Valuing nature after COP 15: systems, policy, action

Key takeaways

• Policy and regulatory action in line with the goals defined by the global biodiversity framework (GBF) achieved at COP 15 is required to give the financials and corporate sectors an economic reason to act in support of the GBF’s objectives.
• Nature is essential to the global economy but, currently, it isn’t valued in our accounting systems, and companies aren’t disclosing their dependencies and impact on nature.
• Today, both public and private asset classes offer vehicles for nature-positive investment, but regulation, valuation, and disclosure systems must be operable for these investments to scale significantly enough to meet the GBF-identified financial gap.

The GBF agreed on last December as the culmination of the UN Biodiversity Conference represents a critical landmark for sustainability. It did nothing less than galvanize the will of 196 nations to participate in the global effort to halt and reverse potentially catastrophic anthropogenic biodiversity loss on Earth. A key challenge now is for these governments to design regulatory and legal frameworks consistent with the GBF that can promote more accurate valuations of nature, thereby rewarding investments in nature and discouraging actions that damage it. We explore the next crucial steps forward, which we see involving governments moving quickly to define detailed policies using the guidance and objectives of the GBF, which will then help scale sustainable investment.

The GBF includes key financial targets

Among the 4 goals and 23 targets articulated by the Kunming-Montreal GBF at COP 15, the fourth goal focuses on ensuring the accessibility to the means of implementing the GBF, while target 19 specifically focuses on the mobilization of US$200 billion annually by 2030 from public and private sources, including blended finance. While the entire framework is crucial for business leaders and governments to understand and implement, we see these two elements of the mosaic as key to the ultimate success of the GBF.

By themselves, they’re historic in nature, given that they recognize the global reality of biodiversity loss while promoting a realistic understanding of the financial gap that needs to be closed to address the problem effectively. And in doing so, these features of the GBF lay the groundwork for properly mobilizing capital markets at scale to seek—and have a fighting chance—to halt and reverse nature loss, with much of the most critical investment groundwork needing to be accomplished in our present decade.

As we see things now, roughly six months after the GBF was signed, the central challenge confronting robust private sector involvement is regulation; where regulation doesn’t financially incentivize nature-positive actions, the pools of capital willing to invest will remain limited.

“Quantifying the value in nature is the first step to making it an investable thesis.” —Brian Kernohan

COP 15’s momentum is beginning to yield detailed action plans

The good news is that COP 15 established a clear trajectory for governments globally. With governments now committed to protecting nature, they should be moving rapidly to set the ground rules and incentive structures that will motivate companies to act and capital markets to invest. In what follows, we focus first on how we know that nature has genuine value and is crucial to our economy and, second, we consider how the financial and regulatory systems need to change to acknowledge and incentivize the valuing of nature.

Understanding how crucial nature is to the global economy

In the years running up to COP 15, certain landmark studies helped put the economic value of nature front and center for economists and financial markets. A key example is the Dasgupta Review, which concluded, in February 2021, that half of global GDP, or US$44 trillion, is moderately to highly dependent on nature. This is a staggering sum, to say the least, the realization of which comes from careful study of the value of natural ecosystem services and the compounding effects of their often trade-driven disruption. The study shows how unsustainable forms of economic growth that rely on ever-greater consumption of natural resources can help raise the risk of economic catastrophe.

A second example was announced in 2020, when the Dutch central bank, De Nederlandsche Bank (DNB), issued a joint study with PBL Netherlands Environmental Assessment Agency that expressed the financial risk dimensions of biodiversity loss to the Dutch financials sector as well as the sector’s biodiversity footprint.

Building from an earlier study on the qualitative nature of these issues, the report begins with the premise that ecosystem services (provisioning, regulating, cultural, and supporting) are “the starting point for defining and understanding the relationship between biodiversity and the financial sector.” And methodologically, the authors are quick to point out that whatever conclusions they were able to draw about the magnitude of the overall dependence were limited by the availability of financial and biodiversity data. The numerical value that it ultimately declared was at risk, close to US$1 trillion, was in all likelihood just a lower bound for the real value of total financial exposure in the sector.

The study underscores the Netherlands’ financials sector’s exposure to potential tipping points, including the potential domino-like effects and hidden feedback loops that might lead to ecosystem service collapse. Understanding the importance of something, such as the economic dependencies of the Dutch financials sector on ecosystem services, is the first step toward managing it, and this is why the quantitative clarity of the central bank’s study is worth close attention by policymakers, asset managers, and institutional investors.

These and other studies demonstrate how our global economy is highly dependent on nature and that the damage being caused represents a major systemic financial risk, absent a transition to a nature-positive environment. We also know at a high level that the vast majority of global governments are now committed to a framework to halt and reverse nature loss embodied in the global biodiversity framework. We believe there are two crucial pillars to this: the quantification of nature within the financial and accounting systems alongside structural change by governments and regulators to incentivize nature-positive action and penalize destructive activity.

We now need to make measuring the value of nature an integral part of accounting

In 2022, we worked with a leading global consultancy in environmental economics to pilot a natural capital accounting approach for our timberland investments. The approach entailed the construction of a natural capital asset register and materiality assessment, followed by valuation of natural capital assets and liabilities using a combination of internal company data and publicly available research.

Encouragingly, measuring the value of nature has become a focus for government, as well, although much needs to be done to move this from conception to actual implementation. Here we can point to efforts by the United States, which recently introduced a new road map for aligning natural capital accounting with national statistics.

Introduced just ahead of COP 15, the U.S. National Strategy to Develop Statistics for Environmental-Economic Decisions (U.S. Strategy) offers a well-founded diagnosis of the problems with our current system of national accounts. Gross domestic product (GDP) is our core measure of the strength of national economies; however, current national accounting, which omits economic dependencies on nature, can result in misleading assessments of growth, in which negative effects on the environment aren't appropriately measured and accounted for. Such a failure perpetuates a “misattribution of systematic macroeconomic change,” according to the U.S. Strategy. Continuing to fail to account for nature with national accounts will only serve to promote a false perception of value, which, in our view, likely leads to an unsustainable use of natural resources. It may well also contribute to the disconnect between official estimates of the health of an economy and people’s lived experience.

“A system of natural capital accounts puts nature in language that investors and banks understand.” —U.S. National Strategy to Develop Statistics for Environmental-Economic Decisions, 2022

Change in natural asset wealth: a new indicator for the value of natural assets

A key statistic proposed by the U.S. Strategy—drawn from the work of influential economists, including the lead author of the eponymously named Dasgupta Review—is change in natural asset wealth. With a single data point, the statistic would capture the aggregate change in value of a nation’s natural assets. According to the U.S. Strategy, this would expose “one of GDP’s well-known blind spots.”

Like GDP, unemployment, inflation, and other headline statistics, change in natural asset wealth would rest atop a deep dataset. Among other things, it would require ascribing a monetary value to natural assets, developing a careful process for not double-counting assets where ecosystems invariably overlap, and implementing a variety of technical considerations—much as other national statistics require. If we assume the technical success of the latter, the central benefits of the statistic could be in how it might:

1. Function as an index to sustainability—The theoretical and practical sustainability of nations resides in what they can pass on to future generations.
2. Shift attention from growth to wealth—As a headline statistic, it would help stage a much-needed alternative to the growth-focused narrative of economic development, putting an immediate and powerful spotlight on cases of resource depletion.
3. Sustain a national conversation about values—Because the statistic focuses on the rise or fall in natural assets while injecting the value of natural assets into the collective understanding of economic growth, it would naturally disrupt habits of valuing growth for growth’s sake or for thinking of nature in purely instrumental terms.

The point of the U.S. Strategy is to establish nature and natural capital within the national accounting system, and it demonstrates why finding the right language and statistics to capture the value of natural capital is so important. The language and statistics of natural capital are necessary tools to help foster accountability with respect to nature—by the government, businesses, financial institutions, and individuals—and lead to better, more sustainable economic, policy, and personal decisions.

Guidelines for disclosing biodiversity footprints and nature-based risk and opportunity

The road to accountability with respect to nature will also require robust disclosure, which is why the Taskforce on Nature-related Financial Disclosures (TNFD) framework is so important.

In what’s likely to be a globally influential development slated for release later this year, the TNFD framework will enable companies to report within a comparable structure on how they approach the natural environment, how important it is to their business, how they affect it, and how they govern their actions. This will bring clear information to investors that we expect could relatively quickly become decision-useful, and it will have a strong potential to encourage productive management discussions focused on nature. According to the TNFD, the framework should help:

• Drive alignment with the emerging global reporting baseline under development by the International Sustainability Standards Board and with best-practice standards and tools already in use by market participants today
• Provide adaptability regarding the approach to materiality to accommodate the preferences and regulatory requirements of report preparers and report users from organizations of all sizes and across all jurisdictions
• Encourage early action by companies and financial institutions to begin reporting nature-related dependencies, impacts, risks, and opportunities
• Provide a structured path to increase disclosure ambition over time, recognizing that the incorporation of nature-related issues is new to many organizations, but is a rapidly growing strategic imperative for sound governance, strategy, risk management, and capital allocation

Like the Task Force on Climate-related Financial Disclosures, the TNFD will offer a framework rather than a prescriptive set of rules for disclosure. Consequently, we expect best practices for nature-related disclosure to evolve—potentially quite rapidly—within the framework’s scope. In particular, we’d hope to see, and would seek both to exemplify and advocate for in our approach to asset stewardship, an urgent sharpening of nature-related metrics and targets for the majority of companies, and for capital markets in aggregate.

Regulatory change begins to penalize harmful activity: the EU’s anti-deforestation policy becomes law

Discouraging or prohibiting harmful activities is clearly a key way of preventing nature-negative activity, and it has begun. A good case to illustrate this would be the European Union’s (EU’s) soon-to-be-ratified anti-deforestation policy, which in two to three years’ time could be encouraging companies to be more deliberate in their supply chain decisions and redirecting capital flows across a variety of sectors, ultimately carrying material benefits for both climate and nature beginning in this decade.

In 2021, the European Commission (EC) proposed a law to address deforestation in the supply chains for a wide range of commodities, including palm oil, cattle, soy, coffee, cocoa, and timber. This will have dramatic consequences for companies that produce and distribute these commodities and related products. With respect to palm oil alone, the law will precipitate product change in everything from snacks and beverages to cosmetics and biofuels. Per the EC:

    “When the new rules enter into force, all relevant companies will have to conduct strict due diligence if     they place on the EU market, or export from it: palm oil, cattle, soy, coffee, cocoa, timber and rubber as     well as derived products (such as beef, furniture, or chocolate). These commodities have been chosen     on the basis of a thorough impact assessment identifying them as the main driver of deforestation due     to agricultural expansion.”

The regulation is broad in scope and is set up to be stringent in its application, although the UN has pledged monetary assistance to help balance the economic limitations it may impose on commodity-exporting countries. In addition, under the European Green Deal, the EU will seek to set up country- and region-specific forest partnerships. These are intended to help strengthen or establish sustainable forestry in producer countries and to assist with related socioeconomic development among the affected populations.

Overall, we see the regulation as offering a powerful incentive structure that has the potential to make a significant positive difference in deforestation dynamics globally. The EC estimates that, beginning in 2030, the regulation could annually save more than 70 million hectares (170+ million acres) from deforestation that would otherwise have been caused by European consumption. It would also lead to a substantial decline in carbon emissions—an estimated 32 million metric tons per year. Based on the EC’s impact assessment, the regulation would have a substantial effect on the global importation of the primary commodities targeted as well.

Beyond this, the regulation can help to establish new conditions for engagement with corporate issuers whose supply chains will be affected. Supply chain exposures will merit close attention by market participants, and related disclosures will rise in significance for the companies whose products and distribution models will be affected. In some ways, the regulation could be seen to enhance the opportunity available to these companies as they seek to meet the regulatory requirements in order to benefit from EU market participation—not to mention participation in any other markets that could potentially fall in line behind the EU’s example.

Bond markets to support nature-positive development

As we stated earlier, the fourth goal of the GBF focuses on ensuring accessibility to the means of implementing the framework itself. This inclusionary condition should help ensure that all countries, including island nations, will stand to benefit as capital is redirected toward nature-positive opportunities. This is significant because a large proportion of emerging markets that are most vulnerable to environmental factors also happen to be subject to high levels of fiscal risk.

In this regard, it’s worth mentioning the emerging category of blue bonds. These were developed by The Nature Conservancy’s projects with various countries, including, most recently, the government of Barbados, to redirect portions of sovereign debt service into marine conservation funding. Use of proceeds for this type of bond varies across a range of activities, including sustainable development for fisheries and aquaculture, renewable energy projects, shipping and port infrastructure, biodiversity and habitat protection, and issues pertaining to nutrients and waste management.

While this is a nascent category of sustainable debt, it’s valuable in showing to less wealthy countries that the opportunity is there, at scale, with the support of development banks, to enable them to act in a nature-positive way. This is particularly the case in the wake of COP 15, given the significance of the global ocean economy and the GBF’s encouragement to countries to develop national biodiversity finance plans. According to some research, the benefit-to-cost ratio for ocean-focused investments would be high: “Investing $2.8 trillion today in just four ocean-based solutions—offshore wind production, sustainable ocean-based food production, decarbonization of international shipping, and conservation and restoration of mangroves—would yield an estimated net benefit of $15.5 trillion by 2050.”

Other innovative finance programs include the Bank of China’s issuance of the world’s first biodiversity bonds in 2021, in which proceeds are earmarked for projects that include aquatic biodiversity and forest conservation. One project in Central China involves the creation of wetlands, including 80,000 square meters of sewage treatment wetlands, 3.5 million square meters of buffer wetlands, 28.2 kilometers of greenway projects, and a total of 300,000 square meters of pipe networks for sponge city construction. The latter refers to innovative solutions that use natural landscapes to catch, store, and purify water—systems that address urgent drainage problems in urban contexts and can help stabilize and improve the resiliency of local ecosystems.

Other important developments include the expansion of green bond frameworks to contemplate biodiversity and marine conservation projects, such as that recently announced by the International Finance Corporation, as well as efforts to scale up sustainability-linked sovereign debt.

The growth of ecosystem services markets

As we’ve noted elsewhere, the investment community has begun to realize that biological real assets, such as forests and farms, are worthwhile investments. In part, this is because we’ve been able as an industry to apply the traditional language of value to these assets in terms of portfolio diversification, income, and capital appreciation.

But the realization goes beyond this, as investors are increasingly aware of the tangible environmental and social services provided by these investments, including carbon sequestration and rural employment. Some of these services can be monetized, potentially increasing investor returns; those services that can’t be—or haven’t yet been—monetized can still be recognized for the benefits they provide to society more broadly.

Valuing nature can no longer be the road not taken

There’s a growing understanding and widespread political consensus on the need to protect and preserve our natural environment, including all the “silent and invisible” elements of the biosphere that regulate climate and other conditions for life on earth.

In this discussion, we’ve tried to set out that in order for companies and the global financial system to be incentivized to support nature at scale, we need change in the overall frameworks for understanding nature’s value, for disclosing our reliance on natural systems, and for regulating economic behavior in connection with nature. In sum, we need:

1. A framework that helps businesses commit, collaborate, assess, and disclose their relationship with nature, including setting targets for advancing credible and effective action on nature—for this, we look to the TNFD
2. Systems to measure natural capital, which will help measure the wealth of the planet that supports society, so we can then measure our impact on that wealth
3. Sustainable accounting standards that will continue to evolve so that the effects of economic activity on nature are measured as routinely as core financial metrics
4. Governments to act on the positive signals they’ve sent through their support of the global biodiversity framework, meaning they need to deliver regulatory and legislative changes that recognize and support the unique value of nature. This extends to the need for governments to either prohibit or penalize nature-negative activity while encouraging nature-positive action

We know the financial markets are willing to step up and help fill the funding gap, but for this to happen at scale, the financial incentives need to be properly aligned to nature. Only when the widest pools of capital are available can the full power of the market be aligned to addressing the crucial challenge of building a nature-positive future.