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Editor’s note: This feature forms part of edie’s dedicated Countdown to COP28 editorial campaign. Find out more by clicking here.
The UN estimates a $4.1trn nature finance gap between 2021 and 2050, despite nature underpinning the global economy and posing significant financial risks. An oft-quoted statistic from PwC is that more than half (55%) of the global economy is dependent on nature.
“I would argue that nature finance has actually increased at a pace that is faster than climate finance, but it started later,” says Helen Avery, director of Nature Programmes and GFI Hive within the Green Finance Institute (GFI).
Helen explains that the scaling of climate finance has been influenced by the clarity and well-defined international goal of carbon reduction, in the Paris Agreement. This level of focus has long been absent from the realm of nature.
“However, it is quite incredible that the Taskforce on Nature-Related Financial Disclosures (TNFD), which was a glint in the eye of Andrew Mitchell, the vice-chair of the Taskforce, back in 2019, is now a fully formed framework in just four years. So, I would argue that we’ve moved really quick on nature,” Avery adds.
September 2023 saw the TNFD releasing its long-awaited finalised recommendations after two years of design and development.
These recommendations are aimed at addressing the ecological impact of the industrial sector by promoting thorough reporting on the environmental footprint of businesses and the effective integration of nature-related factors into their strategies using science-based targets.
So, how will the TNFD shape the flow of nature finance?
“We use nature every day. We use its services every day and we have never really paid for them. There hasn’t been a structure within our economic or financial systems that has enable us to really value and pay for the services that nature provides,” says Helen Crowley, the managing director at Pollination, a global climate and nature advisory and investment firm.
She explains that over the past two decades, a framework has been established for carbon and climate finance, encompassing carbon markets, both voluntary and mandatory credit systems, as well as offsetting. This involved the development of policies and regulatory structures to facilitate the flow of financial resources.
“Finance doesn’t move easily. There are rules that come with it. So those rules haven’t been really created for nature,” Helen adds.
Nevertheless, Helen highlights that the TNFD, in essence, establishes a framework for businesses to identify their priorities regarding nature. This, in turn, fosters the development of knowledge and a better understanding of key investment opportunities. The hope is that TNFD will raise awareness about these opportunities, ultimately paving the way for funding to be directed to nature and nature-based solutions.
Challenges with TNFD
It bears noting that adoption of the TNFD will be voluntary at first. More than 190 nations have, however, committed to mandate corporate nature disclosures by 2030 through the UN’s biodiversity treaty.
“The TNFD is the path, but if companies don’t report on it and if they’re not mandated to report, they may not report. Then you can’t move along that trajectory,” says Avery.
She elucidates that it has become a bit of a chicken-and-egg situation where both the government and businesses are hesitant to make the first move. Governments want to see businesses willingly adopt the framework before making it mandatory, while businesses are waiting for governments to officially endorse the mandate, which would provide them with clear policies for their investments.
“If governments were to announce their ambition to mandate the TNFD at some point with a glide path that alone would send a signal to companies that to not wait, but to be early adopters,” Helen adds.
Accelerating nature finance through collaboration
In addition to the need for an official government endorsement of disclosure frameworks, the private sector also requires assurance in the nature credits market, which can be achieved through the establishment of government-sanctioned standards for this market, argues Avery.
Nature markets revolve around the exchange of environmental credits, which include carbon credits, biodiversity units, nutrient credits, and compensation for natural flood management.
These credits originate from nature-based solutions. Done well, these projects are capable of providing numerous advantages for both society and the environment, while also creating new income opportunities for rural communities and those involved in agriculture.
Nonetheless, the absence of comprehensive regulations overseeing these emerging markets risks leading to a situation reminiscent of the unregulated “Wild West,” where subpar or ineffective initiatives could proliferate, allowing certain industries or companies to engage in deceptive greenwashing practice.
Recently, a partnership of green groups collectively unveiled a set of principles aimed at enhancing the integrity and effectiveness of nature markets linked to carbon and nature credits, underscoring the need for official standards in the credits market.
Avery says: “Corporates need to have confidence in what they’re buying because they don’t want to be perceived greenwashing. It is important to have the Government’s stamp of approval on standards and verifiers so that there is a level of confidence.”
As the nascent market for biodiversity credits and other nature-based investment opportunities continues to expand, studies suggest that investors could increasingly view nature as a distinct asset class.
Nature as its own asset class
Last month, Pollination released the results of a survey of 557 institutional investors globally. More than half of them oversee assets exceeding $100bn.
Two-thirds of these investors have intentions to boost their investments in nature, while three-quarters of these investors believe that nature-related investments will transform into a distinct asset class, either wholly or in part.
Within nature, Avery explains, the investment opportunities vary across different asset classes, with some being more developed than others. Currently, public equity offers limited chances for nature-focused investments, primarily due to the scarcity of companies embracing a nature-positive path.
On the other hand, private equity presents more opportunities, such as investments in marine technology benefiting coral reefs and alternative proteins reducing fishing pressure. Private debt is also gaining popularity, with loans supporting projects repayable through carbon markets. Real assets, like land transitioning from forestry to sustainable forestry or agriculture to regenerative agriculture, are emerging as a novel asset class.
However, investors’ preferences differ. Philanthropic investors in the UK generally seek low-interest loans, while institutional investors, dealing with larger capital allocations, often require substantial, landscape-scale projects, possibly involving blended finance.
“Would I say so nature is an asset class in its own right? Not really. But there are opportunities within different asset classes,” summarises Avery.
Nevertheless, it is evident that the motion to bridge the nature finance gap is well underway.
Crowley explains that despite dedicating half a century to comprehending nature and ecosystem services, it’s only in the past three to five years that the world has begun to truly appreciate their tangible value – even if natural capital accounting methods still remain rare within governments and corporates.
This shift is driven by increased knowledge and improved measurement techniques. Simultaneously, the urgency of the situation has become evident as there’s a rapid loss of nature, and the sense of this loss is palpable among people.
“We are losing nature much faster, and people are feeling it. There’s no buffer in the system anymore,” says Helen.
According to WWF, global wildlife populations, on average, have experienced a 69% decline since 1970.
Hopefully, with the emergence of the new Global Biodiversity Framework and the recent launch of the TNFD, a transformative breakthrough in nature-focused finance is on the horizon.
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