This month, we interviewed Ivo Mulder, Head of the Climate Finance Unit at UN Environment Programme. We used the opportunity to ask him about what we can expect to see out of the upcoming biodiversity COP in Montreal. He shed light on the many opportunities that nature finance presents as well as the evolving world of nature-related risk disclosure. Mr. Mulder discussed the private finance industry’s levers in preserving and restoring biodiversity, including some specific ideas for Geneva-based actors, as well as the momentum he is witnessing from the finance actors to play a more determining role in this fight.
When most people think of COP, they think of climate change and are not aware that there are also COPs (Conference of the Parties) for the Convention on Biological Diversity (CBD). The upcoming COP15 in Montreal running December 7-19 is an important moment for nature, why is that?
Half of global GDP is moderately to highly dependent on well-functioning ecosystems. When these degrade or even collapse, underlying economic activities collapse as well. COP15 is arguably the most important biodiversity meeting since 2010 as government leaders will have to hammer out a new post-2020 Global Biodiversity Framework, which needs to become the turning point to stop and reverse biodiversity loss.
Since 2018, the awareness of nature finance opportunities and nature disclosure-related risks has increased significantly, while at the same time we are increasingly seeing economic and societal impacts from destroying our natural environment. Given the enormous negative impact that our current agri-food system has on ecosystems from mangroves to tropical forests, we need to better integrate sustainable land-use practices throughout our agricultural systems, from farm to fork, and better mitigate and adapt to the increasing effects of climate change, enhance biodiversity and support rural livelihoods. COP15 is expected to deliver a nature impacts disclosure regime, new nature financing targets, and the mechanisms to meet those targets.
What role do you think private finance actors should play in preserving and restoring biodiversity?
The private sector has an enormous opportunity to redirect capital toward investments that pay climate and biodiversity dividends as well as make strong financial returns. Investments in sustainable-land use with an emphasis on preserving and restoring biodiversity, for example, support more diverse, climate-resilient crop outcomes that strengthen supply chains and tell strong consumer narratives.
Equally, increased focus on product traceability and supply-chain transparency is increasing the risk exposure of financial actors that fail to adequately assess and disclose the nature impacts of their investments. There have been multiple efforts by regulators and standard setters to advance the private-led transition to nature-positive economic activity. As such, financial institutions are starting to investigate opportunities to develop new NbS products via their lending arms.
Given the novelty of some nature-based solutions business models, in some cases, there is a need for partial risk reduction to account for heightened risks that banks, investors, and other private entities are unwilling or unable to cover. The AGRI3 Fund, for example, is working with Rabobank and other financial institutions to provide long-term loans to farmers, with several deals having been closed in Brazil as well as China. Impact investors are similarly embedding climate and nature-related risks into their decision-making through the Task Force on Climate-Related Financial Disclosures (TCFD) and the forthcoming Taskforce on Nature-related Financial Disclosures (TNFD) frameworks.
In the climate negotiations, we saw an increase in momentum when private sector actors began to engage and take the topic seriously. Do you think it will play out similarly on the nature side? Do you expect strong private sector participation at COP15?
Yes, very much so. COP15 in Montreal is expected to attract between 1,200 – 1,500 business and finance participants and the highest number of business and finance events ever at a nature and biodiversity conference. The scale of interest from the business and finance sectors will provide a compelling impetus for senior government officials to agree on a Global Biodiversity Framework. The private sector is waking up to the nature crisis and awareness of the financial materiality of biodiversity loss is rapidly increasing. Biodiversity is fast becoming a leading priority for businesses that depend on nature and especially for those who have made public commitments to increase the sustainability of their supply chains. Preserving and restoring biodiversity is no longer a ‘nice to have’, it is fast becoming a strategic imperative across investment portfolios.
The latest UN Environment Programme State of Finance for Nature report found that private sector investment in Nature-based Solutions (NbS) represents only 17 per cent of total NbS investment, representing an enormous opportunity for private sector actors to increase financial flows to NbS, whether that be through institutional, commercial or impact investment.
From the nature-based solutions statement made at COP 26 by multilateral development banks, to business commitments to make agri-food supply chains deforestation-free, to net-zero commitments by governments, businesses and finance institutions, the private sector has already made significant commitments. COP15 must now progress this momentum to ensure all member states are accountable to meeting ambitious nature finance targets across the public and private sectors. We must now move from talk to action, and from pilots to applying large scale integration across investment portfolios.
You mentioned the 2022 State of Finance for Nature report, which was just published. Can you give us a quick overview? What are the trends you are seeing in the area of Nature Finance?
Finance flows to NbS are currently US$154 billion per year, less than half of the US$384 billion per year of investment in NbS needed by 2025 and only a third of the investment needed by 2030 (US$484 billion per year) according to the report. It basically means that “time is up” if we want to have a fighting chance of staying within the 1.5C warming target and turning the tide on nature loss and land degradation.
The increase of nature investments is unlikely to be bridged by public finance alone. A high portion of the finance gap must be closed through an acceleration of private finance actors investing in net zero, nature-positive supply chains.
The need for private sector finance actors to scale up finance into NbS could not be more urgent. This is particularly true in emerging economies and developing countries that are bearing the brunt of increasing climate risks, the breakdown of ecosystems, and increasingly degraded lands.
Where public resources are limited, impact and philanthropic investment can provide the initial concessional or patient catalytic capital to allow other private investors to engage and co-invest in forest and landscape restoration projects in emerging markets. For example, through co-funding early-stage pipeline development provided by the Restoration Seed Capital Facility (RSCF), Ecotierra and Arbaro Fund, two of the facility’s cooperating partners are developing integrated sustainable landscape models across Latin America.
As you know, SFG’s network is made up of finance professionals who aim to advance sustainable finance, and therefore they are looking for tangible solutions, projects, companies, etc. What do you think are the most interesting nature-related investment opportunities that our network should be paying attention to?
Geneva is home to some of the largest agricultural commodity traders in the world, such as Cargill, Louis Dreyfus and others. Many of these companies wield an enormous influence in the agri-food industry and play a crucial role in buying commodities from farmers, selling them to food processors, and then ultimately on to consumer goods companies like Nestle (also located on the shore of Lake Geneva). While the competitiveness between these traders is fierce, there is a need to create a level-playing field where environmental costs are not externalised as they are at present in the form of rapid tropical deforestation, soil degradation, overuse of limited water resources, and destruction of natural habitats. This is arguably an area where SFG could play an important catalysing role.
In addition, Switzerland is home to a number of impact investors, large multinational operating banks as well as food companies that operate across the globe. Given the triple planetary crisis of climate change, pollution, and biodiversity loss occurring in the context of a rapidly changing macroeconomic environment, Geneva and Swiss-based institutions are well placed to lead by example.
The Responsible Commodities Facility (RCF) Cerrado Programme 1 is an example of a practical financial model that enables companies to directly support a system of financial incentives for farmers in Brazil who commit to DCF soy cultivation.
British supermarkets Tesco, Sainsbury’s and Waitrose and global cocoa business Barry Callebaut have already invested US $11 million in the RCF, demonstrating how, with the financial tools available, private capital can be unlocked to accelerate sustainable commodity production to help protect vast tracts of native Cerrado vegetation in Brazil, enhance biodiversity, improve water quality and increase carbon sequestration. This small pilot now needs to be followed by a much larger deployment of private capital by the large number of consumer goods companies and retailers that have committed to sustainable soy.
There is an opportunity for Swiss-based retailers like Migros, COOP, Manor, and others to take a similar leadership position and play a positive role in switching to ‘nature positive’ business models.
Financial solutions such as the RCF provide a mechanism for the over 160 global agri-food companies who have signed the Cerrado Manifesto Statement of Support to materialize their commitment to halt deforestation and move towards DCF soy. The RCF also provides a pathway for companies to meet their science-based scope three carbon emissions targets and uphold the integrity of their environmental commitments across the value-chain.
I encourage all members of SFG who have made similar climate, biodiversity, and sustainable supply-chain pledges to promptly materialize their commitments via similar facilities.
On December 6, SFG will be hosting a breakfast with the UN Environment Programme team to further unpack their most recent report on the State of Finance for Nature. Register here.