Stockholm (NordSIP) – The annual global biodiversity financing gap is estimated to be $700 billion. This is the shortfall of what is needed to fulfil the goals of the Kunming-Montreal Global Biodiversity Framework (GBF) that was agreed at COP15 in December 2022. As international delegates gather in Cali, Colombia for COP16, nature finance is expected to dominate the agenda. With the challenge of mobilising private sector capital to help close the nature finance gap in mind, the Cambridge Institute for Sustainability Leadership (CISL) published the results of a new investigation into the matter on 15 October 2024. Scaling Finance for Nature: Barrier Breakdown is the result of a collaboration between the CISL’s Centre for Sustainable Finance, the Capitals Coalition, the UN Environment Programme World Conservation Monitoring Centre (UNEP-WCMC), natural capital accounting firm the IDEEA Group, and the Tecnalia research group.
According to the authors of the report, the private sector should consider the relatively large amounts needed to support the GBF against a backdrop of a far greater risk to their respective value chains represented by a partial collapse in ecosystem services. The latter could potentially cause a $2.7 trillion hit to global GDP by 2030. As a positive counterpoint, the report also aims to highlight the investment opportunities that should arise from innovations in nature restoration and conservation.
Investors wary of perceived pitfalls of natural capital
In researching the underlying causes of the nature finance gap, the CISL interviewed banks, asset managers, and insurance companies from its Banking Environment Initiative, Investment Leaders Group, and insurance-focused ClimateWise panel. The respondents pointed to a lack of in-house nature and biodiversity knowledge within the financial sector, as well as a general perception of high levels of investment risk and an obscure regulatory environment. Those firms that were ready to act highlighted the difficulties in accurately measuring the relevant exposures and impacts. According to the CISL, the peer group consensus was a perception that nature finance consists of low-return conservation projects considered more suitable to philanthropy than private, large scale commercial capital.
Victoria Leggett, a member of the CISL project’s Nature-related Finance Steering Group and Equity Fund Manager and Head of Impact Development at Union Bancaire Privée explains: “There’s a perception that nature finance is restricted to the realm of conservation projects with low returns and low scalability. This report seeks to broaden the definition of nature finance, to include ‘halting’ nature loss (reducing existing pressures) alongside conservation efforts. Seen through this lens, nature finance becomes a term that can penetrate mainstream finance, across a range of asset classes and returns expectations. This gap – in both perception and financial flows, must be closed to achieve our ultimate aim of a nature positive economy.”
Investor support framework under contruction
Some of the practical reporting-related concerns expressed by the participants are being addressed by the A-Track project, which along with this latest CISL study has been funded by the European Union, UK, and Swiss governments. The A-Track project is run by the Capitals Coalition and aims to provide market participants with a one-stop-shop platform to access the most up-to-date guidance, metrics, and tools to support their efforts to integrate natural capital and biodiversity information within their investment processes.
The CISL report seeks to encourage institutional investors to build on the established Mitigation Hierarchy technique of avoidance, minimisation, restoration, and offsetting as a basis for moving towards nature-positive investing by 2030, based on a 2020 baseline. The investors’ stated concerns over the viability of nature investing are also addressed in the report, which provides examples of successful monetisation mechanisms applied to natural capital. These include ecotourism, higher-margin eco-certified products, and biodiversity credits. However, the CISL further advocates for the creation of a broader range of investable instruments, with use-of-proceeds based green bonds insufficient to satisfy demand and cover all nature finance needs. There has been some progress from the investment management community in creating new natural capital-themed funds and other sustainability-linked instruments, but scalability remains a problem. The report concludes with a stark call to urgent action from all market participants.
CISL Director Dr Nina Seega said: “The central message of this scene-setting report is that the whole finance sector can play a meaningful role in addressing the nature crisis already today. Well-established financial mechanisms can be used to redirect private capital away from harmful activities and towards those that restore and conserve nature. Nature positive finance is more than impact investing, it includes reducing pressure on nature through mainstream finance.”