Isabelle Millat, Head of Sustainable Finance Global Markets & Barclays Europe
8 November 2024
We are almost halfway through the most important decade on the road to net zero, and while much attention has rightfully been placed on climate targets, the road to success is not possible without a focus on nature given the interdependent relationship between the two. The past two weeks saw global leaders descend on Cali, Colombia at the UN biodiversity summit, COP16, to bring this focus to the fore.
It has been two years since countries, globally, committed to take action to address the biodiversity crisis by adopting the Kunming-Montreal Global Biodiversity Framework (Framework) – a series of global targets to be achieved by 2030, together with 2050 goals, to halt and reverse biodiversity loss. COP16 sought to explore how best to agree practical ways to accelerate progress on this landmark agreement, with a particular focus on National Biodiversity Strategies and Action Plans (NBSAPs).
Fundamental to this is the need for effective and timely financing, and indeed it has been pulled out as a clear target in the Framework. The Framework details a specific target to mobilise at least $200bn a year by 2030 in domestic and international biodiversity-related funding, as part of the $700bn financing gap identified as being needed to support nature and biodiversity – but negotiations around finance targets were challenging and globally the gap is still nowhere near closing. Private finance is one important lever in closing the gap. However, mobilising such capital is not straightforward.
While there is growing understanding of the value of natural capital and its intrinsic link to combatting climate change, there is significant divergence between the perceived value and the level of funding directed to scaling nature-based solutions (NbS). The Green Finance Institute has reported that deterioration of the natural environment could slow economic growth, and in the UK alone result in an estimated 12% loss to GDP1 by the 2030s. This compares with the financial crisis which saw 5%2 being taken off the value of GDP in 2009, while the Covid-19 pandemic saw GDP decline by 9.7% in 20203.
And yet, nature is not receiving the private investment needed, let alone at the scale required. There are multiple factors restricting its effective deployment, which can be grouped into three interlinked themes; risk appetite, data, and regulatory and policy environment.
Nature is still emerging as an asset class; as such, understanding of its risk profile and consequent investor appetite is nascent. This challenge can start to be bridged through public-private collaborations. Such partnerships and collaborations across the capital stack can help leverage concessional finance, and bring more parties, who might otherwise be reluctant, to the table. Blended finance is a strong example of how this can work, particularly when it comes to risk appetite for investing in first of a kind projects. But, as with any asset class, NbS are nuanced and effective capital deployment will only work when incorporating local, ecological knowledge, which in turn requires the right expertise and resource on the ground to inform its use.
The role of innovative financing approaches was brought into discussions around risk mitigation and the role insurance can play in driving nature investment. To date, many projects have offered too low a return or too high a risk, or are often too small to achieve the scale needed. Parametric insurance, as well as premium financing models (loans to pay for premiums) and outcome-based bonds were explored as tools to drive progress, but one issue emerged loud and clear - the need to see real benefit and tangible impact for paying such a premium, and in turn how that could create demand for further nature preservation and restoration.
Underlying all of these conversations was the issue of data – the lack of a consistent approach or global agreement of which metrics to use to measure and track the state of nature speaks to the scale and complexity of the challenge. It is clear from the broad range of discussions that took place that countries are grappling with how best to map their commitments and be able to effectively compare, track and measure progress. Currently there is no set format for a NBSAP, yet having clarity on metrics and data points will be vital in helping countries and businesses to focus on sustainable practices and adopt biodiversity positive actions, and in turn provide private finance with clear guidance on investment priorities.
Ecosystems are not currently priced at an asset level (not least in part due to the lack of asset-level data available, as well as the absence of global agreement on the financial value that can be placed on nature), and this is a major challenge. Without high-quality, credible and transparent data it is nearly impossible to appropriately track progress, whether at the macro NBSAPs level, or at the individual project level. This consequently presents a challenging investment proposition for private finance.
A strong policy and regulatory environment will be an important tool in helping to define and put a price on nature, including regulatory drivers such as the UK’s Biodiversity Net Gain scheme. NBSAPs can provide a clarity of long-term vision and a specificity of targets, from which policy can be viewed and developed, with incentives for example, while simultaneously providing investor confidence in the market outlook and direction of travel.
The biodiversity crisis is too great to be solved in silos, but, as we saw during these past two weeks there is an opportunity and appetite for the financial services sector to work alongside government, NGOs and the real economy; it’s clear it will take a whole system, collaborative approach to explore viable ways in which to unlock and scale much needed capital, and ultimately it is this willingness to engage that will drive progress.
About the author
Isabelle joined Barclays in April 2024 to lead Global Markets’ sustainability proposition across all regions and is responsible for the development of the overall sustainable finance franchise for Barclays Europe, contributing to Barclays’ goal of facilitating $1tn of Sustainable and Transition Financing by 2030.
Footnotes:
- https://www.greenfinanceinstitute.com/insights/assessing-the-materiality-of-nature-related-financial-risks-for-the-uk/
- https://www.parliament.uk/globalassets/documents/commons/lib/research/key_issues/key-issues-recession-and-recovery.pdf
- https://commonslibrary.parliament.uk/research-briefings/cbp-8866/
- https://www.worldbank.org/en/news/feature/2021/09/16/what-you-need-to-know-about-concessional-finance-for-climate-action