Natural Capital Banks and Why the Bioeconomy Needs Them

New ideas for sustainable finance are put into action, starting with how we measure the value of nature

Historians looking at the first half of 2022 will likely focus on two themes: the scramble of central banks to stem inflation and the record heat waves that hit China, Europe, Africa and America. North.

Inflationary spirals and scorching temperatures seem to have little in common. However, there is a growing sense that financial and climate breakdowns are part of the same trend.

Sobering, S&P data shows that fossil fuels were about the only reliable stock market returns in 2022, with 19 of the top 20 companies having an oil or gas tie. Many of the biggest private equity firms, exempt from certain financial disclosure rules, remain deeply intertwined with fracking and oil drilling. Much of our pensions, higher education, and charities depend on these companies.

Although the ESG concept has swept the financial community in recent years, more have capitalized on reputational gains than taken substantial steps to green their investments. The credibility of ESG will continue to suffer as long as it remains ill-defined and under-regulated.

What is nature worth?

There is an even bigger barrier to incentivizing green investment. All common macro- and microeconomic measures of wealth exclude environmental impacts. There is no agreed standard for assessing the cost of economic activities from an ecological perspective. The market, in effect, is eco-blind.

For seventy years, nations have universally regarded GDP as the most important measure of economic success – one that rewards increased economic productivity without capturing the environmental costs of how this is achieved. Similarly, attempts to increase the company’s accounting with the triple bottom line have failed. Adoption has been limited and the triple bottom line remains primarily conceptual innovation without a strict regulatory basis.

For decades, a minority of economists have criticized GDP and equivalent microeconomic frameworks as flawed measures of wealth and value. Alternative economic indicators that take into account long-term environmental health remained only a theoretical possibility until very recently.

Nature Accounting

Calls for greener accounting measures have become more vocal, organized and well received.

As of March 2021, 89 countries have taken interim steps to institutionalize ecocentric measurement of economic development by adopting the United Nations System of Environmental-Economic Accounting (SEEA).

The SEEA is a method of calculating the economic value of natural resources such as air, water, soil and energy. What makes it particularly innovative is that in addition to standard metrics such as carbon emissions, it tackles more delicate variables such as ecosystem diversity, extent, condition and services. .

These ecosystem resources, most of which have zero value under conventional econometric frameworks, underpin our quality of life and our survival. Yet, as the 2019 global assessment of the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services revealed, these irreplaceable life support systems are rapidly deteriorating.

Invest in nature

Many believe that to stem the decline of undervalued or unvalued natural resources, you need a government-run bank that operates to the SEEA standard. A group of economists and environmental scientists – Michael Vardon, Peter Burnett, Heather Keith and Peter Burnett – recently proposed a Natural Capital Bank it just does that.

A natural capital bank would resemble a conventional central bank in its authority and functions. Just as central banks are responsible for holding government money, controlling the money supply, fostering growth, mitigating unemployment, and achieving inflation targets, the Natural Capital Bank would coordinate the existing institutions and divert the flow of capital to support environmental stability. The bank would use SEEA data on the value of environmental features to guide its investment and governance decisions.

Some, however, remain cautious and even proponents of the new banks admit their idea will be politically controversial. It is perhaps for this reason that the World Economic Forum remains agnostic on specific approaches to valuing nature, advising that existing private and public institutions be reoriented to deploy sustainable investments at scale. In a 2022 report, the organization urged business leaders to put pressure on the public sector to “redefine public support schemes and create the policy and regulatory conditions necessary for investments in nature to become more financially attractive. This too listing eight concrete steps companies can take to meet their commitments to invest in nature.

What a natural capital bank would offer the bioeconomy

Circular and biomaterials companies would reap huge benefits from a natural capital bank. Innovative low-carbon substitutes for petrochemicals offer exactly the kinds of benefits that are obscured by conventional risk assessments for investing. Existing metrics simply fail to quantify the social and environmental benefits of manufacturing processes and commodities that reduce carbon emissions and improve biodiversity health.

There has long been a demand for natural capital accounting in the bioeconomy. For example, the organization Circle Economy recently pointed out that a new approach to risk is needed to “direct capital from non-circular (and often riskier) companies to those that promise stable long-term value creation and impact. positive”. Initiatives along these lines have been launched over the years, but have tended to be sector-specific, limiting their adoption within the wider investment community.

Private initiatives for valuing natural capital

Although proponents of a natural capital bank are aware of the potential political objections to their proposal, they justify their idea by pointing out that environmental assets are often “fragmented between nations, within different governmental institutions or widely in outside existing institutions.

The nature of natural assets and the scale of decarbonization needed means that voluntary action alone would be too slow, inefficient or both. Consider, for example, that although 70% of new power generation investment in 2021 was in renewables, clean energy investment would still need to double in the 2020s to keep temperatures below freezing. 2 degree rise by the end of the century.

Within the bioeconomy in particular, the largest private natural capital initiative is the Lombard Odier Fund, established in 2020. It now holds $937 million in assets including regenerative agriculture and waste management projects. While projects like this are welcome, the tight timeline for implementing a low-carbon transition makes more centralized efforts paramount.

The ineffectiveness of relying on private initiative to achieve rapid decarbonization is illustrated by the difficulties of carbon offsetting. Although the mechanism has been in existence for twenty years, and despite the increase in demand over the past two years, carbon credit markets would still have to increase traded volumes by 15 times in 2019 to reach their objective of offsetting 2 gigatonnes of carbon. 2030.

This should offer a cautionary tale for the bioeconomy. While private capital flows into biomaterials and circular sectors are increasing, they are still not informed by a universal accounting scale. Therefore, there cannot be a consistent cross-comparison between portfolio options in terms of environmental impacts and climate risks. A single standard, enforced and used by a central authority, would allow private investments to become more targeted, streamlined and likely to produce environmental benefits.

A public institution for funding economic activities that support biodiversity and planetary health is also a compelling proposition given the unresolved issues around carbon and ESG offsetting. Almost all the weaknesses of these market-based approaches to environmental protection can be traced to a lack of central oversight and clear definitions of key terms.

Within the framework of carbon credits, for example, there are numerous standards for assessing the extent to which and for how long offset projects eliminate or reduce carbon emissions. This has led to questions about the environmental integrity of carbon offsetting, the true market value of credits, and a fragmented market. The uncertainty surrounding a new and under-regulated initiative such as offsetting also means that investors and business leaders are unable to properly assess the business risks of engaging with them. This inhibits market scaling and ultimately the concrete environmental benefits of such systems.

National monetary institutions that deploy rigorous methods to identify environmentally sound companies would be the fastest way to scale the biomaterials and circular industries enough to operate towards global decarbonization.

A step in the right direction

In 2022, the global environmental and financial crises unfolded in parallel. It is becoming increasingly difficult to ignore the role that financial institutions play in pushing the planet beyond habitable limits. Without new investment measures and the institutions that implement them quickly and at scale, existing channels will not be able to divert enough capital in time to avert catastrophe.

Natural capital banks based on the new SEEA accounting standard offer the most promising avenues for global change within the financial system. They would be the fastest and most reliable instruments for coordinated investment in developing biomaterials and circular sectors.

These institutions would play a particularly important role in ensuring that green products finally become competitive with cheaper petrochemicals, whose market advantage currently rests on the fact that their prices do not take into account the environmental damage caused by their extraction. , their production and disposal.