COMMENT: Andrew Mitchell explains why solving the data gap is critical to unlocking a flood of money towards a nature-positive economy.
The impact of nature on portfolios rose rapidly up the finance sector agenda in 2020, partially fuelled by Covid-19. The pandemic has woken up regulators, bankers and asset managers that biodiversity can create big, fast-moving financial impacts. So how can such giant risks be managed, and how can we report on progress to avoid them?
The Economics of Biodiversity: The Dasgupta Review, released earlier this month, offers a much-needed guide, and adds further weight to calls for the substantial muscle of the global financial sector to get behind transforming the movement of money towards a nature-positive economy. Commissioned by HM Treasury, the UK government’s economic and finance ministry, the comprehensive independent Dasgupta Review declares that everyone must urgently change how they “think, act and measure economic success” to protect, restore, and sustainably manage our most precious asset: nature.
To mobilise the finance sector, solving the measuring problem is critical. An increasing number of financiers are aware of the escalating nature crisis. Many understand the problem at a high level: the tropical rainforests and oceans and soils we are rapidly destroying provide ecosystem services that underpin our economies and societies. But to respond to nature-related risks in practice, financial institutions need to know how the specific companies and projects they lend to, invest in, or insure, depend on and impact nature. They need nature-related data, and at the moment that data doesn’t exist in a form they can use.
What is ultimately required is a set of global standards underpinned by credible, decision-grade data.
As the Dasgupta Review says: “What is ultimately required is a set of global standards underpinned by credible, decision-grade data, which businesses and financial institutions can use to fully integrate nature-related considerations into their decision-making.”
Professor Sir Partha Dasgupta and his team highlight that the Taskforce on Nature-related Financial Disclosures (TNFD) is “a step in that direction”. Building on the successful Task Force on Climate-related Financial Disclosures (TCFD), the informal working group to bring together a TNFD now includes 48 financial institutions and corporates from five continents, as well as governments, regulatory bodies, thinktanks and consortia. The taskforce is due to launch later this year. Standardised reporting recommendations from the TNFD are planned to be released by 2023.
Initially, use of the reporting framework is likely to be voluntary, as were the recommendations from the TCFD in the climate space. The UK is now mandating TCFD reporting from 2025; France has already. But the Dasgupta Review points out that policymakers and financial regulators will “increasingly demand that financial institutions systematically assess both nature-related financial risks and their own impacts on nature”. Eight governments and regulators are already involved in the initiative to bring together a TNFD. Last year, the Dutch Central Bank and financial supervisor, De Nederlandsche Bank (DNB), became the first central bank to highlight biodiversity as a material financial risk.
As the finance sector learns what’s worked for climate and what hasn’t, it needs to get ready for the next big shift; from a nature-negative economic system to a nature-positive one, and this might happen faster than the shift from high-carbon to net-zero. Nature protection cannot wait whilst we fix climate, and without addressing nature loss, we won’t be able to fix climate. Measuring and disclosing nature-related risks across corporates and financial institutions is only one of many levers that leaders must urgently use to shift the financial system and our economies from fuelling nature’s collapse.
Another opportunity lies in redirecting public subsidies away from activities that drive nature loss and degradation. The Dasgupta Review highlights that subsidies of at least $4-6tn per year, and other nature-negative investments, currently vastly outweigh the financial flows that support nature. Global Canopy’s Little Book of Investing in Nature, released last month, estimates that the annual funding gap for biodiversity is a staggering $824bn. New innovative finance mechanisms that protect nature ‒ like payments for ecosystem services, biodiversity offsetting schemes and various financial products such as green bonds ‒ are the seeds of a new bio-economy. These green shoots will grow faster if we change the false price signals created by the dramatic misallocation of public funds towards unsustainable production and nature’s destruction.
Alongside reducing and reforming nature-negative subsidies, governments must urgently look to overhaul their own measurement and disclosure practices. Just like financial institutions need nature-related disclosures to guide their decision-making, governments need to introduce natural capital into national accounting systems to create better policy decisions.
Unlike with GDP, inclusive wealth fully accounts for the dividend we receive from a healthy planet.
The Dasgupta Review argues that only looking at gross domestic product (GDP) and other traditional measures of economic progress gives a falsely optimistic picture of a nation’s economic health, and recommends a move towards a more inclusive measure of wealth that includes natural as well as produced and human capital. Not to account for the rampant depletion of natural capital in national and corporate accounts is no different from raiding the family silver to fatten our personal balance sheet. Sooner or later that debt will be called. Unlike with GDP, inclusive wealth fully accounts for the dividend we receive from a healthy planet.
The Dasgupta Review is the latest in a series of signals from governments that demonstrate the compelling economic case for systemic change. Targets will be set in May for nature protection and restoration at COP15 in China, the world’s nature summit. Harnessing nature’s climate solutions will gain traction at the COP26 climate summit in the UK. The menu of solutions set out in the Dasgupta Review is a recovery plan that puts nature and people at the heart of value-creation. If we do not seize it, we will continue to finance ourselves into extinction.