Ellie McLaughlin – Big finance wants to turn nature into an asset class: but that’s not the way to save it

The financial industry is paying lip-service to green investment while its financing of nature’s destruction goes unchecked.

Ellie McLaughlin is Positive Money’s Senior Policy and Advocacy Officer

Cross-posted from Positive Money

Photo: Հանուման/Creative Commons

Nature is rising up the green finance agenda, but the financial industry is gearing up for new avenues for profit whilst its financing of nature’s destruction goes unchecked. Governments, central banks and regulators need to actively steer finance away from harming nature for a just approach to saving it. 

Last month, over 60 conservation organisations launched a landmark report finding that the UK is now one of the most nature-depleted countries on earth. It’s clearly not just a UK crisis. Nature is being depleted at a staggering rate globally – a fact that has not failed to catch the attention of economic policymakers and, notably, the financial industry. 

Growing awareness of the enormity of the biodiversity crisis has given nature a voice in international economic policy debates in recent years. In 2020, the World Economic Forum declared that over half of the world’s Gross Domestic Product (GDP) is ‘moderately or highly dependent on nature’. Setting aside the intuitive truth that surely all of GDP must be dependent upon the world we live in, it’s hardly surprising that discussions of the economic impacts of nature loss are quickly catching up with that of climate change. 

Attempts to place nature’s destruction into the logic of finance has alerted policymakers and financial institutions alike to the risks this poses to individual firms, and to the stability of our broader financial and economic systems. Whilst this recognition is crucial, the test is how policymakers respond. 

Following in the footsteps of now legal requirements for all large UK companies to assess and disclose climate-related financial risks, the private sector-led Task Force on Nature-Related Financial Risks (TNFD) has recently developed a framework for firms to assess the risks that nature loss poses to their bottom line. Campaigners, however, are raising the alarm that major loopholes and its subjective nature leave the TNFD framework ripe for greenwashing, and that more broadly, risk disclosures are a distraction from the urgent need to curb the trillions that financial institutions are pouring into nature destruction through financing fossil fuel expansion and other activities destroying critically important habitats. But governments, financial regulators and central banks have welcomed the initiative. The Bank of England, whose Financial Policy Committee – responsible for maintaining the stability of the UK’s financial system – now has a mandate to consider environmental risks beyond just climate change, has embraced the TNFD framework as ‘essential’ to understanding the risks posed to our financial system by nature’s destruction. 

Many question the underlying logic that the financial risks from nature-loss can ever be accurately estimated, let alone whether attempting to do so will influence corporate behaviour. The inherent complexity of nature and ‘radical uncertainty’ characterising environmental breakdown more broadly, does not lend itself to reliable economic and financial modelling. Profound failures in the economic models underpinning the climate scenarios used by the investment industry and even central banks, has already led to a potentially catastrophic underestimation of the financial implications of climate change. Estimating financial risks from nature loss is arguably an even harder task. The deep limitations of this risk-based approach means that those who supervise our financial system urgently need to take a ‘precautionary approach’ to environmental crises. In of itself, disclosures like the TNFD would perhaps not do much harm if they were accompanied by policies to curb the financing of destructive activities. But relying on the financial sector to write its own rules as one of the core means to address environmental breakdown doesn’t qualify. 

Alongside the portrayal of protecting nature as being primarily a means to protect the financial industry, efforts are accelerating to enable new avenues for accumulation by seeking to make investing in nature recovery a profitable endeavour.

Private finance investment in nature can take the form of directly providing finance to nature recovery projects, such as through loans, but the dominant approach entails the government supporting the creation of new markets for ‘natural capital’. Put simply, this describes a system of assigning values to a habitat, usually in the form of a “credit” or “unit”, that can then be bought and sold on a market. Companies can then buy and sell credits to ‘offset’ their negative impacts, either voluntarily or to meet legal requirements. This is not an entirely new concept, but has emerged from earlier established carbon markets that have been repeatedly plagued by failures to mitigate carbon emissions and links to human rights abuses. 

Nature markets are posited as a way to get private finance to fund the nature ‘financing gap’ that governments claim their stretched finances won’t allow them to fill. Quickly rising in prominence, they were even included in last year’s COP15 agreement as one of the ways to finance the global deal to restore nature. Many warn that this will do little to support meaningful conservation, but instead will lead to land speculation and neocolonial dynamics in which land is bought up in the Global South for conservation efforts to mitigate unsustainable consumption and land degradation in the Global North. Indeed, research has found that biodiversity offsetting projects overwhelmingly fail. 

The UK government is also relying heavily on private investment as its core means for financing domestic nature restoration, with a goal to grow private investment flows into nature to over £1 billion a year by 2030. Much of this rests on the often cited ‘finance gap’ for UK nature, which has been estimated to be £56 billion short of what’s needed for the UK to meet its targets to restore nature by 2030. But as analysis by John Hollingdale at Community Land Scotland has shown, a significant proportion of this estimate is made up of costs for acquiring land, rather than just restoring it. These estimates also fail to incorporate the valuable asset that investors gain when buying up land for restoration projects, land that will likely only increase in price and ownership concentration as more private investors see it as a profit opportunity. These dynamics are already pricing local communities out of land ownership in the UK – land with afforestation potential in Scotland rose by 60% in 2021 alone, with similar reports of carbon offsetting projects pricing local residents out of land ownership in Wales. 

As others have pointed out, critically assessing estimates of the costs of financing nature recovery is an entry-point to allow us to go beyond the dominant narrative of persuading private finance to fill the investment gap. And the good news is that there are other tools that can be used to protect and restore nature in line with principles of environmental justice. For starters, nature needs to be fundamentally embedded within our response to the climate crisis. For the financial sector, this entails prioritising nature alongside carbon emissions in private sector transition plans and green taxonomies. It also requires us urgently going beyond the current de-risking approach to actively curb the financing of the most destructive activities like fossil fuel expansion and deforestation, and take a ‘double materiality’ approach that addresses the impact of our financial system on climate and nature, and puts environmental justice at the centre of the financial and economic policy agenda. More widely, the failures of market-based approaches to nature restoration point to the need for a deep-rooted cultural shift away from attempts to financialise our natural world. 

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