Dr Nicola Ranger, director of the global finance and economy group, Environmental Change Institute at the University of Oxford, spoke on her work at the institute in a keynote and then with moderator Richard Peers in the Q&A session, ‘What’s missing from the transaction journey?’ Dr Ranger outlined how nature risks are priced and which methods the Green Finance Institute (GFI) has put forward to assess nature-related risk.
Dr Ranger emphasised that nature is a material financial risk which companies need to be thinking about, since the economy does revolve around it. She added that 25% of species are threatened with extinction and that biodiversity risk is critical from the perspectives of corporates and supply chains.
The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) accumulates data on nature, and has revealed that 14 out of the 18 critical ecosystem services have declined, which is an urgent concern for the state of our planet.
“20 years ago I came into this as a climate scientist," said Dr Ranger. "When we were making climate projections, we would never have expected the level of temperature change that we're seeing today. In 2023, the scientific community was shocked, globally, by the level of temperature rise. It was the warmest year on record by a large margin. You see here the variation year-on-year and 2024 is above it again.”
When analysing nature-related risk, there are significant overlaps with climate-related risk. When assessing nature risk, companies need to keep in mind that risks can cascade across supply chains, and nature and climate risks amplify each other. Dr Ranger emphasised that climate and nature cannot be disconnected from each other, so when assessing risk, both need to be taken into account.
Turning to the key sources of nature-related risk, Dr Ranger underlined pollinators' decline as well as soil quality changes and water-related risk. Dr. Ranger closed her keynote by reminding the audience that while transition risks are considerable, they also represent strong investment opportunities. Those pertaining to biodiversity, carbon, and water are expected to grow in the near future.
The panel session ‘How can financial institutions build on the proposals from the GFI to both enhance and ensure the sustainability of natural capital is embedded in the transaction journey for their customers?’, included speakers Rachael Barza, associate director and lead climate adaptation and nature finance at EBRD; Tim Coates, managing director at Evenlode Landscape Recovery; Andrew Creak, founder of Kana Earth; David Croft, global head of sustainability at Reckitt; and Robert Gardner, founder of ReBalance Earth. The speakers discussed the customer experience aspect of a natural value transaction, and how companies can remain transparent and accountable with their ESG and impact investing strategies.
Coates started by outlining that the global economy needs to be shifted, and that it will not be a smooth, easy, or quick process: “There is a lot of focus on trying to make projects ‘investment-ready’. The truth is that the market is not ’investment-ready’, and that is to do with market infrastructure. It is to do with policy and regulation, and misallocation of rich risk, which means there's a misallocation of capital. If we can describe and manage risk better, we can have better risk-reward statements...”
When asked how ReBalance Earth attracts capital, Gardner said that there has been a shift in pension funds’ strategic assets to include impact investing. He continued that it is difficult for nature to gain funds in the marketplace of private equity, so it is important to identify who your customer is and what she will pay. He stated that flooding is an immediate pain point and risk, and by focusing on pain points they are gaining capital and making a difference, and that they don’t have time to wait for another solution.
Gardener went on to state that local governments and regional municipalities shouldn’t be underestimated, as they push for a more localised conversation and drive investments in biodiversity and carbon.
Barza said the EBRD is reprofiling a river in Moldova: “It's climate resilience investment. It's about flood resilience. It's about amenity. It's also about biodiversity. So it's hard to get a project like that off the ground where there's a lot of other social, environmental and climate objectives.”
Barza noted that while it is a challenge to create a market for nature investment in the current economy, there is a successful 'mainstreaming' happening across biodiversity investments, whereby clients are more willing to invest in regeneration projects. These include nature-based solutions for slope stabilisation, landslides, and flooding. She added that they are more open to the revitalisation of wetlands within the boundaries of a project - all of which bodes well for the aligning of interests and the role of community, though stil far from where they want the market to be.
Croft gave his perspective on enhancing the sustainability of natural capital; emphasising that the market is still immature and opportunistic, and that resilience is about relative growth, and motivating investment in risk and nature. He argued for the need to blend market and non-market actors for dynamic solutions.
“If it is only about market-based private sector actors, then risk and resilience, even opportunity with absolute growth, doesn't necessarily go far enough for the level of investment or the breadth of investment in some of these solutions. That's when we need to see how market and non-market actors, from a policy point of view, are going to work. There's an awful lot of downside risk and opportunity through resilience that we can build on. There'll be other things that create a common public good which meet within that stakeholder group - of both government, public sector actors as well as private sector actors. The two are absolutely conjoined, in my opinion, and you can then create solutions that work in multiple ways, both from a nature and a carbon point of view, together.”
According to Creak, there needs to be asset managers willing to take on the business case and do the hard work of allocating that capital and moving nature-related projects forward. He also commented on the shortage of talent to drive natural capital:
“If I look at the asset sector, there're thousands of people who can do equities. There're loads of people who can do passive, there're loads of people who can do fixed income property. We found 32 people in the UK who could run one of these funds. It's a good career path.”
Gardner added that nature-related risk should be given more widespread importance given the gravity of its impact: “The investor context is that just 6-12% of GDP will drop due to nature loss in the global financial crisis. Peak loss in the UK was 6%, so you might think that is not a big number. It is a big number right now for what's called Investment Committee week. I used to spend my life going from investment committee to investment committee, and it starts with unemployment, inflation; that economic clock. There is no mention of the mass carbon emissions. There is no mention of the nature-related risk, so I would love to have a dashboard that seats nature with equal footing as interest rates, inflation, and unemployment, because that’s when you land the economic value of these things.”