Nature loss cannot be addressed within an economic model where benefits and burdens are not shared equitably

Carbon emissions mitigation to address climate change is a simpler problem to tackle than nature loss, and the struggle to create ‘first-best’ economic incentives is not over. With nature loss, the problem is spread out further through supply chains and requires more of a systems approach to align incentives at the front lines of nature loss, which can’t succeed without sharing the benefits as well as the burdens.

  • Climate change is often viewed as having one missing ‘price’, but in practice that solution has eluded our best attempts to find a ‘first-best’ outcome with a price on carbon; the sources of nature loss are more concentrated and have been disconnected from the gains created by the destruction of environmental resources in megadiverse countries
  • Reducing nature loss and finding a nature-positive alternative relies on supply chains that contain 80% of the costs, but few benefits for finding a nature-positive alternative or even for providing data to understand the problem
  • As sustainable finance taxonomies expand from net zero to include nature loss, they shouldn’t become just compliance mandates, but should open up tangible benefits for collecting and sharing data and taking steps towards a nature-positive future

As the Convention on Biodiversity’s COP15 kicks off in Montreal, there is a push to align nature-positive investment frameworks with the sustainable finance taxonomy discussion. A new WWF report provides some good context on the role of supply chains in driving nature loss, the limited coverage for nature within most taxonomies, and the challenges that presents for creating a net zero and climate-positive economy.

One difference between climate change and nature is that although both are aggravated by economic externalities, it is easier to conceptualize a solution on climate change by pricing carbon emissions than a singular ‘price’ that could turn nature loss into nature-positive investment.

The lack of a single ‘unpriced’ externality relating to nature, however, is not the most difficult challenge. After all, economists have proposed carbon taxes or cap-and-trade mechanisms as market-based mechanisms to mitigate the impact of climate change for decades. Although these mechanisms have been effective in some cases, the credibility they promise translates into practice only where they are widely and consistently applied.

Nature lacks a single ‘price’ that could conceptually ‘solve’ the market dysfunction. This makes it more difficult to see a role for a ‘price’ that coordinates market-based mechanisms but also removes the perception that just getting the ‘price’ of carbon emissions or nature loss right is an ‘easy button’ to address the issues.

In addition, attaching nature loss and climate change together should highlight the disproportionate expectations that have been placed on finding solutions versus remediating the damage caused. WWF points out that about one-third (33.5%) of the land surface of the earth holds 70% of its biodiversity. Apart from the United States and Australia, the other 15 countries considered ‘megadiverse’ are all emerging markets and developing countries.

There is a wide chasm between nature loss and economic gain. The United States and China together account for about 40% of the world’s GDP. The next 5 megadiverse countries account for about 10% of global GDP and the remaining 10 for only a combined 2.5%. Large portions of the global GDP not covered here, and the profits of companies and financial institutions that benefit them, are connected to nature loss through supply chains (WWF estimates that supply chains drive 80% of nature-related costs).

These links exist in the context of climate change as well. High-emitting sectors demand the greatest attention because the financial risk of a cost on carbon is a clear whether that comes from regulatory or explicit pricing. But a focus on high-emitting sectors in isolation can create blinders that obscure the actions needed to address the underlying problems. Electricity generation produces so much emission today and an increased amount tomorrow because people need the output of more manufacturing and transportation and building, as well as to deal with the waste of all of those sectors.

Often the approach taken by the financial sector is to define solutions to the proximate cause of the emissions, which are the high-emitting sources, without considering the complexity of the supply chains and sources of demand that cause those sources to emit. It would be fine for policymakers to focus their efforts on emissions regulation at the largest sources, but financial institutions often only direct a narrow slice of their financing to those sectors and don’t have the capacity to understand how their financing impacts both the demand and supply of high-emitting sectors.

For nature loss it may be construction, agriculture and forestry that are the ‘high-nature-loss’ sectors, but they have even more disparate supply chains and connections to the financial sector that are largely ignored because they operate out of sight and out of mind for individual financing decisions. As we saw in the outcome of COP27, the linkage between disparate sources of harm and the tangible loss and damage done is one that is hard to address equitably.

There is not today, and nor will their likely be in the near-term, a global financial mechanism put in place to do what carbon pricing, international climate finance and carbon offsets markets have tried to do for climate mitigation. Even producing the data that guide financial decisions on climate change in supply chains or nature loss in supply chains will be spread out inequitably to companies, financial institutions, investors and governments if past experience is anything to go by.

It is critical that as taxonomies spread and progress, the value of the data collected in the process accrues for the benefit of those on the front lines in creating a nature-positive economy and financial system, as well as for the public benefit. In the absence of a clear benefit for any entity that undertakes the expense and effort to collect the data, the burdens will not be equally shared, the problems will go unaddressed and, unfortunately, we as the collective humanity will continue to leave people behind.

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Promoting adoption of responsible finance in Islamic markets & Islamic finance. CEO @RFIFoundation.

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Blake Goud

Promoting adoption of responsible finance in Islamic markets & Islamic finance. CEO @RFIFoundation.