenue for carbon credit revenue, Sealaska made the decision to set aside nearly half of its 336,000 acres in Southeast Alaska for 100 years. This act of conservation leaves the forest free for trapping, hunting, and crucially, salmon spawning. Additionally, conservation requires limited investment of capital to recoup, as compared to logging. In 2018, the Alaska Sustainable Fisheries Trust (ASFT) set up a nonprofit, SeaBank, to conduct research and assess the natural capital value of Southeast Alaska’s intact forests and fisheries through social, economic, and ecological lenses. SeaBank was created to give residents information and tools to lobby for long- term, responsible management over short-term extraction. Using some of the data generated by SeaBank, Sealaska was better able to assess the value of activities that are supported by a healthy, intact forest, and to assess the optimal role of carbon credits in diversifying the company’s revenue- generating activities. Sealaska’s project is registered under the ‘improved forestry management’ protocol of California’s carbon markets. The carbon credits helped make 2018 the most profitable year in Sealaska’s history (Sealaska, 2019). Between 2015 and 2019, the company made $100 million selling carbon credits to oil companies (Elbein, 2020), and currently sells its carbon credits to British Petroleum at $13 to $16 per credit. Sealaska’s mandate enabled it to take an integrated and longer-term approach to managing its business, considering environmental stewardship in addition to profit generation, as well as profits for both future and current shareholders. i. The 11 million acres of the Tongass National Forest is estimated to provide $13 billion in ecosystem services annually. ii. There is a symbiotic relationship between the forest and the salmon population that migrates from the ocean up the streams into the forest. The salmon feed the trees and the trees shelter pools that salmon grow in. With logging, salmon streams and their fisheries withered as hatcheries were eroded and exposed to sun. World Resources Institute report found that, broader environmental and social goals (Browder “Integrating nature into mainstream infrastructure et al., 2019). NBS, particularly through PES, can systems can produce lower cost and more be used by governments and between private resilient services.” Green infrastructure can be actors to price externalities and realign business packaged and marketed as ‘green investments,’ practices. Capital market instruments such as which may help to ease financing challenges. bonds and funds are being used to attract wider Additionally, governments, the private sector, and sources of private finance into these projects. development agencies sometimes provide grants Aligning these structures with investor needs or concessional loans for green infrastructure requires further development, and scaling them because it both improves services and supports requires greater standardization. 52 Mobilizing Private Finance for Nature Investment in the provisioning services incentivize these sustainable business practices. of biodiversity One example, the Seychelles sovereign blue bond, is described in Box 11. So called ‘transition bonds’ Biodiversity provides material goods that could also be issued to green supply chains. For contribute to everyday life, and which are often example, the beef supplier Marfrig issued $500 traded on markets. These include food, fiber, million bond from ING and BNP in July 2020, raw materials, energy, and genetic resources. The with the proceeds used to buy beef from cattle private sector is involved in the management and ranchers who comply with non-deforestation production of these goods. Often, however, the criteria (Avery, 2019b). Further issuance could resource from which they originate is a public good, come from funds, development banks, or project for example when the good is the genetic material managers to allow them to access a broader for curing a highly contagious disease, or where it group of investors beyond their usual donor is characterized by open access, for example in the partners, or combined through blended finance case of fisheries. In these cases, the incentive for techniques to provide the risk/return profiles to private sector participation is diminished. match different investor needs. For example, the Conservation Fund launched a $150 million The role of green finance is to identify mechanisms green bond in 2019 that is perhaps the first pure to direct capital toward the provision of these conservation green bond of its kind. This is a plain goods sustainably. Examples of this include vanilla41 10-year bond with a 3.4 percent coupon, sustainable forestry and fishing. Labeled bonds rated A3 by Moody’s, with a green bond opinion are financial instruments which can be used to by Sustainalytics.42 BOX 11 Financing Mechanism 7: Blue Bonds In 2018 the Republic of the Seychelles launched the world’s first sovereign blue bond. The bond has a $15 million face value, a 10-year tenor, and a coupon rate of 6.5 percent. A $5 million concessional loan from the Global Environment Facility (GEF) reduces the coupon rate paid by the Seychelles to 2.8 percent (World Bank Group, 2018a). The World Bank, which helped develop the blue bond, also provided a $5 million guarantee. Three of the main investors are Calvert Impact Capital, Nuveen, and U.S.-headquartered Prudential Financial, Inc. The public funds raised by the blue bond provide grants and loans to the real sector that help to catalyze private investment in conservation and sustainable marine resources management— mostly in the fishing sector. These grants and loans are dispersed by the Blue Grants Fund and the Blue Investment Fund, managed respectively by the Seychelles’ Conservation and Climate Adaptation Trust (SeyCCAT) and the Development Bank of Seychelles. These grants can help to grow domestic industry that contributes to conservation and is aligned with sustainable marine resources management (World Bank Group, 2018a). The blue bond demonstrates the potential for countries to harness capital markets to finance sustainable investments and the demand from private investors for sustainable investment opportunities. 41  As opposed to a labeled bond. 42  Goldman Sachs was the bookrunner. Proceeds are being used to increase the scale of the Working Forest Fund, which invests in sustainable forestry, and in protecting natural ecosystems through the permanent conservation of at-risk working forests (The Conservation Fund, 2019). Mobilizing Private Finance for Nature 53 approach promotes biodiversity conservation and Greening finance: reducing environmentally sound restoration of degraded biodiversity and ecosystem lands, and delivers financial benefits to farmers services loss (IFC, 2016). Nature-reliant consumer-facing sectors, such as the fashion industry, are facing especially The role of financial incentives in significant pressure to green their supply chains. greening real sector behavior New industry standards and financial sector Biodiversity loss has double materiality for the real initiatives for the shipping sector are incentivizing and financial sectors. As discussed in section 2, ‘greening’ of the industry. Such initiatives include loss of nature services means loss in income, higher the treatment of ballast water, blackwater, costs, or practices that expose a business to other greywater, and bilge water on ships; the reduction categories of risk. For this reason, industries which of noise pollution; and the treatment of solid waste traditionally have had the largest negative impacts at ports and terminals. Stricter emissions standards on biodiversity are exploring ways to address from the International Maritime Organization it. They are driven not only by risk management (IMO) and the framework for the financial sector to incentives, but also by potential productivity assess the Paris alignment of shipping portfolios drivers—including through the generation of (the Poseidon Principles) have been particularly premiums compared to traditional products and instrumental in helping to drive these changes. services. For example, agricultural commodities IFC has also supported green shipping projects— sectors have begun to recognize the biodiversity for example by financing the Mediterranean risk and opportunities facing their industry, and the Shipping Company, one of the largest shipping ongoing shift in consumer preferences resulting companies in the world, to retrofit 150 ships with from associated biodiversity loss. As a result, some filters to treat ballast water to reduce alien species producers have taken steps to shift their practices invasion and negative ecological impacts, in line toward more biodiversity-friendly approaches. with international standards (IFC, 2017a). Certifications and standards are aimed at Since biodiversity risk can underpin systemic, providing corporate buyers, consumers, and portfolio, and economy-wide risk, the adoption investors with additional information on the of sustainable practices can be incentivized by biodiversity impact of companies. The Roundtable the financial sector. Where risks and opportunities on Sustainable Palm Oil certification, for example, related to productivity, reputation, and market has become a requirement for many large buyers, share are not sufficient to incentivize significant given increasing awareness in recent years of the shifts in corporate behavior—and where sufficient deforestation associated with noncertified palm oil industry or regulatory standards are not in place— (Steinweg et al., 2019). Other certification bodies the financial sector can drive change. Financial exist for specific commodities and sectors (e.g., the institutions, including banks and institutional Forest Steward Council and Marine Stewardship investors which operate at the portfolio rather Council) and for companies that meet certain than project level, make decisions driven by the standards (e.g., the Rain Forest Alliance and Wildlife risk profile and exposure of their client pools and Friendly Enterprise Network).43 In the coffee sector, by their own sustainable finance goals, reacting to Nespresso seeks to source coffee from producers government regulations and to customer demand that meet the ‘AAA Sustainable Quality’ program for green finance products. standard developed by Rainforest Alliance. With support from IFC, Nespresso will help farmers scale To incentivize changes in corporate behavior, up agroforestry planting of native shade trees. The lenders are starting to use financing tools which 43  Rainforest Alliance. Accessed on June 2, 2020. Available at: https://www.rainforest-alliance.org/ and Wildlife Friendly Enterprise Network. 54 Mobilizing Private Finance for Nature Coral reef: © Vitas Edush/Shutterstock link the cost of capital to the achievement of banks, so no one financial institution bears the sustainability objectives. The use of Sustainability- full cost. In some cases, donor institutions can Linked Loans (SLLs) has grown significantly since provide the financial incentive when the borrower the first loan was issued in 2017. These loans, meets the environmental target—at what can be linked to the borrower’s performance on ESG a relatively low cost for a high level of impact. In criteria, saw a 168 percent jump in volume to $122 2019, ING created the first capital call facility for billion in 2019 (Bloomberg, 2020). The proceeds a private equity group with an interest rate tied to of SLLs are fungible and are not directed to sustainability targets, providing evidence that the specific green projects, as are green loans and trend is expanding beyond corporate lending (ING, green bonds. The pricing of the loan is linked to 2019). These loans are governed by standards key sustainability performance indicators, with the issued by the Loan Market Association in 2019 lender and the borrower working together to set (LMA, 2020). The main limitation of this model is a target. If this is met, the borrower benefits from that it relies on underlying assets that can generate a reduction in the interest rate on the loan. The a reliable and regular cash flow necessary to service incentives for the lenders go beyond reputation the loan. However, once this hurdle is cleared, this and corporate sustainability, as these loans are said instrument can easily be scaled up and replicated to represent better credit risks and demonstrate to other sectors, such as eco-tourism and certified better risk management and governance by the agricultural commodities. As a representative of borrower, offsetting the lower rate (Box 12). In BNP Paribas, a frequent SLL adviser and lender, has addition, most of these loans are structured as said, “this type of financing will likely become the ‘revolving credit facilities’ provided by multiple new normal in the industry” (BNP Paribas, 2019). Mobilizing Private Finance for Nature 55 BOX 12 Financing Mechanism 8: Sustainability-Linked Loans In late 2019, Bunge, one of the world’s largest agricultural producers, took out its first sustainability- linked revolving credit facility, following closely behind its competitors, Louis Dreyfus and Wilmar (Louis Dreyfus Company, 2019; DBS 2018). Through the sustainability-linked mechanism, the interest rate on Bunge’s RCF is tied to the company meeting several key performance targets, deemed core to the company’s business. Two of these targets have the potential to substantially reduce the company’s biodiversity impact and associated risks: 1) increasing traceability for its main agricultural commodities and 2) supporting increasing levels of adoption of sustainable practices across its wider soybean and palm supply chain (Bunge, 2019). These types of financing mechanisms, categorized as ‘sustainability-linked loans,’ provide an example of the greening of the financial system. They have the potential to help drive the transition to the nature-smart economy by offering a short-term financial incentive for management to implement a company’s sustainability strategy and provide a signal to investors that the company is taking steps to do so. On the lending side, these instruments are said to represent better credit risk and demonstrate improved risk management and governance by the borrower, offsetting the lower rate. In early 2020, Finnish forest-based bioindustry company, UPM, became one of the first companies to link an RCF to a biodiversity target. The interest on the €750 million RCF is tied to UPM meeting its goal of having a net positive impact on biodiversity in the company’s forests in Finland, and a separate carbon reduction target (BNP Paribas, 2020). Biodiversity offsets management practices for example, or using temporary roads and structures. At the project level, the biodiversity risk • Restoration—To the greatest extent possible, mitigation hierarchy remains the key approach any impact should be reversed and the site currently used to avoid or reduce project restored to its original state as soon as possible. impact on biodiversity.44 The hierarchy provides Any delay in the restoration will create a a framework for understanding and analyzing temporal loss of the functions of the habitat. impacts on biodiversity, with the ultimate goal • Offset—Any impact that cannot be avoided, of minimizing unavoidable impact to biodiversity minimized, or reversed should be offset through from development and business activities. The risk the protection, restoration, or creation of a mitigation hierarchy has four steps: similar habitat in proximity to the impact site. Without this last step, it is unlikely that projects • Avoidance—A project should be designed in could claim no net loss of biodiversity, and a net a way that avoids impacts on biodiversity and gain even less so. ecosystem services. An option could entail relocating the project or using an alternative Each subsequent option in this hierarchy is less design. desirable than the previous one; priority needs • Minimization—If impacts cannot be avoided, to be given to ‘avoidance’, with each step they should be minimized by reducing the adopted only if the previous one is not feasible. footprint of the project, putting in place best For example, it would be inappropriate to restore 44  For example, the mitigation hierarchy is a key component of IFC’s Performance Standard 6. 56 Mobilizing Private Finance for Nature and offset impacts to biodiversity when they could for compliance purposes in the Northern Mariana have been avoided altogether. Finally, scientists Islands, and is in the process of being piloted in recognize that some biodiversity should not be Colombia (Salzman, et al., 2018). impacted at all, because it is rare and significant, because it is critical for the survival and well-being A country’s enabling environment is crucial to of local communities, or it because restoration or ensuring the success of a mitigation banking mitigation is impossible. program. In developing countries, permittee- responsible mitigation is the most common Biodiversity offsetting involves investing in a approach to compliance. However, many countries, separate biodiversity conservation project as a including Brazil, Cameroon, China, Colombia, way of offsetting the significant and unavoidable Egypt, India, Mozambique, and South Africa, allow residual impact of another project. Regulated developers to pay a compensation fee rather than biodiversity markets offer investors an opportunity implementing an offset. According to a study on to generate returns by taking on and managing PES conducted by Nature Sustainability, “from the environmental liabilities of project developers. an efficiency and ecological perspective, large Regulated biodiversity markets exist when a mitigation banks can achieve economies of scale project proponent is required by regulation, often in design, maintenance, and monitoring, enabling as a condition of obtaining a permit, to provide them to protect larger contiguous areas that offer mitigation for its impacts. The mitigation can be better ecological outcomes than smaller, isolated for direct impact on species or habitat, as is the permittee-responsible mitigation projects.” These case for biodiversity offsets.45 However, other programs require a strong legal framework, markets exist where nature and biodiversity are effective monitoring, and credible enforcement used as green infrastructure to generate offsets. (Salzman et al., 2018). It is also crucial that the unit For example, there are currently functional or pilot used to measure biodiversity credits adequately markets for the water quality improvements offered reflects the value of the services of an ecosystem. by vegetated riparian buffers, or for reductions in Box 13 provides further detail on mitigation stream water temperature through the shading banking. effect of riparian forests.46 Biodiversity offsets show great potential—but Mitigation banking is a way to facilitate the require careful design and effective institutional scaling of these investments—generating setups. International good practice calls for offset financial returns through the sale of biodiversity projects to not make local people worse off. This offsets to developers. Specialist fund managers means in practice that there is no net gain—and finance and aggregate projects with measurable little point—in undertaking an offset project which biodiversity impacts and sell mitigation credits. itself does harm. It is crucial that when biodiversity Mitigation credit banks are growing, primarily offsets are utilized, models integrate local poverty in developed countries, with transactions in the alleviation, equity, and cultural heritage factors year 2016 estimated at $3.6 billion (Bennett and (Griffiths et al., 2019). The core principles in the Galland, 2017). Almost all growth in this market has design of successful biodiversity offsets include occurred in the United States, Australia, Canada, additionality, in which conservation gains are above and Germany, and the credits have mostly been what would have been obtained without the offset; used for wetlands. Mitigation banking has been equivalence, which requires careful application introduced on a voluntary basis in Malaysia, and of scientific principles; and permanence, which 45  For example, under the Endangered Species Act in the United States, companies are required to mitigate their unavoidable impacts to the habitat of endangered species, regardless of the potential absence of ecosystem services provided to communities. This regulation has created a thriving conservation banking market where one can purchase panther credits, red-legged-frog credits, or golden-cheeked warbler credits (U.S. Department of the Interior, 2003). 46  Willamette Partnership. Water Quality Training. Accessed on July 28, 2020. Available at: https://willamettepartnership.org/ water-quality-trading/ Mobilizing Private Finance for Nature 57 means that conservation persists in perpetuity. protected area; applying sound science as well Beyond these core principles, good practice that as traditional knowledge; meticulous project applies to biodiversity offset schemes includes, supervision; building the capacity of institutions among others: using a “landscape approach” that and stakeholders; addressing livelihood concerns; takes into account relevant habitats and species; and robust stakeholder engagement, among looking beyond the boundaries of a specific others (World Bank, 2016). BOX 13 Financing Mechanism 9: Biodiversity Mitigation Banking Biodiversity mitigation banking can offer a more efficient and ecologically sound alternative to permittee-responsible mitigation. In advance of any impact, a biodiversity offset developer, called a mitigation banker, receives approval from public agencies to develop a mitigation bank on a specific piece of land. The mitigation banker will then protect the land in perpetuity through a conservation easement, implement environmental restoration activities, and provide an endowment that ensures the land will be managed in perpetuity by a nonprofit land trust. In exchange for these actions, the mitigation banker receives a number of environmental credits that can be sold to developers. The type of credit is determined by the type of habitat or ecosystem that is being protected. The area in which a credit can be sold and used to mitigate impacts is determined by the ecology. For example, a wetland credit can only be used to mitigate an impact in the same watershed as the one where the offset project is located. For endangered species, the area is defined by the range of the species, subspecies, or specific population. If a project developer needs to offset the unavoidable impact of its project, it has the option of purchasing mitigation credits from a mitigation bank instead of implementing its own biodiversity offset project. If it purchases a credit, the developer does not have to manage an additional project, and can transfer the environmental liability to another entity. Developers are often willing to pay a premium for this convenience. Through this premium and the aggregation of credit purchasers, mitigation bankers can generate significant profits. Investors are needed to provide the up-front capital to obtain a mitigation bank permit, and to design and build a bank. This capital is often provided in the form of private equity, as the cash flows generated from mitigation banks are too irregular for debt, and the relatively small scale of investments (usually $3–5 million per project) does not allow them to raise capital in public markets (Bennett and Galland, 2017). An example of a company working in this space is Ecosystems Investment Partners, an investment group specializing in mitigation banking and biodiversity offsets. The firm acquires, restores, and conserves priority properties (such as wetlands, stream, and habitat mitigation and restoration projects), and sells the credits generated to customers who must offset their unavoidable environmental impacts. The firm recently closed its fourth US compensatory mitigation fund. Because it is one of the only fund managers with a track record in the space, it was able to raise $455 million in less than 10 months (Monument Group, 2020). 58 Mobilizing Private Finance for Nature Agriculture,47 forestry, and fisheries are priority Barriers to scaling up sectors, as they are collectively responsible for biodiversity finance 60 percent of biodiversity loss, mostly from deforestation, unsustainable exploitation, and Despite growing innovation in nature-related water extraction (TEEB, 2018), and a quarter of all financing, challenges to scaling up remain. These fall GHG emissions. Energy is another priority sector. into three main categories: (i) public policy failures There is broad evidence that economic incentives that fail to correct for the wedge between the social in these sectors are not aligned with sustainability and private costs of stakeholders’ decisions, which goals. For an overview of economic incentives promote overuse or overharvest; (ii), the lack of data intended to promote biodiversity conservation and and measurement standards for measuring impact sustainable use (such as biodiversity-relevant taxes, and biodiversity risk; and (iii) issues with small-scale fees, and charges, and tradable permits) and the or otherwise noncommercial biodiversity investment finance they generate or mobilize, see the OECD’s opportunities which make private sector financing report Tracking Economic Instruments and Finance challenging. for Biodiversity (OECD, 2020c). For example, in 2017, 76 predominantly OECD and G20 economies Policy failures spent $340 billion in fossil fuel support (OECD, IEA, 2019). In the same year, the OECD countries Policy and market failures mean that the private provided $228 billion of support to farmers, of players in the real and financial sectors alone cannot which $116 billion could be considered harmful fully absorb social costs and risks originating to biodiversity (OECD, 2020b). Over half of global from the loss of biodiversity. Governments spend subsidies to fisheries, estimated at $35 billion per around $500 billion per year in economic support year, are for fuel support and result in overfishing that is potentially harmful to biodiversity—five to (Sumaila et al., 2016). More examples are provided six times more than the estimated global spending in Table 3. on biodiversity (OECD, 2020a). Under the status quo, economic incentives (fiscal, sector, trade, Challenges with data, measurement, and financial policies) generally favor expansion and standards of economic activity, and often environmental harm, over conservation, restoration, and the Measuring both the risks associated with failure sustainable use of nature in support of economic to conserve biodiversity and the benefits of doing activity (IPBES, 2019). The failure to account for the so remain challenging. Progress has been made social and environmental externalities associated in measuring and monitoring climate risk and with biodiversity loss results in the underpricing benefits—but for structural reasons biodiversity of biodiversity risk and misinformed investment measurements are more complex. and policy decisions. In such cases, public policies to correct for externalities, public goods, and Lack of targets and data asymmetric information are needed. One overarching challenge is that there is no In practical terms, this means reforming economic single high-level policy goal for biodiversity incentives in the form of subsidies, credits, or conservation to work toward. At the highest tax relief in key sectors driving biodiversity loss. level, there is no clear apex target for biodiversity, 47  Agriculture: Support for the agriculture sector tends to have negative environmental impacts (e.g., through deforestation, wetland conversion, etc.) if it: (i) pushes food prices below extraction cost by lowering the cost of finance and/or inputs to farmers without constraints; (ii) lowers the costs of inputs without constraints; (iii) supports output directly; or (iv) creates a gap between domestic and international commodity prices. Such policies promote unsustainable agricultural practices, and facilitate the expansion of agriculture through land-use change, leading to deforestation and the conversion of wetlands. This, in turn, reduces the provision of ecosystem services needed to sustain the sector in the long term. For example, in Brazil, the complexity and geographic distribution of the rural agricultural credit system is resulting in a mismatch of credit supply and demand across the country (Assunção and Souza, 2019). Mobilizing Private Finance for Nature 59 Table 3. Examples of Distortive and Potentially Environmentally Harmful Support Country Policy Year Active Potential mechanism for impact Brazil Preferential interest 2018 - present May support unsustainable practices on commercial rates on working farms capital loans Indonesia Subsidized fertilizer 2012 - present Reduces the cost of fertilizer inputs, potentially leading to excess inputs, and supporting agriculture in marginal areas India Subsidized fertilizer 1970s - present Various instruments have been used in India over the years to subsidize fertilizers, notably nitrogen- based fertilizers such as urea, effectively lowering their per-unit cost below market prices; this has encouraged their overuse (both in absolute terms and relative to other available fertilizers), causing damaging effects on soil quality, an increase ground water pollution and negative health impacts on communities Mexico Subsidized electricity 2001 - present Could support unsustainable water extraction and for pumping water use, leading to ecosystem impacts and increased demand for electricity Sources: OECD, 2020b, World Bank Group, 2018b, Ministry of Agriculture and Farmers Welfare of India, 2016. similar to the 1.5°C temperature increase ceiling integrate biodiversity factors into risk monitoring established by the Paris Agreement. Developing frameworks (van Toor et al., 2020). such targets is difficult, as biodiversity loss is multidimensional, encompassing the loss of Data on biodiversity and ecosystem services is still genetic diversity, species, and ecosystems. Inter- lacking at a national level—but technology can be species interactions and interactions between used to fill in crucial gaps. From the perspective species and ecosystems are complex. As a result, of real sector firms looking to assess and limit their developing a single goal or measure of success, environmental footprint, there is a dearth of data in terms of resource mobilization, is difficult, and on basic species occurrence in developing and most governments have not articulated a clear emerging countries. Data simply may not exist, target to the private sector. Some countries or making it challenging for companies to conduct blocs of countries are taking steps to develop environmental and social (E&S) impact assessments. detailed targets and strategies with estimated From a broader perspective, there is still costs attached, such as the EU Biodiversity uncertainty about how much pressure biodiversity Strategy, released in May 2020. Integrating and ecosystems can withstand before they reach biodiversity risk is a much more complex problem critical thresholds, beyond which large-scale, from a financial stability perspective than climate irreversible degradation of nature can unravel and change risk—because, among other reasons, it is interact with climate change in unpredictable ways. highly dependent on local factors, despite having New technology and continued scientific research global implications (Chenet, 2019). However, a has the potential to fill in the gaps—for example, recent report published by the Dutch Central the terrestrial biodiversity database developed Bank calls for the development of a biodiversity by the World Bank, using remote sensing data, risk disclosure framework, which would provide can support implementation of environmental supervisors with data to allow them to begin to standards for infrastructure projects and investment 60 Mobilizing Private Finance for Nature in environmentally sensitive infrastructure in field. It is not clear what the qualifications for a cost-effective and environmentally sound conservation investments should be. Financial manner.48 Crucially, better data, scenarios, and institutions need a clear investment taxonomy of forward-looking risk analysis tools also need to be potential conservation investments in order to be developed to better understand and assess the able to report back to regulators and investors. systemic risks associated with nature loss. IFC has developed such a taxonomy and will start testing it in 2021. Lack of standardized investment taxonomy and definitions Lack of standardized risk reporting and accounting frameworks In addition to national level challenges, data on the relationship between companies and biodiversity The financial and economic implications of are lacking and are complex to measure. Although biodiversity risk are generally poorly understood companies have historically incorporated some by the real and financial sectors, policy makers, biodiversity criteria into their business models,49 supervisors, and regulators. This is partly many obstacles remain that prevent companies because there is limited requirement for reflecting from incorporating biodiversity risk into their biodiversity as a financially material risk in business planning. These include the following mandatory disclosures. The consolidated financial barriers: statements of listed companies following the IFRS or GAAP standards allow corporations to define • The links between biodiversity and business, material risks from the perspective of shareholders through operations and supply chains, and investors. A 2012 study of the materiality of are extremely complex and often not well natural capital found that, “in general, the focus on understood by companies themselves. financial measurement for determining materiality • Biodiversity risk can be endogenous to the acts as a barrier to the identification of biodiversity company—as in the case of BP and the and ecosystem services issues as material” (Bonner Deepwater Horizon Oil Spill—or exogenous, et al., 2012). Even when mandated to report on non- and therefore a lot more difficult to assess and financial elements, such as by the EU Non-Financial manage—as in the case of a coastal hotel at risk Reporting Directive,50 standardized disclosures are of increased hurricane damage and reductions lacking, as companies can decide how and under in tourism due to the disappearance of the which framework to disclose.51 The Global Impact local coral reef. The relationship between the Investing Network (GIIN)’s IRIS+ System is one of impact of biodiversity on business, and in turn the few examples of financial reporting frameworks the impact of business on biodiversity, can be that include biodiversity criteria. Launched in May difficult to unpick. 2019, the framework is designed for use by impact investors, and currently has about 11,000 users The complexity of gathering data on corporations (Suttor-Sorel, 2019). and biodiversity risk is exacerbated by a lack of a standardized investment taxonomy and While climate-related financial risks are beginning to definitions. The field of conservation investment is be better understood, largely due to standardized just starting conversations that have been taking risk reporting frameworks, biodiversity-related place for years in the green or climate finance financial risks do not yet have such a framework. 48  The database is accessible at: https://datacatalog.worldbank.org/dataset/terrestrial-biodiversity-indicators. A brief description of the database is accessible at this blog: https://blogs.worldbank.org/opendata/overlapping-priorities-data-mapping-biodiversity- and-development-activities?CID=WBW_AL_BlogNotification_EN_EXT 49  Such as quotas for fisheries, grazing, and timber harvesting permits. 50  This requires the largest companies to disclose certain “non-financial information on the way they operate and manage social and environmental challenges.” 51  https://www.finance-watch.org/wp-content/uploads/2019/05/Making-Finance-Serve-Nature_Finance-Watch- Report_23May2019_web.pdf Mobilizing Private Finance for Nature 61 A standardized financial risk reporting framework limits and planetary boundaries, hindering the (like the framework discussed in Box 14) could drive ability of management and investors to assess and evolution in corporate decision making and cross- manage corporate sustainability.53 sectional analysis within peer groups and sectors. Without such a standardized framework, the use of Corporate natural capital accounting efforts are risk information in applications such as credit risk expanding, but these efforts are still nascent assessments or insurance pricing is limited. The and mostly voluntary. A 2019 journal article in financial sector requires a framework that allows the Oxford Review of Economic Policy outlines a for the estimation of expected changes over the need for natural capital accounting and reporting medium term, as well as amplification between systems to serve two distinct purposes (Barker, climate change and biodiversity loss. Box 14 2019). Firstly, according to this analysis, natural provides a proposed financial reporting framework capital accounting should provide information to for biodiversity risks. meet the needs of shareholders in order to support a transition toward environmentally sustainable Analysis by the CBD Secretariat found that, business models. Secondly, natural capital “biodiversity is not often explicitly addressed and accounting should contribute to the conservation reported on in sustainability reports, and, even of natural capital as an end in itself.  As noted in when it is, there appeared to be a lack of coherence this article, “extant corporate accounting and and consistency across reports” (CBD, 2020). reporting practices favor one of these purposes at Table 5 lists nonfinancial reporting frameworks the expense of the other, a problem that is unlikely identified by CBD that include some biodiversity to resolve itself and that most likely requires a considerations (Convention on Biological Diversity, regulatory intervention” (Barker, 2019). While 2018). Reporting in line with these frameworks is the needs of shareholders are increasingly being voluntary. Of those listed, CDP’s52 framework has the addressed, a shareholder-oriented perspective most granular biodiversity disclosure requirements, constrains the value of natural capital to only that for companies reporting under its forests program. which privately affects shareholders. In addition However, the framework is not yet widely applied. to this challenge, there is a lack of standardization In 2019, CDP, on behalf of its investors, requested in corporate natural capital accounting. The that over 1,400 companies report on five forest- UK Natural Capital Committee developed the risk commodities—timber, palm oil, cattle, rubber, Corporate Natural Capital Accounting (CNCA) and soy, and approximately 20 percent (300 framework in 2014, designed to address this issue companies) complied. Through CDP’s supply by ensuring comparability and consistency. Other chain initiative, it also requested disclosure from frameworks for corporate natural capital accounting companies in the supply chains of high forest risk include the Natural Capital Protocol, ‘CARE-tdl’, companies, on behalf of the purchasing company. and the BSI Natural Accounting Standard (Suttor- This set of companies responded at a higher rate, Sorel, 2019). with approximately 60 percent disclosing (399 suppliers), demonstrating the relative influence However, both sustainability reporting and natural purchasers have over suppliers. However, a CDP accounting, absent the context of ecosystem representative noted the continued challenges thresholds and levels, leave companies and around traceability (CDP, 2020). And since most of investors without the information they need these frameworks rely on measuring and disclosing to effectively manage corporate sustainability. use of resources and impact on biodiversity and In response, the use of ‘context-based’ or ecosystem services in the previous year, they are ‘integrated’ reporting and accounting frameworks backward looking. Additionally, use and impact are is becoming more widespread (UNRISD, 2020). not assessed within the context of local ecosystem Under such a framework, a company using water, 52  Formerly the Carbon Disclosure Project. 53  Formerly the Global Reporting Initiative. 62 Mobilizing Private Finance for Nature BOX 14 Reporting Lessons from Climate Change The Task Force on Climate-related Financial Disclosure (TCFD) framework can serve as a foundation for building a framework for biodiversity risk (TCFD, 2017). TCFD terminology can be used to classify biodiversity risk, derived from the dependencies and impacts on nature of real and financial sector companies, communities, and governments. The proposed framework below is built on frameworks developed by PwC, WWF, and BaFin, and separates biodiversity risks into three types: physical, transition, and systemic (WWF and PwC, 2020). • Physical risk—risks related to the physical impacts of biodiversity loss. These risks originate in the dependencies, impacts, and exposure of real sector companies, communities, and governments on nature. • Transition risk—risks related to the transition to the nature-smart economy. These risks emanate from where a company falls (sector, geography, jurisdiction) in the transition, the effects of new regulation and evolving expectations from the public, and how the company assesses and manages its physical risks. • Systemic risk—risks related to impacts from extreme physical or transition risk. These risks stem from biodiversity serving as the foundation for an economy and the interdependent nature of loss, transition, and economic activity that results. Risks are then mapped to five channels: operations, market, credit, insurance, and regulatory/legal risk (Table 4). Table 4. Biodiversity Risk Transmission Channels Channels Regulatory/ Operations Market Credit Insurance legal • Changes in • Supply chain • Mispricing of • Companies lack • Lawsuits from quantity or quality of disruptions may capital leads sufficient coverage communities Physical risk key inputs lead to loss in to suboptimal for risks harmed by • Need to replace market share expenditure • Insurance projects free natural systems • Credit rating companies incur • Fines from with engineered does not reflect losses from regulators Categories of Biodiversity Risk solutions real risk of mispricing risk • Loss of license default to operate • Business model • Loss of market • Increase in • Increase in • Loss of license becomes obsolete share to more cost of capital insurance costs due to operate from biodiversity biodiversity due to increased to risk Transition risk • Regulators change or regulatory friendly biodiversity risk • Companies force transition change competitors • Loss on bond may become on an entire • Supply chains • Consumers portfolio once uninsurable sector require redesign boycott markets price-in • Changing size of • Increase in risk • Assets become company or biodiversity risk segments in the of lawsuits for stranded products insurance market companies that fail to transition Systemic risk • Supply chain • Consumers • Downgrade of • A sector becomes • Increase in failures create risk boycott sovereign debt uninsurable regulations at for entire regions or products from • Correlated losses the international sectors an entire region threaten insurance level or sector companies Source: Authors. Mobilizing Private Finance for Nature 63 Table 5. Reporting Tools That Include Biodiversity Considerations Organization Description CDP CDP focuses on the disclosure of information on greenhouse gas emissions, along with water and forests. Backed by over 800 institutional investors, CDP gathers information through annual questionnaires sent on behalf of these investors. Climate Disclosure CDSP is an organization of businesses and environmental organizations committed Standards Board to advancing and aligning corporate reporting to equate natural capital with (CDSB) financial capital. CDSP’s ‘Framework for reporting environmental and climate change information’ is complementary to the Natural Capital Protocol, and compliant with the EU Non-Financial Reporting Directive. GRI a GRI is an international independent standard-setting organization that helps businesses, governments, and other organizations understand and communicate their impacts in areas such as climate change, human rights, and corruption. GRI produces standards used by thousands of real and public sector reporters in over 100 countries. Of the largest 250 corporations in the world, 93 percent report on their sustainability performance, and 75 percent of these use GRI guidelines to do so (KPMG, 2017). The GRI standards include four ‘disclosures’ on biodiversity and the management approach to biodiversity using GRI 103: Management Approach, as well as other indicators relevant to biodiversity. The International IIRC has created an Integrated Reporting Framework that includes biodiversity Integrated Reporting and ecosystem health. As a general framework to integrate thinking and decision Council (IIRC) making, it does not include specific indictors or metrics. Sustainability SASB provides sustainability accounting standards based on sustainability topics Accounting Standards and related accounting metrics at the industry level that are likely to constitute Board (SASB) material information to companies in that industry. The extractives sector is the only sector for which the SASB framework classifies biodiversity as a material issue for more than 50% of companies in the sector. Source: Authors. a. Formerly the Global Reporting Initiative. for example, would gauge the sustainable amount of ecosystems, people, and animals” (Future-Fit, of water it can use in the watersheds in which it 2020). Assessing the sustainability performance of operates, taking into consideration local social a company requires the recognition of social and and environmental criteria. One such tool, which environmental thresholds and limits. allows companies to calculate performance relative to social and environmental criteria, is the Future- While there are robust international performance Fit Business Benchmark. The Future-Fit framework standards that address biodiversity project risk, asks companies to report their progress toward 23 many companies do not apply them. The IFC science-based ‘break-even goals’, the achievement Performance Standards (see Box 15) and the of which Future-Fit deems as necessary to prevent Equator Principles are the most widely recognized a company’s operations from slowing down the as robust standards for assessing projects’ transition to the sustainable economy (aligned with environmental impacts. IFC Performance Standard the SDGs). The tool can also be used to map a path 6 on biodiversity requires no net loss of biodiversity toward positive impact, beyond the break-even where feasible in natural habitats, and net gain goals, and to quantify progress. One of the break- in critical habitats. To reduce global biodiversity even goals in the Future-Fit framework is “natural and ecosystem loss, these standards need to resources are managed with respect to the welfare be adopted and applied by a greater number 64 Mobilizing Private Finance for Nature BOX 15 The IFC Performance Standards IFC’s Performance Standard 6 is focused on ‘Biodiversity Conservation and Sustainable Management of Living Natural Resources.’ Under this standard, the recipient of IFC financing should consider, assess, avoid, and minimize negative impacts on biodiversity and ecosystem services. Requirements differ depending on whether the project is located in a modified, natural, or critical habitat. Performance Standard 6 requires recipients to achieve no net loss of biodiversity where feasible in natural habitats and net gain in critical habitats. The standard places emphasis on engagements with relevant experts and conservation organizations in defining both the assessment and mitigation measures for biodiversity. IFC Performance Standards, including PS6, are the basis on which the Equator Principles are built, followed by the leading banks in the world. For this reason, they are the international biodiversity benchmark for private sector financing. The Convention of Biological Diversity, COP-11 Decision XI-7 on Engagement with Business, also references IFC’s Performance Standards as well as the Global Climate Fund (financial mechanism under the UNFCCC). of financial institutions and companies across their impact on biodiversity throughout their markets. At the national level, many countries have supply chains or portfolios (CDC Biodiversité and environmental regulations in place that require ASN Bank, 2018). Other tools such as the Product developers to assess and limit the impact of their Biodiversity Footprint, bioscope, the Biodiversity projects. In some emerging markets and developing Footprint methodology, and the Biodiversity countries, however, these regulations lack clear Impact Metric, can be used by companies to standards and enforcement mechanisms. Other assess the impacts of their supply chain or of initiatives to develop standards for project impact specific products. Several ESG data providers also and offsets include the work of The International offer environmental risk data and indices to users, Association for Impact Assessment,54 which is supplying them with information on biodiversity risk developing methodologies to assess the social and in the areas surrounding a project. environmental impacts of projects globally, and The Business and Biodiversity Offset Program, which Some companies are starting to use these tools to developed a standard for biodiversity offsets that incorporate biodiversity into their decision making is being used internationally by several companies processes. The Integrated Biodiversity Assessment (BBOP, 2012). An increasing number of countries, Tool (IBAT) for Business, a multi-institutional such as Colombia and South Africa, have also tool developed by IUCN, allows companies to adopted a national standard for biodiversity offsets. estimate risks that construction or operations under consideration may pose to critical habitats, In addition to standards, several tools have been and the opportunities for biodiversity conservation developed to assess the impact of business near production sites, through desk analyses.55 operations on biodiversity. For example, the Caisse Some companies have also started to develop and des Depots et Consignations (CDC) has developed implement Integrated Biodiversity Management the Global Biodiversity Score, a tool that can be used Systems to manage risks to biodiversity at the overall by companies and financial institutions to measure corporate level, instead of at the project level. 54  International Association for Impact Assessment. 2020. Accessed May 18, 2020. Available from: https://www.iaia.org/ 55  Integrated Biodiversity Assessment Tool. 2020. Accessed May 18, 2020. Available from: https://ibat-alliance.org/ Mobilizing Private Finance for Nature 65 Tools are being developed to assess the biodiversity financing studies at country levels. relationship between investment portfolios and BIOFIN, an international initiative supporting biodiversity. For example, the Natural Capital 36 countries around the world in developing Finance Alliance developed Exploring Natural biodiversity financing plans, estimated in 2019 Capital Opportunities, Risks, and Exposure that, of its member countries that completed (ENCORE), a tool that allows financial institutions their biodiversity expenditure review, only to assess both the impact of an investment 8 (including Costa Rica, the Philippines, portfolio on biodiversity, and its dependencies on and South Africa) reported on private sector biodiversity (NCFA, 2020). Additional examples of expenditure (World Bank, 2020c). BIOFIN notes industry initiatives to measure biodiversity impact that this information is partial, and there are are in Box 16. methodological and practical challenges to tracking expenditure, notably the lack of clarity A consequence of the lack of standardization in on what constitutes ‘private sector expenditure’ accounting, reporting, and impact measurement and ‘biodiversity expenditure.’ The absence of is that the measurement and tracking of private baselines for the monitoring and evaluation of finance for biodiversity is limited. There are biodiversity outcomes also pose a challenge currently no comprehensive private sector (World Bank, 2020c). BOX 16 Industry Initiatives to Measure Biodiversity Impact France’s Article 173 of the Energy Transition Law motivated four French asset managers to launch a call for expressions of interest in January 2020 for a partner to develop and implement an innovative tool to measure both the impact and dependency of investments on biodiversity. The asset managers— AXA Investment Managers, BNP Paribas Asset Management, Sycamore Asset Management, and Mirova—have specified that the methodology will ideally apply a life cycle approach, assessing company supply chains from product use to end-of-life. Additionally, the methodology would be compatible with investment taxonomies and internal environmental assessment systems already in use. The data provided should simplify portfolio performance assessment in relation to an index. The approach must be applicable to companies active in the main market indices, and ideally also compatible with other asset classes such as unlisted equities, infrastructure, and real estate. In a statement, the asset managers said, “We hope the tool we develop will be used by all market players, and that it will become a benchmark tool” (Mirova, 2020). In March 2020, ASN Bank, along with a group of five other Dutch financial institutions, launched the Partnership for Biodiversity Accounting Financials (PBAF), which aims to develop a common accounting measure for the positive biodiversity impacts of investments. In 2016, ASN committed to having a net positive biodiversity impact by 2030 and has measured its biodiversity footprint every year since. ASN uses the ReCipe methodology developed by the Dutch National Institute of Public Health and Environment. The methodology generates a parameter that shows the fraction of species lost in a certain area during a certain time—the potentially disappeared fraction of species (PDF). This unit is then translated into hectares (Avery, 2019a). So far, ASN Bank says that every company it has assessed has a “net negative impact on biodiversity.” The initiative will help to answer questions on how financial institutions can compensate for the negative impacts of their investments. ASN has said, “We need to invest in nature-based compensation.” The initiative will help to define how positive impact is measured and what the reference point is (Verney, 2020). 66 Mobilizing Private Finance for Nature Sea otter (Enhydra lutris), Monterey Bay, California: © Enrique Aguirre/Shutterstock In summary, though awareness of biodiversity risk Data quality and availability will continue to pose is growing in the financial sector, a lot more needs challenges, but the risk of irreversible change and to be done, and lessons can be learned from lasting impacts on the economy call for a proactive the industry’s response to climate change. The approach. As Roel Nozeman from ASN Bank has Equator Principles show that the financial sector stated, "We can’t wait for perfect data, there is a can play a leading role in driving the real sector crisis going on (Verney, 2020)." to better manage biodiversity risk. As outlined above, the data, standards, and tools to catalyze Challenging characteristics of this are beginning to be developed. However, biodiversity projects further work is needed. The WEF Global Risks report (World Economic Forum, 2020b) notes that A key challenge with biodiversity projects, biodiversity is currently mentioned in less than even more than other environmental and social half of Fortune 500 company reports, of which projects, is their small scale and localized nature. only a handful set measurable and time-bound Most biodiversity challenges are location-specific targets. Dependency on biodiversity is still absent and solutions need to be tailored to individual from the risk assessments of most companies. conditions. This creates difficulties in both While most developed countries have well- identifying a problem that could be solved by established regulations requiring environmental the private sector, and then replicating a solution impact assessment, this is not the case in many across a large enough market. Biodiversity projects developing countries. The development of a will need to be aggregated in many cases.56 As standardized methodology for assessing company with the infrastructure sector, the challenge is not impact on biodiversity would provide clarity and so much a lack of capital as the lack of a pipeline of direction to both governments and companies. biodiversity investment opportunities. 56  To provide one example, the Climate Policy Initiative analyzed Brazil’s rural credit system, which parcels out funding to agribusinesses big and small, and found that loans to smaller farmers lead to more efficient land use and reduced deforestation—a major contributor to climate change. Every 1.00 percent increase in credit offered by the National Program for Family Farming at the municipal level results in a 0.03 percent increase in forest area, as the proceeds go to fund more intense land use rather than toward felling trees to expand the arable area. In contrast, rural credit extended to large agribusinesses leads to an expansion of pastures and cropland, increasing deforestation (Assunção and Souza, 2020). Mobilizing Private Finance for Nature 67 Coffee bushes in a shade-grown organic coffee plantation on the western slopes of the Andes in Ecuador: © Morley Read/Shutterstock Biodiversity projects rarely have an easily a competitive risk-return profile, and remain monetizable cashflow, making it difficult for them small-scale, niche initiatives. ‘Blended finance’ to attract private sector financing. Biodiversity is needed, mixing concessional and commercial and many of the ecosystem services it supports returns. However, creating an efficient blended are public goods whose true value is not reflected structure and allocating risk and return to various in economic transactions. Though there is growing investors is more complex for biodiversity than interest in—and capital available for—biodiversity it has been for the renewable energy sector, financing, finding projects with the characteristics for example. In the renewables sector, the key that match investors’ profiles is proving difficult, challenge is to support the development and as many do not generate revenue or a cashflow. deployment of new technologies and lower costs Allowing for investments in ecosystem services to a level where these new business models can requires the valuation and monetization of the compete with fossil fuel-based businesses. In benefits provided by nature. It also requires the case of biodiversity and ecosystem services, appropriate mechanisms to capture the resource’s due to the risky and untested character of rent, apply a price or payment scheme, and the investment, new sources of concessional distribute these financial benefits to various finance and different approaches to ‘blending’ stakeholders. Experts in this field are working are needed. Traditional sources of finance, actively to address these challenges. such as governments and development banks, are important actors in the development of Even where projects do generate a cashflow, biodiversity-focused ventures. the financial returns are often low and below market return hurdles. In many cases, nature- Innovative ecosystem and biodiversity projects based or nature-friendly projects do not have are still mostly in their early stages, making it 68 Mobilizing Private Finance for Nature Figure 10. The Biodiversity Investors’ Universe Return Profile Majority of the Biodiversity Retail Investors Finance Space Pension funds/Insurance Market Rate MDBs Family Offices Corporate Entities High Net Worth Individuals HNWI Return-First Impact Investors Investment Seed Angel Venture Private Equity Public stage Capital Debt Markets Governments Concessionary NGOs Impact-First Impact Investors Foundations Programs Development Banks difficult for them to attract a broader range unproven. For example, the fund manager of investors and to scale up. While most Althelia was able to overcome this challenge opportunities are still early-stage investments, through seed funding from donors for their most investors are looking for larger, more Climate Fund—securing a first loss guarantee mature opportunities, and for investment funds from the USAID Development Credit Authority with established track records (KKR, 2016). As to allow it to lend up to $133.8 million to forest illustrated in Figure 10, the majority of investors conservation and sustainable land use projects participate in large and well-established funds (USAID, 2014). A key innovation of the fund has with a positive track record. The key component been its use of carbon credits as both a source of established funds is a seasoned investment of return to investors and as a collateral for the team with deep industry expertise and the ability loans, allowing it to make investments in projects to execute investment from a reliable pipeline that would be too risky for regular investors. of investment opportunities. However, most investment managers in the biodiversity space Financial professionals are too often unfamiliar with are raising their first fund. Because it is a nascent biodiversity finance. Investment teams at pension field, most of the business models remain funds and other large asset owners do not have Mobilizing Private Finance for Nature 69 enough knowledge of biodiversity to be able to to provide the technical assistance and the small- create risk pricing models and capital allocation sized grants and loan needed in this space. For strategies that take biodiversity factors into this reason, they often rely on nongovernmental account. Financial advisors and wealth managers, organizations to channel their capital. Although the gate keepers to most investors—including high- largely ignored by the current efforts to develop net worth individuals and retail advisors - are also conservation investments, it will be critical to build unfamiliar with this space (see Figure 11 below). a critical mass of expertise and data in order to Development organizations are often ill-equipped unlock the doors for most investors. Figure 11. Investment Advisors’ Role in the Investment Process Pipeline of Investment Investment Advisors Opportunities Established Funds with Positive Investors Track Record Seasoned Investment Team Source: Authors. 70 Mobilizing Private Finance for Nature Red ants: © khlongwangchao/Shutterstock Chapter 4 The Way Forward M obilizing resources at scale for The role of public policy and biodiversity is a complex problem, and a composite web of solutions involving financial regulation different players will be required to move forward. These solutions are broadly centered around To address the double materiality of nature loss the public sector’s role in creating a supportive and degradation, government response needs enabling environment with the right incentives, to cover both the real and financial sectors. standards and, regulations; providing data and Governments play a key role in addressing the information; and integrating a systemic risk lens market failures and lack of enabling environment in the planning and decision-making processes. that are impeding greater private sector On the private sector side, the key will be for participation in biodiversity finance. Their action financial institutions to support the incorporation of is instrumental in ensuring that the policy space— biodiversity risk into investment decisions via risk which includes both economic and financial measurement and reporting. This will encourage sector policy—is consistent with environmental businesses to operate in a more sustainable sustainability goals, and that private biodiversity manner and prevent biodiversity loss; this is known finance develops into a more mature, efficient, and as greening finance. In addition, more innovation mainstream market that can support the transition in developing projects with sufficient cashflow and to a nature-smart economy. returns, and financial instruments with the right risk return profile is needed; this is known as financing While governments globally are focused on green. Multilateral development banks such as immediate responses to controlling the COVID-19 the World Bank Group can play an important role pandemic and increasing the level of economic in bringing these sectors together—including activity, recovery packages being designed can through de-risking and scaling projects. incorporate short-term biodiversity opportunities 72 Mobilizing Private Finance for Nature Figure 12. The Way Forward Actors Public Sector Private Sector MDBs For the real sector: Incorporating Supporting Policies to level the risks implementation in Actions playing field & address the public & externalities Developing & private sectors structuring investment For the financial sector: opportunities Providing credit Policies, data provision, enhancement through regulation, & supervision blended finance Foundation for Success Enforceability, resources, Transparency, capacity, Innovation & global & capacity & compliance coordination Source: Authors. and contribute to the avoidance of future risks. the country’s reforestation efforts. Many of the new Environmental policies and programs focused on jobs are being created in rural areas, with a focus biodiversity can play a crucial role in contributing on hiring women and youth (Khan, 2020). to a stable and resilient recovery and addressing the biodiversity risk that may have contributed to Governments should mainstream biodiversity the pandemic. Investment in avoiding long-term aspects at strategic levels in sector-wide planning. risk does not require a trade off with short-term In the infrastructure sector, for example, impacts needs. For example, restoring degraded forests or on biodiversity are cumulative. In the renewables other landscapes can create jobs in the short term sector, projects are often clustered in the same while also generating net benefits worth hundreds watershed or airshed. Incorporating biodiversity of billions of dollars from watershed protection, sensitivity screening, equivalent to and alongside climate change resilience, better crop yields, and technical and commercial factors in early sectoral forest products (Hallegatte and Hammer, 2020) planning, will enable the consideration of (New Climate Economy, 2014). Productive safety biodiversity factors in a more meaningful and net programs can achieve significant scale – past sustainable manner. For example, the IFC’s Scaling examples include the Mahatma Gandhi National Solar and Scaling Wind initiatives take into Rural Employment Guarantee in India, which consideration the biodiversity aspects upstream covered 80 million people (Subbarao, 2013) and the of competitive tenders to independent power National Program for Community Empowerment producers (IPPs). With the knowledge gained in Program in Indonesia with 10 million participants early planning, biodiversity management and (Hallegatte, 2020). Pakistan has implemented the mitigation could be priced into the tariff structure largest program during the current downturn. and built into power purchase agreements, rather Through its 10 Billion Tree Tsunami Program has than being considered only at the often ‘too late’ created more than 63,600 jobs to contribute to stage of the environmental and social impact Mobilizing Private Finance for Nature 73 Figure 13. The Way Forward: Policy and Regulation THE WAY FORWARD: THE ROLE OF THE PRIVATE SECTOR $ Real Sector: Financial Sector: • Environmental • Policy frameworks standards & regulations • Data & accounting • Taxes & subsidy reforms • Regulation, supervision, • Payments for ecosystem & reporting Criteria services • Integrated land use, for success planning, & governance • Enforceability • Resources • Staff capacity Source: Authors. assessment (ESIA). Another example is in Jordan, seeking debt relief. While countries in dire need where IFC supported the government’s effort in of relief may find it difficult to meet conditions developing a more sustainable wind sector. Wind for refinancing their debt, there is potential for energy experienced considerable stakeholder debt-for-nature swaps to be an effective tool for pushback from conservation organizations the achievement of economic and conservation concerned about the impacts on biodiversity. goals, as part of a broader debt relief package IFC led a multi-stakeholder effort to establish (see Box 17). Additionally, as the COVID-19 crisis a regulatory framework to assess, monitor, and creates financial stress for agricultural commodities manage potential cumulative impacts of the wind producers, some governments and conservation sector on iconic bird species, and the framework organizations may see an opportunity to purchase has since been successfully implemented in wind land from distressed producers for conservation energy projects country wide (IFC, 2017b). purposes or to be leased to smallholders, who would be required to incorporate sustainable Debt-for-nature swaps are one instrument practices into their operations. which could help countries fund economic and conservation goals. They can be used to blend The recommendations for governments, financial finance in order to mobilize domestic real sector regulators, and supervisors can be organized investment in conservation and sustainable into two key areas of intervention: (i) policies and industry (example in Box 17). The current economic regulations to level the playing field in the real shock comes after an unprecedented surge in sector; and (ii) policies, data provision, regulation, borrowing, both public and, particularly, private, and supervision to drive integration of biodiversity with total debt stocks reaching $229 trillion at the criteria into financial decision making and market end of 2018, over two-and-a-half times global development. These two sets of policies work GDP, and up from $152 trillion at the onset of together to help a country move toward a nature- the 2007–2008 global financial crisis (UNCTAD, smart economy. 2020). As a result, many developing countries are 74 Mobilizing Private Finance for Nature BOX 17 Financing Mechanism 11: Seychelles Debt for Nature Swap As part of a $21.6 million debt swap brokered by the Nature Conservancy (TNC) and others in 2016, the Seychelles agreed to designate 30.0 percent of its exclusive economic zone as a Marine Protected Area (MPA). This is up from 0.04 percent protected before the deal. More than two- thirds of the Seychelles economy is dependent on tourism and fishing, with the fishing industry valued at $300 million annually. According to TNC, this was the first debt conversion to focus on marine conservation, and also the first with a policy commitment. The debt was purchased from European Paris Club creditors via a $15.2 million loan from TNC and $5 million of grants from several foundations (TNC, 2020). The debt was restructured to extend the average maturity on the notes from eight to 13 years, with approximately a quarter to be paid in local currency, and was purchased at a $1.4 million discount (Cornish, 2018). The debt is now held by The Seychelles Conservation and Climate Adaptation Trust (SeyCCAT), an independent private trust which disperses blue grants funded by the debt conversion.i TNC will be repaid in full, but part of the interest payments the government makes to SeyCCAT will be used to fund conservation and climate adaptation work. Additional interest payments will be placed in a long-term investment trust fund to continue paying for conservation work once the loan is paid off (Strand, 2016). From this deal, SeyCCAT will fund $5.6 million of marine conservation and climate adaptation activities, and award $3 million to an endowment that can fund similar activities in perpetuity, over a 20-year period (World Ocean Initiative, 2020). The loan to the Seychelles from TNC was financed through the organization’s NatureVest conservation investment unit, which raised loan capital from commercial investors. One of the most complicated aspects of the project was the negotiation, led by the government with stakeholders, to determine the location of the MPAs and the rules that would govern them. Two years of consultations preceded the execution of the deal, and another four before the plan for the full 30 percent of MPAs was agreed upon. The MPAs include both High Biodiversity Protection Areas and Medium Biodiversity Protection and Sustainable Use Areas. The latter is designed to conserve natural ecosystems and support sustainable economic activities, including catch and release fishing, tourism charters, and renewable energy (TNC, 2020). It is possible that the current economic crisis could create more opportunities for these types of deals, which could also help provide crucial sources of conservation funding, even as other sources dry up during the recession. In the Seychelles the President has exempted businesses that fund conservation from paying taxes until September 2020, due to the pandemic-induced reduction in tourism. The CEO of SeyCCAT has commented: “With the debt for nature deal, we have a recurring fund, enabling us to continue financing conservation efforts even when other sources of income for conservation are at risk (World Ocean Initiative, 2020).” While the debt-for-nature swap freed up some savings for the Seychelles to invest in managing its MPA, more funding is needed to meet the country’s 30 percent target, and to fund the management of the MPA over time. i. The Seychelles Conservation and Climate Adaptation Trust. 2020. Accessed on May 18, 2020. Available at: www. seyccat.org Mobilizing Private Finance for Nature 75 Leveling the playing field via real sector integrate biodiversity across sectors and policies industries with mandatory biodiversity offsets. Real sector policies directly influence the behavior Businesses often adopt standards on a voluntary of firms that operate in productive sectors, such basis to green their supply chains and incorporate as agriculture, food and beverage, textile and biodiversity conservation into their business fashion, construction, energy, and mining. These practices. For example, over 1,200 companies have policies are critical because they change the voluntarily made commitments to low- and zero- incentives of the industries and value chains that deforestation in their supply chains, and almost 211 are driving the loss and degradation of ecosystems. million hectares of commercial forest operations They include: (i) standards and regulations, often have been certified by the Forest Stewardship termed command and control policies; (ii) pricing Council (FSC, 2020). In industries in which this policies, which include fiscal policies governing happens, the alignment of real sector policy with taxes and subsidies, fees, and payment for the objectives of conserving, restoring, or avoiding ecosystem services; and (iii) information disclosure a negative footprint on ecosystems is even more rules. The key role of real sector policies is to important, as it will level the playing field and allow correct for externalities and other market failures, the scaling up of existing voluntary initiatives. thus levelling the playing field on which private Governments can provide further support for such actors operate. Protecting and sustainably using practices by promoting sustainable certification nature involves the conservation of natural areas, and transparency in supply chains. and the restoration and avoidance of damage to ecosystems. These activities can impose a private Governments can also lead the way by integrating opportunity cost on businesses, given that they biodiversity considerations into their procurement involve public goods and externalities. Nature tends practices and using nature-based solutions in to be underpriced, leading to private investment public works. Governments, utilities, and other decisions that contribute to the overexploitation infrastructure service providers can transition to a and misuse of natural resources. policy of evaluating and, where feasible, shifting to natural infrastructure solutions for every decision Standards and Regulations about infrastructure design and procurement. It will be key for these entities to exercise greater Standards and regulations are the most common creativity around creating cashflows and revenues type of policies used to protect biodiversity from public good resources. and ecosystems. They are aimed at re-orienting investment toward more sustainable practices by Subsidy and tax reform allowing or preventing a defined set of activities or production processes. Building the capacity of Besides standards and regulations, well-designed environmental agencies at the national level will be fiscal reforms can increase welfare while required for these measures to succeed. Regulatory reconciling economic growth with nature and measures include (but are not limited to): the services it provides to people. The literature on Environmental Fiscal Reform (EFR) has so • Land planning and governance reform to ensure far focused predominantly on climate change. clear and secure land tenure integrated with But EFR can also be applied to biodiversity and inclusive and informed landscape planning, and ecosystem services. To maximize impact, and to protection of indigenous lands and community- ensure that the main drivers of biodiversity loss based forest and land management initiatives; are addressed, efforts should concentrate on • Introduction of stricter pollution standards, for agriculture, forestry, fisheries, energy, and mining. example, on pesticide and fertilizer use; and The most important opportunities are likely to be • Broadening of the base for mandatory found in the potential to reform perverse subsidies environmental impact assessments that (OECD, 2020b). 76 Mobilizing Private Finance for Nature The repurposing of perverse subsidies toward relevant taxes amounts to less than 1 percent of ecosystem conservation and restoration can play total revenue generated from environmentally- an important role, particularly when ecological relevant taxes in OECD countries58 (OECD, services are underpriced or underprovided. 2020c). There are multiple entry points for While not all production subsidies are harmful to biodiversity-relevant taxation, including land use the environment, and their burden is gradually change, harmful inputs into agricultural production declining, they remain a significant opportunity (pesticides, fertilizers), emissions and pollution cost for the taxpayer, and a factor contributing to from production, and exports and direct resource environmental degradation. Reforming economic extraction, among others. Taxes on groundwater incentives requires a two-step approach: (i) an extraction, and hunting and fishing license fees, assessment of the existing programs that do not represent a promising tool to prevent ecosystem work and need to be eliminated; and (ii) gradual use beyond its replenishment rate, and also an repurposing of support in favor of sustainable effective way to achieve fiscal, public health, and production practices. Successful examples of economic objectives. While the political economy green subsidies are emerging. For example, challenges around the implementation of tax Brazil has established a Low-Carbon Agriculture reform are significant, the current ‘reform window’ (ABC) Plan57 to provide low-interest credit to around COVID-19 support and recovery packages sustainable agriculture that is both climate smart could represent an opportunity. Ten Brink (2011) and more biodiversity friendly. Technical assistance notes that fertilizer and pesticide taxes, or excess support, provided by the World Bank to farmers nutrient taxes, can improve efficiency in fertilizer in the context of the ABC Plan, achieved a 1:7.2 use, and reduce the associated environmental leverage ratio. This means that for each $1 damage. This is demonstrated in the experiences invested by the project in providing technical of several European countries, including a 20–30 assistance, beneficiaries invested $7.2 of their percent decrease in fertilizer use in the Netherlands own funds to adopt low-carbon and conservation and a 15–20 percent decrease in Sweden. technology. It is a powerful example of how small amounts of public finance, often with a link to An important challenge with real sector policy, carbon finance, can be used to effectively mobilize and fiscal policies in particular, is that reform private resources that foster conservation efforts, creates winners and losers. Political economy such as preservation of organic matter in the soil considerations in the design of the reform are , or limiting the conversion of natural habitats. paramount, as these will determine whether a While the ABC program has generated traction reform succeeds. Stakeholders who could be in recent years, it still represents only 2 percent affected by policies that protect ecosystem of the total credit disbursed annually through services, like water yield, pollinators, fish Brazil’s government-subsidized National Rural production, and carbon sequestration, include Credit System. This system is known to suffer from landowners, farmers, fishermen, and workers in significant inefficiencies and conflicting incentives sectors related to the use of these resources. Key and to encourage activities that are damaging to considerations at play are the competitiveness climate and biodiversity (Lopes and Lowery, 2015). of domestic industries; distributional impacts, Together these factors create a strong case for notably the impact of the reform on the poor; scaling up subsidized credit that promotes better vested interests; and political acceptability social and environmental outcomes. (OECD, 2017). These have undermined the efforts of many developed and developing countries to Taxation is another important component of fiscal introduce environmental fiscal reforms (EFR), for reforms, as revenue generated from biodiversity- example, by creating exemptions of key sectors 57  Brazil’s Low-Carbon Agriculture (ABC) Plan is a credit initiative that provides low-interest loans to farmers who implement sustainable agricultural practices. 58  Average 2016–2018. Mobilizing Private Finance for Nature 77 such as agriculture and industry (Chaturvedi, green investment. This would include plans for 2014). A positive feature of both subsidy reform developing a pipeline of priority projects, such as and taxation is that they generate resources projects structured as PPPs. The roadmap should that can be used to compensate those who lose include targets for the role that the private financial subsidy support. Country experiences show sector should play in financing the country’s that the key to the success of EFR is a phasing biodiversity objectives. Several countries, including out of conventional subsidies while investment the UK, have implemented strategies, policies, and is ramped up in complementary social and instruments with this aim. While several of these development programs. In the context of climate strategies include biodiversity criteria, it is crucial change, assessments of the potential effects of that biodiversity considerations are central to the a carbon tax and other fiscal reforms suggest strategy and on an equal footing with climate that governments could reap a ‘triple dividend’ considerations. through: curbing pollution, generating and funding development co-benefits and public goods, and Governments can further mobilize private raising economic activity (Pigato, 2019). Similarly, finance for biodiversity through including a role a recent assessment (Hogg et al., 2016) of the for the private sector in National Biodiversity potential for EFR across the 28 EU members Strategies and Action Plans (NBSAPs). NBSAPs found that a combination of environmental and constitute the main implementation mechanism energy taxes can generate substantial revenue for of the Convention on Biological Diversity, and member governments and have a positive impact include country-specific strategies for resource on jobs if these measures replace other taxes, mobilization. With the support of BIOFIN, several such as those on employment. countries are preparing strategies that specifically identify opportunities for private sector finance. Greening the financial sector In Mexico, impact investment is identified as a key priority, and BIOFIN is seeking to develop Financial sector policy frameworks and investment-ready portfolios of conservation and biodiversity strategies sustainable use projects in or near Protected Natural Areas. In Kazakhstan, BIOFIN is supporting National roadmaps or strategies for greening the introduction of biodiversity offsets as a formal the financial sector can help set an overarching instrument; the introduction of tax incentives for framework. Governments can pursue an ecotourism development; and the creation of an overarching policy framework that maps a multi- enabling environment for attracting forest-based pronged approach to better assess and manage carbon offsets from the international market, and environmental risks and opportunities, in the financial from multinational enterprises operating in the sector and the economy more broadly (Van Acker country.59 and Mancini, 2020). Such a roadmap could align financial sector policies, regulations, incentives, Data and Accounting and government spending with biodiversity goals. It could prioritize actions and coordination between While ensuring that policies and incentives are relevant stakeholders. A task force or expert group, aligned with biodiversity conservation goals, including representatives from regulators, relevant governments can also provide the knowledge ministries, the financial sector, the real sector, the and data which real and financial sector firms science community, and nonprofit organizations, will need when building biodiversity into their could serve as an advisory body on the creation of risk analysis and investment decisions. For the roadmap, which would lay out the government’s governments, at the highest level, this means strategic priorities for industry development and implementing natural capital accounting (NCA), 59  BIOFIN. 2020. UNDP. Available at: https://www.biodiversityfinance.net/index.php/biofin-around-world 78 Mobilizing Private Finance for Nature A community planting native species of trees to prevent erosion and land degradation, as part of a World Bank funded project in Ethiopia: © WBG. a systematic way to measure and report on ecosystem thresholds and planetary boundaries, stocks and changes in natural capital. Organizing at the global, national, and corporate levels, this information in a standardized way can help supported by the implementation of aligned decision makers understand how nature interacts corporate and national natural capital accounting with the economy, creating the foundation for the or reporting. Methodologies such as NCA, design of policies. NCA can serve both macro- and ‘Doughnut Economics’ (see Figure 14) (Raworth, micro-level decisions. At the micro level, it can be 2017), and a ‘Planetary Health Dashboard’ linked with firm-level disclosures that account for (Degnarain, 2020) deserve further consideration.60 flows, which will help set companies on a path to China’s Gross Ecosystem Product (GEP) measure developing metrics that are context-based, and will provides an example of another innovative provide investors with better information on the approach. GEP is being developed and tested, long-term impacts of their investments. The UN’s and will be reported alongside GDP.61 In the standard for NCA is the System of Environmental private sector, companies practicing context-based Economic Accounting (SEEA), which from 2020 sustainability work backwards from global social, will be included as an indicator for measuring the economic, and environmental thresholds in order SDGs. Over 80 countries are already implementing to determine metrics for corporate sustainability SEEA. Subnational governments, real sector performance (CSO, 2020). According to a recent companies, and nonprofits also have a role to play UNRISD report (2020), “the bottom line is that it in implementing NCA. is only possible to gauge whether a company is on a sustainability pathway if it discloses data that are The current pandemic has demonstrated the structurally oriented, quantified, contextualized, necessity of contextual, coordinated monitoring of and user friendly.” 60  According to the Doughnut Economics model, the economy should operate within the space between an ecological ceiling (Rockström et al., 2019’s planetary boundaries) and the social foundation (the SDGs). 61  IUCN. 2020. Gross Ecosystem Product (GEP). Accessed on May 19, 2020. Available at: www.IUCN.org Mobilizing Private Finance for Nature 79 Figure 14. The Doughnut of Social and Planetary Boundaries Climate change er LOGICAL CEILING aci Ocea lay n difi n ne letio ECO ca ti ep d o Oz er Food Wat OT on FUND HO CI AL ATIO He E RS gy SO N OV alt er En h Chem on Air pollution polluti Edu ks LL TFA Networ cation R HO ical S H o u si n & w ome ork Inc g g ndin loa & Bio d loss ru s g e n Ge u ce & al d er i ve eq ac h o t ro e n it y Pe usti rsi sp N i So j ty l equcial Politica it y v oi ce ho p co n L a n d er w at ve r sio n Freshdrawls w i t h Source: Raworth, Kate. 2017. Doughnut Economics. Governments can take steps to invest in, and to Regulation and Supervision mobilize private investment in, technology that improves data quality and availability. There are Supervisors and regulators have a strong role in several promising technologies for addressing data supporting better management of biodiversity- gaps (see Box 18). Remote sensing and artificial related risks across the financial sector through intelligence, for example, allow for better tracking of better risk assessment, standards, and reporting. deforestation. ‘Fintech’ tools, including blockchain, For financial institutions to fulfill their roles tokenization, and smart contracts are also being of effectively managing and distributing risks explored to support local communities involved and allocating resources to productive uses, in conservation projects (UNEP, 2019).62 The main governments and financial sector regulators will impediment to the wide adoption of conservation need to take steps to better enable the integration monitoring technologies, and therefore of the of biodiversity criteria into economic and financial potential for financial return, is the lack of funding decisions. Tools which are at their disposal (also of public agencies and nonprofit organizations in listed in Table 6) include: charge of managing biodiversity in protected areas. New sources of financing to expand the use of • Green investment taxonomies. There is a need these technologies should be explored. for the development of national and regional 62  For example, Ant Financial, a subsidiary of Ali Baba, has developed a conservation video game which makes a donation to plant trees based on virtual tree growing game results (UNEP, 2019). 80 Mobilizing Private Finance for Nature BOX 18 Tech for Conservation Citizen science, or active public involvement in scientific research, is growing—using new technology to monitor air and water pollution and take stock of flora and fauna (Irwin, 2018). In 2017, multiple citizen-science organizations banded together to form the Citizen Science Global Partnership, which aims to expand the application of citizen science to monitor progress toward the SDGs. The Global Biodiversity Information Facility (GBIF), the world’s largest such repository of such data, gets half of its billions of data points from citizens. GBIF estimates that it has supplied data for more than 2,500 peer-reviewed papers in the past 10 years. The use of technologies has led to a more decentralized approach to data collection and monitoring. A project called Ground Truth 2.0, supported by the European Commission, has set up six pilot ‘citizen observatories’ in Africa and Europe, designed to encourage a dialogue between laypeople, scientists or data processers, and data users. The challenges associated with citizen-sourced data are, however, significant. Deviations from standard protocols and biases in recording and sampling have been observed (Tiago et al., 2017). In order to become an official data stream, citizen science needs to become more institutionalized and methodologies more standardized (Irwin, 2018). Earth Bank of Codes, another potentially impactful use of technology for conservation, is aimed at empowering citizens through payments for their stewardship, by putting all genetic codes of the biodiversity in the Amazon rainforest on the blockchain. Users, including scientists and pharmaceutical companies, can then buy access to the codes with cryptocurrency, part of which will be paid directly to the communities taking care of the area of the rainforest where a particular genetic code originates. The long-term goal of Earth Bank is to help developing countries and communities rich in biological and biomimetic assets to move toward an economy that is more dependent on these assets and less dependent on natural resources and commodities. Through this, Earth Bank aims to increase the economic value of stewardship relative to extraction. The platform is designed to make “the current and future value of nature’s assets visible and accessible” and to protect the property of the stewards of these assets. Earth Bank notes that bio-piracy and inequitable benefit sharing are problems that have prevented communities and developing countries from realizing significant benefit from these assets in the past.i i. Earth Bank of Codes. Accessed on June 30, 2020. Available at: https://www.earthbankofcodes.org/ taxonomies to identify activities that contribute capital to projects aligned with the nature- to sustainable biodiversity. Such taxonomies smart economy, it is crucial that standards and provide a way for governments to identify labels are developed. Standards for labeling target areas for investment and to provide will prevent green washing and help to pilot projects. Taxonomies can also help ensure financial stability and market integrity. financial institutions and regulators measure the These may come from industry groups and alignment of financial flows with biodiversity associations, but regulators and governments goals, and to assess and identify risks (more in can also play a role, providing guidance and Box 19 below). In addition, taxonomies provide encouraging standardization. The Green Bond a framework that can serve as the basis for Principles are an example of a successful labeling standards. collaborative approach to developing • Labeling. In order to promote the use of standards, which has proven successful (ICMA, sustainable financing instruments in channeling 2018). While biodiversity conservation and Mobilizing Private Finance for Nature 81 restoration are already considered eligible also provide guidance on how biodiversity risk activities for green bonds, the green bond can be incorporated into the risk assessment framework needs to go further and impose a and investment process of the firms they ‘do-no-harm’ requirement with an emphasis on oversee. For the insurance sector, regulatory biodiversity. The Green Loan Principles take a incentives could help with the integration similar approach, recognizing projects which of biodiversity data in assessment tools that tackle natural resources depletion, loss of underwriters, surveyors, and others use to assess biodiversity, and air, water, and soil pollution.63 premiums and incentives (Beck et al., 2019). A specific methodology could be devised for • Disclosure. There is a need for a global biodiversity finance instruments. IUCN recently standardized reporting framework for launched a Global Standard for Nature-based biodiversity and ecosystem services-related Solutions, which the organization describes as risks, and for this framework to be mainstreamed. “a framework for the verification, design, and Incorporating biodiversity as a material risk in scaling up of NBS” (IUCN, 2020), and which can financial accounting standards like IFRS and US be used to label both new and existing projects. GAAP would be one way to ensure consistent Governments could consider adopting this reporting of hidden costs and externalities, standard in order to mobilize greater private and to settle the methodology accountants investment in NBS. use to disclose natural capital as a stream to be • Supervisory risk assessment. As with climate maintained (Suttor-Sorel, 2019). Simultaneously, change, the systemic nature of biodiversity a Taskforce on Nature-related Financial risk (Suttor-Sorel, 2019) necessitates its Disclosures (TNFD) could develop a framework assessment at the aggregate level, requiring and recommendations—complementary to financial stability monitoring by central banks and building on, or part of—the framework and supervisors. Supervisors should develop tools and methodologies to map, quantify, and monitor biodiversity-related financial risks, by Table 6. Regulatory and Supervisory Tools and Approaches such means as developing and implementing macro-level stress testing methodologies. Supervisors should integrate key biodiversity and ecosystem services risks in supervisory Taxonomies approaches, risk scoring models, and potentially prudential frameworks. Labeling • Regulatory risk assessment. In addition to their own risk assessments, regulators will need to encourage or require financial institutions to Supervisory risk assessment incorporate biodiversity criteria into their risk assessment and investment processes. For Regulatory risk assessment the banking sector, this would involve central banks encouraging or requiring scenario and Disclosure stress testing of loan portfolios, particularly for banks that are exposed to highly biodiversity dependent sectors or geographies. These tools Solvency and capital regulations will need to be developed, as is currently the case for measuring climate risks. Regulators International networks overseeing nonbank financial institutions, such as insurance companies and pension funds, should 63  Green loan issuance amounted to about $60 billion in 2018. 82 Mobilizing Private Finance for Nature and recommendations of the Taskforce for • Solvency and capital regulations. Whether Climate-related Financial Disclosure (TCFD), regulators could or should go beyond risk a high-profile initiative led by the Financial assessment and reporting to incorporate ‘non- Stability Board (FSB).64 For both accounting and financial’ risks such as biodiversity and climate reporting frameworks, context will be crucial (the current debate is focused on the latter) to ensure such information can be effectively into prudential standards is an open question. interpreted and risks managed. A working Some institutions—for example, the central group is currently conducting preparatory work banks of Bangladesh and China—have already for the establishment of TNFD. Representatives introduced a mechanism for incentivizing green of the working group have indicated that it aims lending in refinancing policies.65 for a framework to be ready for use in 2022, • International networks. Networks can help and that the framework would align with the standardize these supervisory tools, and assist EU double materiality reporting requirement regulators in adopting them and implementing illustrated in Figure 5. Box 20 provides examples international good practice. Cooperative of existing biodiversity reporting regulations government-led efforts to establish supervisory and initiatives. and regulatory frameworks for mobilizing BOX 19 Investment Taxonomies and the Role of Policy Priorities While the EU Sustainable Finance Taxonomy is the best known globally, Mongolia has also begun to implement a green investment taxonomy, and is paving the way for other emerging markets to follow. These two taxonomies offer examples of different approaches in taxonomy development. Where the EU’s Technical Expert Group on Sustainable Finance was instructed to disregard policy goals and focus solely on science-based targets, the Mongolian Sustainable Finance Association (MSFA) was tasked with developing a taxonomy that would help the country reach policy targets. Together sustainable agriculture, land use, forestry, and ecotourism is one of its eight categories. Key strategic challenges Mongolia encountered in its taxonomy development included: setting priorities and boundaries (development vs. sustainability goals, social vs. environmental); and finding a balance between international standards and Mongolia’s unique needs (MSFA, 2020). Source: Mongolian Sustainable Finance Association. 2020. Mongolian Taxonomy. 64  As of February 2020, over 1,027 organizations, representing a market capitalization of over $12 trillion, had pledged their support to the TCFD recommendations. The recommendations serve as an important foundation for the work of sustainable finance initiatives. TCFD. 2019. Accessed on May 19, 2020. Available at: www.fsb-tcfd.org 65  In China, the interest rate that commercial banks get on central bank reserves is a function of a score—the so-called Macro Prudential Assessment (MPA) score. The higher the MPA score, the higher the interest rate they get. The MPA score depends on several dimension of banks’ activities, such as their capital adequacy ratios, their liquidity conditions, the quality of their assets, their competitiveness behavior, etc. (Zheng, 2018). The amount that a bank provides in green loans positively impacts its MPA score. The People’s Bank of China also introduced a scheme that allows commercial banks to pledge green bonds as collateral at preferable conditions in exchange of central bank’s liquidity (The World Bank, 2020a). Mobilizing Private Finance for Nature 83 BOX 20 Biodiversity Reporting The most explicit biodiversity risk disclosure requirements to date have been imposed by France. Article 173-VI of France’s ‘Energy Transition and Green Growth’ law, which went into effect in January 2016, requires investors to disclose how they factor ESG criteria and carbon-related aspects into their investment policies. The French Parliament recently amended Article 173 to require the disclosure of biodiversity impacts starting in 2021 (Ernst & Young, 2017). Other European governments are following suit, including the UK government, which has pledged in its Green Finance Strategy, published in 2019, to “work with international partners to catalyze market-led action on enhancing nature-related financial disclosures” (HMT UK, 2019). The Dutch Central Bank (DNB) published a report in June 2020 on the risks to the financial sector arising from biodiversity loss. The report calls for the development of a biodiversity risk disclosure framework (van Toor et al., 2020). The EU Taxonomy of Sustainable Activities also creates pressure for disclosure. Conservation and restoration of biodiversity and ecosystems is one of the categories of the taxonomy. Additionally, all investments under the taxonomy are required to ‘do no harm’ under its six categories of environmental objective (European Commission, 2020b). climate finance are significant, and growing. governance risk management and increase Two key government-led initiatives have been capital flows to climate projects. The ‘Green established in recent years and are quickly Swan’ report (Bolton et al., 2020) notes the role expanding—the Network for Greening the of central banks, regulators, and supervisors Financial System (NGFS)66 has expanded to in mitigating systemic risks by calling for and 46 members, and the Coalition of Finance promoting broader and coordinated change Ministers for Climate Action to 52 members.67 in order to fulfill their own financial and price This is a testament to the interest from the stability mandates. public sector in advancing climate action through economic and financial reforms. The Enforceability, resources, and staff capacity will guidance and recommendations put forward be crucial to the success of the recommendations by these two groups are helping to lay a strong included above, in achieving better integration supervisory, regulatory, and policy foundation of biodiversity criteria in the financial sector. for climate action. In addition, the Sustainable As sustainable finance broadly, and biodiversity Banking Network,68 which brings together finance in particular, are new fields for most regulators and banking associations from 38 financial supervisors, regulators, and many policy emerging markets, representing 85 percent makers, there will likely be an initial need for of emerging markets banking assets, has technical assistance and capacity building in many been working within their domestic financial countries. Governments should be equipped with sectors to improve environmental, social, and the tools and information needed to be effective 66  The NGFS 2019 Inaugural report said there were “compelling reasons” to look beyond climate risk to broader environmental risks. It raised concerns that environmental degradation could “cascade to risks for financial institutions” because “reduced availability of fresh water or a lack of biodiversity could limit the operations of businesses in a specific region”—businesses to which banks are exposed (NGFS, 2019). 67  Coalition of Finance Ministers for Climate Action. 2020. Accessed on May 19, 2020. Available at: https://www.cape4financeministry. org/coalition_of_finance_ministers 68  Sustainable Banking Network. 2020. IFC. Accessed on: May 19, 2020. Available at: https://www.ifc.org/wps/wcm/connect/ topics_ext_content/ifc_external_corporate_site/sustainability-at-ifc/company-resources/sustainable-finance/sbn 84 Mobilizing Private Finance for Nature in crafting approaches that take into account their of the link between risks and degradation of own unique economic, social, and environmental biodiversity and ecosystems, to encourage them contexts. to take natural capital risk into account in their investment decisions. For financing green, this will require establishing a track record for these Private sector adoption of new business models, and enhancing their ability risk management tools and to generate cash flows. development of financial Incorporating risks instruments The financial sector does not have to wait for In order to leverage private sector financing regulation, and can continue to develop its own for conservation, financial sector firms need standards and good practices for incorporating to develop and adopt the tools to measure biodiversity and ecosystem services–related risks and manage biodiversity risk exposure. They into investment decisions. Standards developed also need to develop and scale up innovative by the private sector can anticipate or comply financing approaches. Using a stylized framework with the regulatory framework. The sector could (Figure 16), this will involve both moving support and coordinate industry initiatives investments up the y axis, improving their outlined earlier in the paper, and provide capacity biodiversity impact, and along the x axis, using building for implementation. As is established in blended finance and other financial instruments, the ‘Green Swan’ report (Bolton et al., 2020), risk to improve investment returns and allow assessment techniques to date have been largely crowding in of private sector financing from a backward looking, and hence are missing the sort broader range of investors. For greening finance, of ‘green swan’ risks that climate and biodiversity this requires increasing the understanding and and ecosystem services losses represent. Forward- recognition among companies and investors looking scenario-based analysis needs to be Figure 15. The Way Forward—The Private Sector THE WAY FORWARD: THE ROLE OF THE PRIVATE SECTOR Risks: Opportunities: • Improved measurement & • Sequenced use of instruments management of biodiversity to spur market development risk exposure • Replication • Industry-led development • Blended finance of standards Criteria • Aggregation • Tools and data for success • Allocation of capital to • Investor engagement— companies greening their Nature Action 100 • Enforceability supply chains • Compliance • Resources • Conservation green bonds • Staff capacity • Sustainability-linked financing Source: Authors. Mobilizing Private Finance for Nature 85 Figure 16. The Two Dimensions of Mobilizing Private Sector Finance for Biodiversity and Ecosystem Services (BES) Financing Green Increase return by better monetizing ecosystem services Positive Conservation project Conservation project Project where BES impact Impact on biodiversity and ecosystem services without cashflow which using program-related are monetized, or on BES requires grant funding or investment or blended co-benefits are public support; finance created through Development project with business activities biodiversity component No impact Development project with Development project Project with on BES negative cashflow, which using program-related proper risk does not affect BES with investment or blended mitigation Greening proper risk mitigation finance with proper risk practices or Finance practices mitigation practices biodiversity offset* Increase positive impact Negative Development project Development project Traditional by better impact without proper risk using program-related investment internalizing on BES mitigation practices** investment or blended without proper environmental finance without proper risk mitigation and social risks risk mitigation practices** practices and benefits Negative Below Market Rate Market Rate Concessional Commercial Risk-adjusted return Source: Authors. Note: The figure assumes that projects comply with national environmental regulations. Standards refer to IFC Performance Standards or other widely accepted market standards. *The creation of an offset should compensate for any negative/residual impacts on biodiversity generated by the project. **Negative impacts on BES are commonly addressed by projects financed by MDBs through their own compliance mechanisms and compliance with national regulations. developed and improved by the financial sector, biodiversity and ecosystem services–related risk, as well as by governments and regulators. Box 21 is to engage with companies that are contributing provides an example of how investment managers to the risk. Global corporations and their supply are integrating biodiversity criteria into their chains are major contributors to biodiversity and investment decision making. ecosystem loss. Climate Action 100+, launched in 2017, is a five-year initiative led by investors to Engagement with companies has the potential engage systemically important greenhouse gas to be a powerful tool for investors to push emitters and other companies across the global the real sector to better manage biodiversity economy that have significant opportunities to risks. This is evident in the climate sector, where drive the clean energy transition and contribute to engagement is cited by investors as a crucial the achievement of the Paris Agreement goals.69 tool for managing systemic climate risks—those A study conducted by the European Corporate that cannot be diversified away. Elements of Governance Institute has shown a link between biodiversity risk are also systemic, as has been investor engagement on ESG issues and portfolio seen with the impact of COVID-19. The best way risk reduction. A similar ‘Nature Action 100’ could for investors to address undiversifiable risks, like be launched, which would engage with the 100 69  Climate Action 100+. 2020. Accessed on May 19, 2020. Available at: http://www.climateaction100.org/ 86 Mobilizing Private Finance for Nature BOX 21 ACTIAM: Integrating Biodiversity Criteria into Investment Decision Making ACTIAM is a sustainable impact investment manager with assets under management of ~$77 billion assets under management. Its clients include insurance companies, pension funds, banks, and private investors. ACTIAM integrates criteria relevant to planetary boundaries, the SDGs, and financial materiality into its investment decision–making processes. ACTIAM’s sustainability policy categorizes potential investments into four key categories, ranging from projects with a clear ‘positive impact,’ to those considered ‘unacceptable.’ For investments that do not address sustainability concerns, but have a ‘high adaptive capacity,’ ACTIAM engages to see if risks can be managed. The asset manager screens hundreds of companies on a daily basis. Assessments of biodiversity policies and management of biodiversity and ecosystem services–related risk exist at the company level, including screening of companies operating in regions with fragile ecosystems, or those with operations that can severely disturb land or marine areas. However, since granular data on biodiversity and ecosystem services at the supply chain and project level are rarely readily available, the company has developed its own tools and is working on integrating satellite deforestation monitoring technology to select and monitor its investments.a There are several key obstacles to mobilizing private sector investment in biodiversity and ecosystem services at scale: (i) lack of knowledge among portfolio managers on biodiversity trends and the role of the banking sector in addressing them; (ii) mismatch between projects and investors on financial requirements, notably the bankability and scale of projects; (iii) corporations lacking scenario analysis to inform them of the consequences of not paying attention to environmental risks; (iv) short timeframes in portfolio management decisions, vs. long timeframes required for positive environmental impact to manifest itself; and (v) only partial participation of the financial sector in this discussion. For example, local banks are a strategic stakeholder to involve, as they make the decisions to invest in palm oil or other activities with substantial environmental impacts. a. China MEE and World Bank. 2019. Workshop on Resource Mobilization in the Convention on Biological Diversity: Harnessing Private Finance. Accessed May 19, 2020. Available at: https://www.worldbank.org/en/events/2019/11/05/ workshop-on-resource-mobilization-in-the-convention-on-biological-diversity-harnessing-private-finance?cq_ ck=1578954214935 firms with the largest impact on biodiversity. As and sectors that have committed to improving frameworks, tools, and standards to facilitate the conservation impact of their operations. For more meaningful analyses of biodiversity risk are example, 19 companies joined together in 2019 to being developed, engagement allows investors to launch the ‘One Planet Business for Biodiversity’ influence companies’ approach to biodiversity risk initiative, which aims to protect and restore management with more nuance. biodiversity through actions to green agricultural supply chains (WBCSD, 2019). Themed investment Investment vehicles can be created which instruments—such a biodiversity funds, ETFs, and support and reinforce these engagement indices—are likely to be developed. activities, facilitating the strategic allocation of capital through the development of biodiversity 4.2.2 Developing Financial Instruments funds, ETFs, and indices. Investors may be able to improve the biodiversity impact of their portfolio Though the innovative application of biodiversity through the allocation of capital to companies financing tools is expanding, the outstanding Mobilizing Private Finance for Nature 87 question is—how many of these mechanisms can The blueprints focus on key sectors—including be scaled? The examples provided throughout sustainable cocoa, forestry, coastal resilience, and this report demonstrate that financial innovation in marine protected areas—and provide companies biodiversity financing is taking place with the aim and conservation agencies with business plans, of mobilizing more private financing for nature. risk management tools, and conservation impact Innovative business models and project structures strategies in each sector, aimed at making deals can be standardized, which can facilitate replication bankable. The hope is that these blueprints will and expansion from pilots. However, there is a need help to develop the pipeline and provide assets for pragmatism about which projects can feasibly suitable for financial aggregation. To overcome be scaled. Many of these instruments are replicable, the challenges associated with the small scale and but are applicable mostly to smaller, local projects, localized nature of biodiversity projects, individual which make it difficult for them to be scaled up producers and initiatives can be combined or to shift significant amounts of capital to invest in pooled at the sector or landscape/geographic biodiversity. The first step is thus to identify where level. In the case of sectoral aggregation, individual the opportunities lie, as shown in experience from producers can be organized into associations climate finance, which only became mainstream once or cooperatives, or abide by sectoral standards renewable energy was clearly identified as a sound established by a buyer, industry, or investor. In the long-term investment opportunity. Figure 17 and case of landscape-wide aggregation, local actors Table 7 provide a qualitative assessment of relevant and producers linked to a particular territory can instruments currently being deployed; it is hoped be pooled under the principle of protecting the that scores of instruments will improve over time as natural assets of that specific territory. This can policies, regulations, and markets develop further. help channel investment to key landscapes where biodiversity loss is concentrated. Additionally, it Project standardization and replicability will also can help to drive investment to publicly owned be crucial to developing biodiversity investment land with restoration potential. opportunities. In 2019, the Coalition for Private Investment in Conservation (CPIC) launched a Project pipeline development will also be key. series of blueprints aimed at replicating and Several private equity investment companies have expanding successful investments in nature. established a successful track record in the field Figure 17. Top 10 Investment Instruments with High Feasibility in Emerging Markets, Scored According to Potential Corporate sustainable timber bonds Green commodity PE/real asset fund Biodiversity/sustainability linked loans Sustainable TIMOs/PE Corporate green commodity debt fund Private debt fund for conservation businesses (SMEs) Fisheries debt fund Conservation PE fund Ecotourism debt fund Ecosystem-based carbon offset funds 0 2 4 6 8 10 12 14 16 18 20 Replicable Scalable Potential biodiversity impact Potential to attract capital From 1 (very low) to 5 (very high) in each category (qualitative analysis). Source: Authors. 88 Mobilizing Private Finance for Nature Table 7. Biodiversity Finance Instruments/Models Scoring Model Appropriate Potential Potential Aggregated Replicable Scalable for developing biodiversity to attract score countries impact capital Corporate sustainable 5 5 5 5 5 25 timber bonds Corporate green 5 5 5 4 5 24 commodity debt fund Sustainable TIMOs/PE 5 5 5 5 4 24 Biodiversity/sustainability 5 5 5 5 4 24 linked loans Green commodity PE/real 5 5 4 5 4 23 asset fund Private debt fund for conservation businesses 5 5 5 4 2 21 (SMEs) Conservation green bonds 5 3 1 5 5 19 (municipal) Ecotourism debt fund 4 3 5 4 2 18 Fisheries debt fund 5 3 4 4 2 18 Conservation PE fund 4 2 4 4 3 17 Conservation ETF 5 3 1 2 5 16 Ecosystem-based carbon 3 2 4 4 3 16 offset funds Ecosystem insurance 3 2 3 4 3 15 EIB for green infrastructure 3 3 1 5 3 15 (municipal or corporate) International biodiversity 3 3 3 4 2 15 offsets Mitigation banking PE 3 2 1 5 4 15 fund Conservation PPP 3 1 4 5 2 15 Blue conservation PPP 3 1 4 5 2 15 Conservation impact bond 2 2 3 5 3 15 Debt for nature swap 2 1 5 4 2 14 Source: Authors, see assessment criteria in Annex (Table 13). of nature-related investments—examples include investments. There is a need for concessional mitigation banking: Ecosystem Investment Partners; capital to invest in pipeline development through sustainable forestry: New Forests, Lyme Timber, business accelerators, especially in technology and Conservation Forestry; and pure private equity: that contributes directly to conservation and to Generation Investment Management, Vision Ridge monitoring and evaluation—for example, precision Fund, and KKR Impact Fund. As these companies agriculture and biotechnology. become more experienced in this sector, their funds under management are likely to increase. However, The use of pooled investment vehicles, which allow scale will be restricted by the pipeline of available for the aggregation of projects and investors, is Mobilizing Private Finance for Nature 89 also key for mainstreaming these investments. As have been geared mostly toward mobilizing noted, private equity funds are establishing a track climate finance, many could be similarly applied record. Some pooled debt vehicles have been to biodiversity investments. New instruments can raised, which include securitization of a portfolio also help attract institutional investment to markets of conservation properties by The Conservation where it has not traditionally flowed, as green Fund, and the Iroquois Valley Farms Real Estate bonds have demonstrated.71 Investment Trust (REIT).70 Issuance of private debt for green infrastructure and sustainable agriculture The use of blended finance can catalyze new is highly scalable and replicable because these business models and investment vehicles. opportunities present credible collaterals and According to Convergence, the leading network sources of cashflow. These pooled vehicles are on the subject, blended finance is the use of critical to expanding the investor universe for catalytic capital from public or philanthropic conservation finance. Most investments are sources to increase private sector investment in relatively small, and have a high level of risk. sustainable development. It can take different However, once properly aggregated, diversified forms, such as technical assistance to a recipient of and packaged, they may be an efficient and a private investment; concessional finance such as relatively safe way for investors to gain exposure a low interest loan provided in parallel to a private to the sector. investment; or a guarantee on an investment or an entire portfolio of investments. In the biodiversity Supporting implementation: finance space, blended finance can play two critical roles: (i) it allows for the exploration and the role of multilateral proof of new business models and the expansion development banks of successful ones to new sectors and geographies; and (ii) it allows new investment vehicles focused Multilateral Development Banks (MDBs) have a on conservation finance to be raised and deployed. key role to play in mobilizing solutions for public An example of the first role is the $8.25 million sector and private sector action, and in creating GEF grant that was provided to the Coalition new mechanisms for biodiversity financing. Policy on Private Investment in Conservation to allow makers and development financial institutions for the development of new business models in are in a position to work closely with investors conservation.72 This money will allow businesses to to develop financial mechanisms which can develop proof of concepts that make them more both fill the biodiversity financing gap and meet investable. An example of the second, in which institutional investors’ risk and return needs. a cornerstone investor provides catalytic capital, Innovative financial tools and approaches are being is the AGRI3 Fund, seeded by the Netherlands developed to allow institutional investors to take and Rabobank. AGRI3 aims to de-risk loans to advantage of investment opportunities with social farmers to fund their transition to sustainable and environmental impacts. The new instruments and deforestation-free agricultural practices. The aim to reduce risk, blend public and private fund is a blended finance vehicle which aims to finance, and facilitate investment across a project’s unlock $1 billion in capital to help the agricultural life cycle. They include concessionary finance, loan sector over the financial hurdle associated with guarantees, policy insurance, foreign exchange transitioning. The fund sees a market opportunity liquidity facilities, pledge funds, and subordinated in partnering with small—and medium-sized equity. While new tools and blending approaches producers, aggregated in cooperatives or through 70  Before changing its structure into a REIT, Iroquois Valley Farm was issuing private debt backed by portfolios of farms that were converted to organic agricultural production, allowing investors to support the transition of farms from traditional practices to organic certification in the United States. 71  Convergence. 2020. Blended Finance. Accessed on May 19, 2020. Available at: https://www.convergence.finance/blended- finance 72  GEF. 2019. CPIC Conservation Finance Initiative—Scaling up and Demonstrating the Value of Blended Finance in Conservation. Accessed on: May 19, 2020. Available at: https://www.thegef.org/project/cpic-conservation-finance-initiative-scaling-and- demonstrating-value-blended-finance 90 Mobilizing Private Finance for Nature BOX 22 Financing Mechanism 12: MDB/IFI Funds The ‘Eco.business Fund,’ initiated by Germany’s KfW Development Bank and Conservation International,i provides debt financing, channeling most funds into local financial institutions. Its objective is to promote business and consumption practices that contribute to biodiversity conservation and sustainable use of resources, and to mitigate the impacts of climate change across four priority sectors - agriculture, fisheries, forestry and tourism. The tiered structure allows the fund to tailor risk-return profiles for different investors. Public investors tend to take on more risk and lower returns, which in turn attracts private investment.ii Another similar fund, the ‘Legacy Landscapes Fund,’iii draws in philanthropic and other donor funds to support landscapes of high biodiversity value in developing countries, which currently receive only 13 percent of global biodiversity conservation investment. Characteristics of the fund that make it highly attractive to donors include: an independent structure that is not managed by a public entity; a lean management style that outsources non-core functions; the possibility of earmarking funding; and the possibility for donations to be tax-deductible. In addition to capital, the fund also provides technical assistance to address low capacity and to ensure that it can operate in a sub-optimal policy environment. The structure is well suited for supporting projects that depend on public support.iv i. With financial support from the German Federal Ministry for Economic Cooperation and Development (BMZ) and the European Commission. ii. Eco.business Fund. 2020. Accessed on May 19, 2020. Available at: https://www.ecobusiness.fund/en/ iii. Supported by the Federal Ministry for Economic Cooperation and Development (BMZ), KfW Development Bank, Agence Française de Développement (AFD), Campaign for Nature (CfN), Frankfurt Zoological Society (FZS), the International Union for Conservation of Nature (IUCN), the UNESCO World Heritage Center, and the Worldwide Fund for Nature (WWF). iv. The Legacy Landscapes Fund. 2020. Accessed on May 19, 2020. Available at: https://legacylandscapes.org/ contract farming schemes together with merchant been $5.5 billion and $565 million,73 per year, companies. (Rabobank, 2020). respectively, between 2015 and 2017 (OECD, 2020a). However, tracking tools are far from MDBs and donor organizations can also step up, exhaustive, and tend to capture only the tip of target, and innovate in their own approach to the iceberg of biodiversity finance, focusing providing finance for biodiversity conservation. on expenditures that directly contribute to The Green Swan report (Bolton et al., 2020) notes conservation, and missing the broader efforts to various proposals for how IFIs can step up their green standard investments. To harness the two role in supporting the climate agenda. This logic levers of resources mobilization—financing green applies—by extension—to the biodiversity and and greening finance—donors and multilateral ecosystem services agenda, given the possibility institutions (see also Table 8) can reprioritize how of systemic risks implicit in nature’s degradation these ODA funds are granted and utilized: and loss. Many multilateral and bilateral donor countries currently channel grants to biodiversity- • Firstly, donor countries can support in- rich countries to carry out programs for the country enabling conditions and the policy protection of biodiversity. The OECD Creditor environment—including regulatory, fiscal, Reporting System estimates bilateral and financial, and trade—to unlock the other multilateral flows of biodiversity finance (ODA mechanisms in the report. This process starts and other non-concessional outflows) to have with support for national planning strategies, 73  These are OECD’s mid-range estimates, which count 100 percent of principal flows (Rio marker 2) and 40 percent of significant flows (Rio marker 1) (OECD 2020a). Mobilizing Private Finance for Nature 91 Table 8. Activities through which MDBs Can Help Develop Supportive Enabling Environments Planning Create knowledge of the importance of ecosystem services in poverty reduction and shared prosperity Develop growth scenarios integrating ecosystem services Support whole-of-government NBSAPs that include a role for the private sector Policy advice Provide sector policy advice on removing harming subsidies/putting in place right incentives (tax, etc.) Advise on supportive sector policies (greening supply chains, etc.) Provide advice and TA on developing innovative approaches to cashflow monetization for biodiversity projects/nature-based solutions Provide support for devising national biodiversity investment plans Help countries develop plans for greening financial systems Support countries in developing economic recovery packages that incorporate short-term biodiversity opportunities and contribute to the avoidance of future risks Data, measurement, and standards Support countries in producing Natural Capital Accounts Provide comparable international data Work with standard setters to ensure biodiversity included in taxonomies, product labels, etc., in a harmonized way Greening the financial sector and risk assessment Build tools and capacity for financial sector regulators to incorporate bio risk into their own regulatory and supervisory oversight and risk assessments Build tools and capacity for financial sector firms (banks, insurance companies, institutional investors) to incorporate biodiversity into their own risk assessment and investment processes Incorporate biodiversity risk into FSAP analysis including the development of roadmaps for the especially in the agriculture, infrastructure, financial sector. extractives, and urban sectors. Again, MDBs’ • Secondly, donors could promote better experience integrating climate change criteria alignment and synergies between the into their decision-making processes provides a biodiversity and ecosystem services agenda useful example of this. and the climate change agenda, including both • Finally, MDBs are in a position to lead the private mitigation and adaptation. Conservation and finance sector by developing transparent nature-based solutions should go hand in hand, accountability and reporting standards for and each dollar should be optimized to achieve biodiversity protection, including the promotion dual benefits. of the rigorous, universal application of IFC • Thirdly, MDBs could improve the mainstreaming Performance Standard 6, requiring the use of of biodiversity across their lending portfolios, the mitigation hierarchy (see Box 22). 92 Mobilizing Private Finance for Nature Rhino in Amboseli national park Kenya: © Volodymyr Burdiak/Shutterstock Chapter 5 Conclusion A lthough awareness of the importance Climate Action and Finance, has said: “Amazon is of biodiversity and nature conservation one of the world’s most valuable companies, yet is growing, market failures and policy the Amazon region appears on no ledger until it is failures mean that it is proving difficult to translate stripped of its foliage, and converted to farmland. this awareness into action. Awareness of the The price of everything is becoming the value of importance of biodiversity and nature, and the everything. This crisis (COVID-19) could help reverse material risks to the real and financial sectors which that relationship, so that public values help shape degradation poses is increasing—not least due to private value. More fundamentally, the traditional the 2020 COVID-19 pandemic. Failure to account drivers of value have been shaken, new ones will for the social and environmental externalities gain prominence, and there’s a possibility that the associated with biodiversity loss has resulted in the gulf between what markets value and what people underpricing of biodiversity risk and poorly-informed value will close” (Carney, 2020). As the IMF has investment and policy decisions. Biodiversity and asked, “Can you put a price on a whale?” (Chami et the many ecosystem services it supports are public al., 2019)?75 The answer is not just yes, but that we goods whose true value is not reflected in economic must. Figure 18 shows some of the ways in which transactions. At the same time, the overexploitation the IMF has determined whales provide economic of nature is often the result of policy choices in the value. While it is impossible to quantify the full presence of competing development needs, which value of a whale, the estimated economic value can in turn create vested interests that can make change influence investment in species protection, which more difficult. can allow the full value of the whale to be realized by humans and the biosphere. Additionally, while Simply put, nature has value, but not a price.74 it is not possible to put a price on the majority of Mark Carney, the former Governor of the Bank species, identifying the economic value of some of England and United Nations Special Envoy for species will help protect others in their ecosystems. 74  “When people talk about natural capital not being assigned a value, it’s not true. We have put a price on nature. And that price is zero,” Ed Barbier, Colorado State University (Avery, 2019a). 75  This analysis has estimated the value of a single great whale at more than $2 million—which comes to more than $1 trillion for the current stock of great whales (Chami, 2019). 94 Mobilizing Private Finance for Nature Figure 18. The Value of a Whale Phytoplankton productivity, $ $ $$ Fishing industry estimated $ $ $ at over $150 billion. Whales which is enhanced by $ $ ale w orth? contribute to the food whales, captures 37 billion How much is one w h $ $$ $ web chain and increased $ $ $ tons of CO2 per year. $ $ $ $ $ $ $$ $$ $ $ $ $$ $$ $$ $ $ $ $ $ $ $ $ $ $ $$ $ $$ $ $ $ $$ $$$$$ $$$ $$ $$ $ $ $ $ $ Each whale sequesters 33 $ $$ $ $ tons of CO2, on average, $ $ when it dies and sinks to Whale watching $ $ industry estimated at $$ $ $$ over $2 billion globally. $ $ $$ $ $ $ $ $ $$ $ $ $ $ $ $$ $$$ $ $ $$ $ $$ $ $ $ $ © GRID-Arendal 2019 Source: Chami et al., 2019. IMF. A supportive enabling environment needs to be existing fossil fuels.76 High profile networks of put in place before the finance needed to meet regulators, alongside private sector initiatives, biodiversity goals will flow. Much still needs have begun to mainstream climate risk analysis to be done to create an environment that will into corporate reporting and financial sector risk enable stakeholders to tap into a broader range analysis. Global commitments and measurable of financial sources, which will be needed to meet targets have provided an overall framework for the biodiversity and nature conservation goals. this. There are important similarities between Until policies are aligned and economic incentives climate and biodiversity risk. Among these are redirected for positive, rather than negative impact, the fact that they are both systemic risks requiring market failures will not be resolved. management or mitigation using analytical tools and policy instruments. Thus, the biodiversity Lessons on how to tackle this problem have financing space can harness lessons already been drawn from the climate sector. As CPIC’s learnt in the climate sector. It is also increasingly Fabian Huwyler has said: “We’re just not going recognized that these risks are linked, and that to be able to save our natural resources by biodiversity and nature losses need to be tackled taking small incremental steps. Just ‘doing a little in a complementary manner alongside climate risk, better’ is not going to be enough. We have to rather than competing with it for investment and crack natural capital valuations and build them other resources. into the entire market” (Avery, 2019b). Climate finance has benefited from substantial sums of Yet there are also important differences between dedicated concessional finance, which has helped biodiversity financing and climate financing— to scale renewable energy technologies and allow which will mean that a different approach and them to compete with, and increasingly replace, emphasis will be required. With climate finance, 76  According to Bloomberg New Energy Finance, “more than two-thirds of the global population today live in countries where solar or wind, if not both, are the cheapest source of new electricity generation. Just five years ago, coal and gas dominated that picture. By 2030, new wind and solar ultimately get cheaper than running existing coal or gas plants almost everywhere” (BNEF, 2019). Mobilizing Private Finance for Nature 95 much progress has been made through ‘financing seen as free or a public good is challenging. green’, i.e., investment opportunities, particularly However, awareness of the risks of biodiversity loss in renewable energy. Subsidies have been used is rising fast and is increasingly being recognized to support new technologies, with new industries as financially material. Introducing incentives for now operating viably and able to compete with biodiversity conservation into existing business fossil fuel production in many cases. Incorporating models, including by greening supply chains, is climate risk into financial balance sheets—i.e., likely to have the biggest impact. ‘greening finance’—has been slower, but now has momentum, for example through reporting This report highlights ‘Big Five’ ideas which have initiatives such as TCFD and the stranded asset the potential to have the impact to meet the debate. It can be argued that biodiversity urgent challenges of biodiversity loss. Among financing will take the opposite route. Financing the many policy ideas presented in this paper, and biodiversity projects at scale is difficult because innovative financing approaches showcased, the of their very nature—being localized and small ‘Big Five’ key initiatives, listed below in Table 9, in scale, with many lacking revenue or cashflows could act as important catalysts to scale finance for which can be monetized. And as noted, putting biodiversity and ecosystem services. a price on something which has previously been Table 9. Five Big Ideas to Mobilize Private Finance for Biodiversity 1. Environmental Fiscal Reforms (EFR) Governments could include EFR as part of crisis recovery plans. The current design of stimulus plans opens a potential ‘reform window’ in which to tackle these difficult issues. Reforming agricultural subsidies and land ownership has the largest potential impact of the recommendations in this paper, and can be complemented with investment in social, development, and job creation programs. Governments/regulators Real sector Financial sector • Develop subsidy reform • Engage with governments • Develop and deploy funds policies on sector subsidy transition and financial instruments that • Develop land ownership and reform drive transition in the real sector, reform policies • Support smallholder farmers including through sustainability in transitioning to sustainable linked instruments and • Develop green stimulus and regenerative practices aggregation of projects plans through TA and aggregation • Invest in and support biodiversity credits 2. National Data Provision and Planning Governments can support the integration of biodiversity criteria in financial sector decision making by adopting natural capital accounting (NCA) practices and providing relevant data as a public good. Governments can also mobilize private investment for biodiversity by including a role for the private sector in their National Biodiversity Strategies and Action Plans (NBSAPs). Governments/regulators Real sector Financial sector • Adopt NCA practices • Utilize public NCA data • Incorporate NCA data into risk • Develop NBSAPs that and adopt corporate NCA analysis include a role for the practices: integrating data into • Engage with governments private sector project planning, operations, and the real sector on NBSAP and investment decisions financing • Align planning and investment with NBSAPs 96 Mobilizing Private Finance for Nature Table 11. Continued 3. Establishment of TNFD The initiative to establish a Taskforce for Nature-related Financial Disclosure (TNFD) can be supported by both private and public sector stakeholders. The initiative, which can be built on or be part of the TCFD, will provide a framework and guidance for regulating and supporting biodiversity reporting and risk assessment by real and financial sector firms. A TNFD framework can help avoid excessive additional requirements for real and financial sector firms and fragmentation of reporting standards. Governments/regulators Real sector Financial sector • Require regulatory • Provide multi- • Develop and adopt assessment of systemic risk stakeholder support for TNFD risk assessment and • Require regulatory the development of TNFD reporting framework at reporting requirements for framework portfolio level biodiversity risk • Adopt TNFD risk • Standardize project level assessment and reporting risk assessment framework • Adopt biodiversity • Integrate biodiversity investment taxonomy and reporting alongside climate standards for biodiversity reporting financial instruments 4. Establishment of a ‘Nature Action 100’ Investors could come together to identify the top 100 companies with the greatest negative impact on nature, and establish an equivalent of the ‘Climate 100’, to drive changes in real sector corporate behavior—including greening of supply chains. • Develop industry • Commit to industry • Engage with investee standards for greening standards companies to encourage supply chains • Work with suppliers to commitment to industry • Regulate and enforce green supply chains standards environmental protection • Set corporate biodiversity • Develop financial goals instruments aligned with industry standards/impact • Adopt NCA practices measures 5. Providing catalytic capital MDBs and governments can mobilize private investment for biodiversity goals by serving as cornerstone investors and providing catalytic capital to funds and other financial instruments that aggregate projects. Governments/regulators Real sector Financial sector • Use concessional finance • Provide market access • Adopt standard measures for aggregated instruments • Build capacity on business of impact • Provide technical model • Standardize investment assistance • Standardize practices products • Promote standardized across projects • Develop aggregation measures of impact • Aggregate projects financial instruments • Identify the asset that generates value (PPP) • Align land management rights with green growth Mobilizing Private Finance for Nature 97 Annex Table 10. Summary of Recommendations by Stakeholder Group Summary of Recommendations Governments Private sector MDBs Levelling the playing field via real Risk management and financial Supporting implementation sector policies instruments Standards and regulations Incorporating risks 1. Developing new 1. Land planning and governance 1. Standards instruments reform 2. Scenario analysis 2. Blended finance 2. Pollution standards 3. Engagement 3. Strategic application of 3. Mandatory standardized Developing investment opportu- ODA funds environmental impact nities 4. Alignment between the assessments that integrate 4. Application of new conservation agenda and biodiversity criteria instruments—scale, the nature-based climate 4. Biodiversity offsets regulation replication, and aggregation solutions agenda and best practice guidance 5. Sequencing of instruments 5. Mainstreaming biodiversity 5. Voluntary sustainable 6. Private equity and pipeline across lending portfolios certification and supply chain development 6. Develop transparent transparency 7. Strategic allocation of capital accountability and 6. Biodiversity friendly through public equity reporting standards for procurement practices 8. Development of biodiversity biodiversity protection 7. Strengthen regulation funds, ETFs, and indices 7. Support governments protecting high biodiversity 9. Labeled bonds in developing enabling areas and ecosystems 10. Labeled loans environments supporting endangered, 11. Pooled debt vehicles 8. Acting as cornerstone endemic, migratory species 12. Carbon and biodiversity investors in funds and 8. Strengthen regulations offset markets other instruments that protecting biodiversity and 13. Incorporating biodiversity aggregate projects and ecosystems with significant criteria into investment scale investment vehicles economic value processes Subsidy and tax reform 14. Blended finance and risk 9. Environmental fiscal reform mitigants 98 Mobilizing Private Finance for Nature Table 10. Continued Summary of Recommendations Governments Private sector MDBs Greening the financial sector Financial sector policy frameworks and biodiversity strategies 1. Green financial sector roadmaps 2. NBSAPs Data and accounting 3. Natural Capital Accounting 4. Planetary health metrics and contextual reporting 5. Technology for data Regulation and supervision 6. Taxonomies 7. Labeling 8. Supervisory risk assessment 9. Disclosure 10. Solvency and capital regulations Developing investment opportunities 11. Serve as cornerstone investor by providing catalytic capital to funds and other financial instruments that aggregate projects Foundation for success Enforceability, resources, and capacity Transparency and capacity Innovation and global coordination Mobilizing Private Finance for Nature 99 Table 11. Criteria for Assessing Biodiversity Finance Instruments and Models Criteria for Assessing Biodiversity Finance Instruments and Models (list of instruments and models in Table 7) Replicable Question: Can an identical project structure be used for other projects in different geographies or countries? Criteria: • Does the project require specific ecological or geographical conditions? (such as charismatic species or large cities downstream of project) • Does the project require specific community-related conditions? (such as community governance structure, recognition of indigenous people rights, or the devolution of land rights to communities to create conservancies) • Does the project require specific regulations, access to data or to technical capacity beyond the usual? • Does the project require specific funding conditions? (such as the fact that green infrastructure financing usually involves municipal bonds) Scalable Question: Can the same project structure be used to include more land, companies, or stakeholders? Criteria: • Do companies involved in the project manage, either directly or indirectly, large expanses of land that are subject to the same threat/opportunity? • Is it feasible to aggregate smaller companies or communities under a single umbrella with standardized standards and operations? Appropriate for developing countries Question: Can the project structure be transferred to or between developing countries with lower levels of govern- ance, regulation, technical capacity, and internal investment capacity? Criteria: • Does the project require specific regulations, governance/enforcement capabilities, access to data or to technical capacity beyond the reach of most developing countries? • Does the project require specific funding conditions beyond the reach of developing countries? Potential biodiversity impact Question: Can the project generate a large ecological uplift when compared to a business-as-usual scenario? Criteria: • Is the project potentially taking place in, in the near vicinity of, or connected to areas with medium or high biodiversity value? (urban forests and urban green infrastructure may not, unless the improved water quality benefits downstream ecosystems) • Will the project reduce an existing or expected threat either directly (by stopping poaching in a protected area or logging of a primary forest) or indirectly (by creating a buffer for a protected area) beyond the business-as-usual scenario? • Will it restore an impacted ecosystem beyond the business-as-usual scenario? • Is the positive impact expected to be durable because of the long-term governance and funding created by the project, in particular to the benefit of local communities? 100 Mobilizing Private Finance for Nature Table 11. Continued Criteria for Assessing Biodiversity Finance Instruments and Models (list of instruments and models in Table 7) Potential to attract capital Question: Can the project attract large amounts of capital, in particular institutional capital? Criteria: • Would the cash flows generated by the project support commercial returns given the level of risk? • Would the scale of the opportunity allow the raising of multiple investment vehicles that can give exposure to the project type to institutional investors? Is the opportunity expected to remain for long enough to incentivize investment? • Is the current investment infrastructure able to easily shift to access this new opportunity? (For example TIMOs going to sustainable TIMOs and carbon is a simpler shift that finding a private equity group in the blue economy.) • Is the investment structure similar enough to existing asset classes that investors and their advisors may agree to overlook the novelty? (Green infrastructures may look a lot like municipal infrastructure for example. 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