- Noor Dewan
Greening the Treasury Through Biodiversity Financing
Biodiversity Finance, popularly known as BIOFIN, represents a strategic approach to channelling resources towards the conservation and sustainable use of Earth’s rich tapestry of life. As per the World Economic Forum, over 50% of the global economy is significantly dependent on nature. Essentially, every sector that creates economic value is, to some extent, reliant on the natural environment. Biodiversity Finance was established because the world realized that business could not continue as usual owing to morbid statistics of endangered species, such as 30-50% of all species may be lost by mid-century. Later, international organizations recognized the historical effectiveness of incentivizing human actions to produce positive outcomes.
Far beyond a simple financial transaction, Biodiversity Finance (BIOFIN) encapsulates a holistic commitment within the notions of law, business, and finance. This innovative framework acknowledges that preserving biodiversity is not just ethically imperative but also a sound investment in our collective future that will unlock sustainable economic opportunities.
The United Nations Development (UNDP) and European Commission pioneered BIOFIN to appropriate funds for biodiversity goals. Ten years ago, the organizations introduced BIOFIN at the Convention on Biodiversity’s Eleventh Meeting of the Conference of Parties (COP 11). Through the years many other international organizations have followed suit by introducing new concepts to aid the goals of BIOFIN, such as the Biodiversity Credit Markets and Natural Asset Companies.
Kunming-Montreal Global Biodiversity Framework
An important step for the Convention on Biodiversity was the Post-2020 Kunming-Montreal Global Biodiversity Framework (“KM-GBF”). Its success is essential to counteract biodiversity loss, emphasizing the urgency of mitigating the challenges of promoting biodiversity through financial incentives. However, this policy, which came under the Fifteenth Meeting of the Conference of Parties (“COP 15”) and the Sixteenth Meeting of the Conference of Parties (“COP 16”) treaties, introduces its own set of challenges. For instance, the 30% target for high-seas protection faces challenges in enforcement, particularly due to the lack of mechanisms and funding for monitoring in areas beyond national jurisdiction. Moreover, the KM-GBF faced challenges during its creation, resulting in the omission of crucial elements and terms, such as the explicit mention of debt, milestones for targets, and the Bioclimatic Ecosystem Resilience Index. An additional point of concern is the lack of a comprehensive glossary, leading to potential misinterpretations of targets, especially terms like “Zero Net Loss” and “Net Gain.”. The removal of horizon scanning for potential technology impacts and weakened precautionary approaches further raises concerns about effective implementation. Overall, the KM-GBF’s success depends on interpretation, enactment, and independent actions by countries and sectors.
Challenges Beyond KM-GBF
Looking beyond the boundaries of KM-GBF example, it can be noted that the BIOFIN concept is still in its early developmental phase as evidenced by a lack of quantifiable biodiversity data, governmental support, and general clarity.
Firstly, quantifying biodiversity proves challenging which, in turn, creates difficulty for potential investors to calculate returns. With over 3,000 varying metrics in use, comparing biodiversity projects is complex, hindering accurate financial assessments. According to fundamental finance decision-making theory, investors back assets promising profits, determined by costs, revenues, and risks. Shifting investments towards biodiversity-positive goals requires adapting these factors to penalize harmful ventures and incentivize protective or restorative ones. The challenges lie in the financial world’s inability to value costs caused by biodiversity destruction and, vice versa, benefits from revenues in biodiversity-positive projects, as well as to gauge risks associated with nature’s impacts and dependencies. Furthermore, scarce comprehensive data impedes the kind of rigorous analysis required. While evolving standards aim to address measurement issues, “there is an overall dearth of comprehensive, granular and up-to-date data, hindering rigorous analysis and forecasting.”
Secondly, many governments fail to domestically support the conservation and sustainable use of nature, despite the COP 15 deal strengthening international policy. Pervasive subsidies distort prices and encourage environmentally harmful activities, mirroring challenges in reforming fossil-fuel support. Ambiguity on subsidy definitions allows diverse interpretations, hindering reform. Governments must not only address harmful subsidies but also frame nature as an asset through policy, encouraging corporate integration. Additionally, they play a pivotal role in creating investment-friendly environments, especially in emerging economies.
Lastly, “nature positive” is an increasingly used term globally, portraying an ideal scenario where economic activities improve nature’s condition. Despite its popularity, the concept lacks clarity, being described as a movement and linked to a Global Goal for Nature. It aligns theoretically with goals like halting nature loss by 2030, but it's not explicitly mentioned in the CBD. Critics stress the need for adherence to global conventions and the importance of accountability, consensus, political support, and scientific coherence among stakeholders. However, the challenge lies in achieving clarity in basic concepts within the umbrella term of “biodiversity finance,” as unclear definitions hinder the establishment of responsibilities among involved parties.
Action Ahead
In order to expedite the prioritized shifts in capital flows, sustainable finance taxonomies have arisen as a mechanism to categorize economic activities that support environmental objectives. To sustain momentum in this positive trajectory, it is imperative that we:
Enforce rules to protect nature, empowering regulators to employ direct measures like bans or restrictions on harmful activities and technologies, or indirect tools like negative lists (such as the one being issued by Monitory Authority of Singapore) and heightened oversight for institutions engaging in high-risk environmental endeavors. A great example of this initiative would be China’s Central Bank’s policy to include green credits as collateral for central bank lending facilities. Moreover, we must back efforts to define “greenwashing” and “sustainable investment” to enhance credibility and address criticism.
Concentrate on gauging local biodiversity risks using standardized methodologies incorporating metrics like resilience, land conversion, and biodiversity richness. Measures such as including biodiversity within generic ESG disclosure policies and regulations, as well as mandatory environmental impact assessments could prove to be a significant addition. Similarly, a more comprehensive approach to solve the gaps would be urging central banks to include biodiversity risks in routine stress tests for all financial institutions. We must encourage public and multilateral financial bodies to set an example by aligning portfolios with the Global Biodiversity Framework. Proposing a broader mandate, following the Task Force on Nature-related Financial Disclosures (TNFD) guidelines, that requires companies to disclose biodiversity risks, ensuring they measure and report impacts on biodiversity loss.
Monetize biodiversity-positive investments through secondary benefits, especially in tandem with climate finance. As suggested by Christoph Nedopil in his publication titled ‘Integrating biodiversity into financial decision-making: Challenges and four principle’ that the “two most scalable examples for merit expansion due to recent regulatory progress: voluntary carbon markets utilizing ecosystem services and climate resilient infrastructure.”
Explore opportunities in voluntary carbon markets and climate-resilient infrastructure projects within existing green finance frameworks. A combinations of such ideas would be integrating concepts of “sponge cities” with a viable ecosystem construction of real-estate (green roofs), thus accelerating the urban “green” planning codes.
Boost global funding every year, emphasizing countries abundant in biodiversity or underdeveloped. This could be achieved through subsidy changes and policy creation, backed by developed nations and Development Finance Institutions (DFIs). “DFIs help establish a track record for investment, partner with banks and asset managers to co-finance projects, facilitate regulatory change needed for investment and develop a pipeline of bankable biodiversity projects.”
Introduce national rules ensuring wildlife trade without harming nature, aligning with global policies like those spelled out at the Convention on International Trade in Endangered Species of Wild Flora and Fauna (CITES).
Plan for a fair transition in the land sector, drawing insights from the experiences of the coal and industrial sectors.
Initiate inclusive forums for stakeholders to get involved in planning for the future. For example, it’s imperative to include representatives from family owned farms and indigenous communities.
Conclusion
In summary, this article highlights significant challenges and potential remedies in advancing BIOFIN, recognizing both program-specific hurdles within the KBGMF and generally for the BIOFIN industry. While acknowledging the profound implications of these challenges on international treaties, nations, and their populations, it is imperative to prioritize their resolution for the collective well-being of our global community.
Noor Dewan is a Corporation Law LL.M. candidate at NYU School of Law and a Graduate Editor for the NYU Journal of Law & Business. Prior to attending law school, Noor worked for AZB & Partners on the Energy team in Delhi. She completed her undergraduate studies in Business Administration and Law at Jindal Global Law School, with a focus on sustainable finance.