Building markets for a nature-positive world: a triple win strategy

Introduction 

Currently, ships and whales share the ocean. Their interaction, however, has been devastating for the whales, as ship strikes have continued to be a primary cause of whale fatalities, along with entanglements among others. Because whales have existed for millions of years relative to the recent advent of ships, whales have not evolved fast enough to recognize the danger from these vessels. At the same time, the fact that a living whale has no market value, at least until recently, implies that the shipping industry has not been designed to recognize or avoid harming whales as well as other living sea creatures. Simply put, living whales are “invisible” to markets and to ships. Herein lies the challenge – a living nature and economic activity colliding to the detriment of both nature and humanity. 

Why does it matter? 

The world is facing the twin risks of climate change and loss of nature and its biodiversity. Humanity’s survival rests on its ability to adapt and to mitigate climate change as well as reverse biodiversity loss. Policymakers as well as market participants have now understood what science has long held, that protecting and restoring nature are key to fighting climate change and to stabilizing economies and markets. Yet, philanthropic and official funding for nature remain woefully short. Moreover, actions by governments, NGOs and multilateral institutions lack coordination disorganized and thus are reliant on market players to take the lead (eg. TNFD, ICVCM, etc.). 

True, the private sector, financial and otherwise, has the resources and the ability to move quickly to provide the funding and market incentives to help protect and restore nature and its biodiversity. But, for private funding to come into the nature space it needs an incentive that goes beyond philanthropy, altruism, or “doing the right thing.” 

In other words, the private sector needs nature protection and regeneration to be a “revenue” proposition, rather than a “cost” proposition, which characterises current conservation efforts. But, to do so, a living nature living for itself must be viewed by the markets either as an “asset” that has value and therefore needs protection; or a “legal entity” that has rights and warrants protection. 

Currently, the market system only views a dead or extracted nature as an “asset.” For example, a tree has value for its timber or its fruit, a dead fish is sold as food at a restaurant, a dead whale is sold for its meat or oil. Not recognizing the value of a living nature to the economy and markets has meant continued exploitation and destruction of nature and its biodiversity, with enormous ramifications for climate change and human existence. So, how can we change the current mindset and embrace a new economic framework that has a living nature at its centre? 

A new paradigm

The world is now realizing that a living nature is needed to mitigate climate change. This is what the 2015 Paris Agreement and subsequent IPCC reports have revealed. The reckless depletion of once abundant and free ecosystem services is putting at risk access to basic life support – clean air, water and its purification, rainfall, climate regulation, pollination of crops, soil for growing food, among others. Recent studies have begun to quantify the financial, material, physical, and transition risks faced by corporates and financial institutions in relation to their impact and dependencies on natural capital. Thus, a nature restored and rejuvenated not only helps in capturing and sequestering CO2 from the atmosphere, but also in providing ecosystem services needed for sustaining our economies and societies. 

In other words, a living and thriving nature and its ecosystem services are now recognised “assets” to our lives, economies, and societies. Indeed, science has shown that conservation and restoration of natural systems – such as forests, mangroves, salt marshes, seagrass, among others – can provide at least 37% of the carbon mitigation needed by 2030 to stay within the 1.5 degree warming scenarios. More recently, science points out that the concept of a natural asset goes beyond recognizing the value of green and blue flora in fighting climate change and providing valuable ecosystem services, to also include fauna on land and in the ocean. For example, whales, fish, elephants, wildebeests, wolves; all are examples of fauna that have been shown to play an important role in fighting climate change and in providing other valuable ecosystem functions. Thus, the benefits of protecting and restoring nature very much hinge on recognizing the contribution to ecosystem services provided by fauna that dwell within the forests and in the ocean. It is this biodiversity and the interactions of species within their ecosystems that provides the invaluable services that can transform nature to a “new asset class” that is invaluable to markets. 

This recognition by scientists and now by policymakers and by markets needs to be matched by action at the policy and market levels. The objective to protect and restore nature needs commensurate policies to be enacted, which would then generate a market reaction to provide the proper pricing, incentives, and services needed to help achieve the policy objective(s). 

As it turns out, the 2015 Paris Agreement by countries, and subsequent declarations by companies, to go carbon zero/neutral/negative by 2050 or so, provided the impetus for the development of a carbon market, with carbon prices varying between $5 and over $100 per metric tonne, reflecting a voluntary or a compliant market. The pricing of CO2, however, also allows for the market valuation of the carbon capture and sequestration services of fauna and flora. For example, carbon sequestration service by a single whale is valued at over $2 million, over $1.75 million for a forest elephant, and over $1 trillion for seagrass globally. 

Recently, market participants as well as regulators have moved beyond carbon, with demand for natural capital projects that provide biodiversity uplift continuing to grow – creating the impetus for a nascent nature/biodiversity market. Furthermore, recognizing the pivotal role of IPLCs in the stewarding of nature and its biodiversity has given rise to demand by countries and investorsto finance projects that yield “nature credits” that include not only carbon sequestration, but also biodiversity and cultural benefits. 

For markets to develop around this “new” nature asset class, however, a new plan of action is badly needed. 

The strategy – step-by-step 

1) Legal – change the rules. Establish legal standing for living nature – either through designating them as assets and establishing provenance, or by endowing them with rights through legal personhood – these assets/legal persons then become “visible” to the market. 

2) Valuation – price nature services. Establish a forward-looking market value for the asset services from which rewards and penalties can be designed. The market value is derived from projecting the ecosystem services performed by the natural asset. 

Steps 1 and 2, would convert nature to a new asset class around the market value of ecosystem services. This should be followed by: 

3) Insurance - Design insurance products to protect companies operating in the nature space against the risk of “double materiality;” that is, their operations potentially impacting these new nature assets or being impacted by nature shocks which could result in business disruption. 

4) Innovation – Develop and deploy technology and innovation designed around the monitoring and protection of these new natural assets. 

5) Rating agencies - Change companies’ debt ratings, which now recognize and internalize the risk of “double materiality,” thus affecting their cost of and access to capital. 

6) Activist Class - Investors, consumers, and employees reward the “nature-positive” market actors through their choice of employment, investment, and consumption. 

Conclusion

Returning to the case of the whale and ships, we can now see that by recognizing legal personhood for the whale – it becomes a legal entity with rights and legal standing if harmed (Step 1). Economic valuation for the services of whales establishes a financial recourse in case of harm to the whale (Step 2). Maritime insurance companies register this penalty as a risk and are likely to hike up premiums to cover costs of insurance and require anti-collision devices (Step 3). Given markets’ action, new technologies around the protection of the whale from harm (step 4) are likely to develop. Rating agencies (Step 5) would reward those shipping companies who choose to insure, while market stakeholders (Step 6) reveal their preferences for “nature positive” companies through exercising their loyalty be it in terms of investment, choice of employment or consumer loyalty to these companies. This is a win for all. 

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