SPI Journal, Autumn 2022
It’s time to stop bankrolling deforestation

Financing a nature-positive future

Our health, wealth and security depend on natural capital under threat from biodiversity loss and climate change, writes Maud Abdelli, lead, greening financial regulation, WWF.

According to the World Economic Forum, around $44tn in annual economic value generation – over half of the world’s gross domestic product – is moderately or highly dependent on nature. In reality, nature powers all industry and enterprise and, as Partha Dasgupta, Frank Ramsey Professor Emeritus of Economics at the University of Cambridge, has reminded us, our economies are embedded within nature.

Yet because our economic and financial systems prioritise market-based values of nature such as food and energy production at the expense of services such as climate regulation, clean air and water, we are using up ‘natural capital’ and degrading natural systems faster than nature can replenish them.

With 1m species at risk of extinction, and the risk of catastrophic global heating of 2.7°C or more, we now face a double emergency of nature loss and climate breakdown that is eroding the very foundations upon which our collective health, wealth and security depend. As we continue to lose natural diversity and degrade ecosystems, we radically restrict opportunities to harness nature-based solutions to climate change and other societal challenges. In turn, climate change further drives nature loss and lessens the resilience and productivity of natural systems.

Almost every sector is exposed to climate- and nature-related risk in some way. Goods and services that flow from the ocean and coasts are worth at least $2.5tn each year. Continuing business as usual means investors in companies dependent on the ocean economy risk losing $8.4tn due to declining health of ocean and marine life. Worldwide, we are spending at least $1.8tn a year on environmentally harmful subsidies, while the potential collapse of ecosystem services such as pollination threatens a $2.7tn annual decline in global GDP by 2030.

Tackling nature loss and climate breakdown together is both an economic imperative and a fiduciary duty. If we redirect financial flows away from activities that degrade natural systems towards those that protect and restore nature, the financial system can drive the transition to a more equitable, net zero, nature-positive global economy.

According to the Global Sustainable Investment Alliance, sustainable investing assets in major markets stood at $35.3tn in 2020, a 15% increase on 2018 levels. Opportunities for scaling net zero and nature-positive investment continue to accelerate.

While food systems are responsible for 70% of global biodiversity loss on land and 50% in freshwater, and around a third of global greenhouse gas emissions, rehabilitating the 52% of farmland that is currently degraded or disused would alleviate much of the pressure for further conversion of natural ecosystems for agriculture. Every $1 spent on restoration promises to deliver up to $30 in economic benefits. Transitioning to a nature-positive economy could generate annual business opportunities worth $10tn and create 395m jobs by 2030.

We need to reshape economic and financial systems and focus on sustainable management of the global commons. Central banks, financial supervisors and regulators have a vital role to play.

In the face of the risks and radical uncertainty of the environmental crisis, central banks and supervisors can and must do more to take precautionary action. And while G7 and G20 central banks and regulators have reiterated their commitment to integrating and managing climate and nature-related risks in their decision-making, they must give clear guidance to financial markets and institutions, activating every available monetary policy and financial regulation instrument, including capital requirements, mandatory transition plans and climate and nature stress testing.

Only by undertaking these measures can we overcome the $4.1tn financing gap in nature by 2050. Together, we must put nature on a path to recovery by 2030 so that we can realise the promise of the United Nations’ sustainable development goals – prosperity for all on a healthy planet.