Finance: Help or Hinder?

In January of 2021, the Guardian ran a story entitled ‘How much is an elephant worth?’. In it, they described an attempt by ecologists and economists to come up with a working model to value nature. To many, this was either morally wrong, or absolutely critical in our attempt to properly price the dependencies and impacts we have on nature into the everyday things we trade.

“The services of forest elephants are worth $1.75m for each animal, the International Monetary Fund’s Ralph Chami has estimated; more than the $40,000 a poacher might get for shooting the mammal for ivory. Whales are worth slightly more at over $2m, he also estimates, due to their “startling” carbon capture potential, and therefore deserve better protection. It is a highly controversial way of thinking about nature and Naeem, a professor of ecology at Columbia University, often relies on humour to explain it. It doesn’t mean that fungi are about to unionise and charge humans for decomposition services, he assures me. Although, if they did, it would get expensive. We would be in even bigger trouble if the trees started to charge us for oxygen.”

Reading this at the time, I found the concept quite interesting. Today it seems we are betting the planet on it. Let’s start by unpicking the broader relationship between nature and the financial markets.

The Market

We have traded naturally-grown products on financial markets for centuries. Tulips were one of the earliest examples of an exchange-traded futures contract in 17th century Netherlands. On Friday 7th November, a random week day, the Chicago Board of Trade (one of the biggest commodity exchanges in the world) traded over US$650 million in futures contracts for wheat.

The relationship between agriculture and finance is well accepted today but our ‘extract and exploit’ mindset has led us down a very dark road and ultimately to the planet-wide mess we are in. The first step on this road was to standardize - i.e. to ‘commoditise’ - the thing being traded such that the price of the thing was consistently measured and transparent. It made trade easier.

Our entire global economy is based on a simple measure of what commercial value we can extract from the ground. For example, the price for a bushel of wheat just focuses on the business of farming and distribution. There is currently nothing in the price of the commodity to account for how the wheat was grown, what else was extracted from the field, what pollution was created in the process, nor the opportunity cost of something else existing on that patch of land.

Today, we recognise how important our connection to nature is. A field is not just a medium in which to grow some food. That field provides so much more ‘value’ than the price for a square metre of topsoil. For example, the value of the vital ecosystem it supports, its role in the carbon cycle, or the defense it provides to flooding.

Set the Right Price

Economists argue that the traditional model of supply and demand can work just fine to accommodate this broader definition of value: we just need to include the impact on nature and make it transparent in the price. In other words, make sure the price of the loaf of bread includes the cost of its impact on nature, across the supply chain from wheat field to high-street bakery.

What follows makes logical sense. The cost of today’s loaf of bread would now be exorbitantly high due to the use of fossil fuel-based fertilisers, poor land stewardship, monocropping, etc. Assuming we’re all rational consumers, the high prices would encourage us to seek out something that was beneficial to - or at least had a low impact on - nature, and would therefore be available at a lower cost and price. The market would work to channel investment and profit into the best nature-positive farms and distribution chains. The end result would be that the ‘pricing signal’ created an opportunity and moved the market towards more nature-positive solutions.

If we agree (and I hope we do) that this is a good outcome, why hasn’t this happened already? The first issue is how the real cost should be calculated: how does the market value the impact our loaf of bread has on nature? How does the supply chain of farmers, manufacturers and retailers value the dependencies they all have on natural systems (like water and land use) and resources (like fossil fuels for electricity and transport) to get our loaf of bread to the table?

I’m not just talking about wheat and bread. This theory is now playing out across every natural resource. For example, what is the true cost to nature of extracting a gallon of spring water by a drinks company, or digging up a forest to build a data centre, or bulldozing a jungle to grow a crop of soybean for animal feed. We are getting very busy figuring out the ‘right price’ to properly ‘value’ the impact of the extraction and pollution of all our planetary resources.

Do the Right Thing

Much academic work has gone into quantifying the impacts and dependencies our commercial activity has on our environment. This work is expensive and time consuming but it is gradually standardising and working its way into the financial reporting and decision making at the company level, following the path already set by climate change. Note my distinction here between impact on nature versus impact on the climate.

The transparency created by financial reporting is seen as a critical first step for companies and industries to understand their starting position. From which, organisations can set science-based targets and implement the projects needed to address the changes they need to make. Reporting standards are being upgraded, led by organisations like the TNFD (Taskforce for Nature-related Financial Disclosures) and GRI (Global Reporting Initiative). Voluntary adoption of these reporting standards is growing, driven by policy change in the EU, UK, Japan and others.

Most organisations, however, are getting stuck when considering all the inputs from their entire supply chain. It is not just the retailer in the final step of the chain that is responsible for doing all the work to set the ‘right price’. Consider this simple example of a chair: a furniture brand wants to build and sell a new chair and ensure that the price of the chair captures the real price. They want to factor into the final price of the chair all the impacts and dependencies the making and selling of the chair will have on nature.

The manufacturer needs to work across their supply chain to understand every step, from sourcing timber and water, to the production and distribution process. The retailer needs to work out their impacts from marketing and distribution activities. Each organisation involved needs to assess and measure their impact on nature (through extraction, pollution of resources, change in land use) as well as climate (through emissions). From the work at every step in the production and sale of the chair, the brand can finally calculate the right price to charge for the chair.

How each player in this process does that is well researched and there are many frameworks to choose from. One popular framework is ‘LEAP’ from the TNFD:

• Locate all your interfaces with nature across sector, value chain and geography, paying specific attention to natural systems or locations that are highly sensitive (for example, areas known to suffer from water stress).
• Evaluate your dependencies and impacts on nature by measuring the scale and scope of the effects your business activities have on nature (for example, extraction of resources, pollution, land use change, freshwater/ocean usage).
• Assess your nature-related risks by connecting the impacts and dependencies prioritised in the previous step to the physical risks (e.g. loss of a species), transition risks (e.g. misalignment between business operations and legal requirements) and systemic risks (e.g. the breakdown of an entire system and the financial instability this might cause). The assessment stage also suggests including the positive opportunities that may be available as you manage your risks.
• Prepare to respond to the nature-based risks and opportunities identified before, setting targets and metrics, and then disclosing the issues, projects and targets in your annual reporting in a structured, consistent way.

It is a long, complicated process that comes at a cost. The availability of data from the supply chain is often missing or expensive to measure. Meanwhile, a competitor who operates in a different legal jurisdiction, or doesn’t see the moral duty to do this, will be able to offer a competing product at a lower price. Having done all this work, the brand in our example is now facing a dilemma: do the right thing and risk the financial viability of the business, or ignore the cost to nature just to compete in the market.

Can we reasonably expect all organisations - globally - to self-regulate such that they are bound to behave and price their products on a level playing field? If this concept of price transparency is a viable approach to restoring nature, why isn’t it having an impact already?

We are embarking upon massive investments in measuring, verifying and reporting our impact on nature to serve this traditional economic model. Is this process of commoditisation and transparent pricing even the right approach?

Change

Organic framing in the UK hit the mainstream with the creation of the Soil Association in 1946. Eighty years later, only ~3% of UK farmland is organic (DEFRA). The costs for the upfront investments, more labor for weed control, more land to offset lower yields, cost of certification and compliance - all add to a higher price in the supermarket. It has failed to achieve any economies of scale that might bring the prices down. The consumer won’t (or in many cases, can’t) pay for organic produce even though it is healthier and tastier. I believe we have the same problem with the price for nature. Consumers will simply not see the value of paying a higher price for something even if it is the right thing to do to live sustainably.

Companies have no real incentive to change if their market doesn’t want it. There is a popular theme in many sustainability circles about reframing the cost as an opportunity. In other words, consumers will seek you out and pay a higher price for your products if you use your ‘nature-positive’ credentials as a differentiation. It’s a nice idea, but it will only appeal to a minority of the market and this strategy will eventually flatline.

Who is left that can act as the catalyst for change? In order for this system to work, we need entire, global supply chains to properly measure our impact and remove or reduce our impact on nature where needed. We are currently pinning our hopes on governments and investors.

Governments are now increasingly aware that a significant share of GDP depends on resources that are highly dependent on nature (Oxford). Governments want to avert climate-induced crises and biodiversity collapse. They can see the risks, the urgency and the scale of the changes needed, but they are largely unwilling to implement the necessary - potentially anti-competitive - policy and tax changes required. Reluctant to intervene, they appear to be playing a game of matched funding: we’ll pay some of the bill, but only if corporate and private investors pay more.

Investors (I’m not making a distinction here between asset managers, pension funds, private investors, philanthropic foundations) are similarly waking up to the huge risks they are running against their own investments (UK Pensions). With no changes, they can expect significant volatility on their portfolios of investments. They too see the risk to their own balance sheets of extreme weather events compounding with biodiversity collapse.

How much would each of these players pay to reduce the risk of an unstable food supply chain, lost revenue or poor investment returns due to some catastrophic nature event?

The gap in financing required to protect resources and reduce our global impact is very large. The ‘Baku to Belem Roadmap’ puts the required global funding target at $1.3 trillion, annually, to support the climate finance needed by 2035 (of which nature projects are seen as a subset).

With so much to play for, it’s surprising how slow the conversations are going. Governments are moving too slowly because poll-watching politicians are trying to address both the political and the market forces at the same time without resorting to unpopular regulation.

Money is not the problem

Investors are also moving too slowly, but unlike governments, the cause is not a lack of money. Their current view is that there are some key things in the investment landscape that are missing for them to really engage:

1. A lack of supply of investable nature projects in which to invest,
2. A lack of legal protection for their investments,
3. A lack of transparency in the investments that would allow them to be properly priced and traded.

The 50,000+ delegates at COP30 in Brazil are currently working hard to find solutions to each of these points. But I wonder if there is something else more fundamental at play here?

The investor mindset wants the best reward for the lowest risk. In other words, in the context of this discussion on nature, they need to control the risk and reward of their investment in their slice of nature. In response, the level of financial innovation in the investment market is starting to pick up to help make the market more attractive to investors. Here are a few examples:

• Bio diversity credits that work the same way as a carbon credit: an organisation buys a tradeable asset (the credit) to offset their own impact and claim nature neutrality. The tradeable asset is tied to a certified restoration or stewardship project somewhere else in the world.
• Debt swaps to allow financial organisations to buy up existing loans so that the lenders in a country can offer new loans to support nature restoration projects.
• Grants that governments can use to create ‘blended finance’ for lenders to offer loans at lower interest rates so that restoration or stewardship projects can be made more financially viable.

With our current economic model and the increasing investment opportunities - can we expect the change we need, within the time frame we need it?

Bad Assumption

To recap, the goal is as follows: as a consumer, the price I pay for a loaf of bread, or a new chair, should reflect the impact it had on nature. The expectation is that investors and governments will help fund the changes we need in our global supply chains. The market will reward those companies that make the necessary investments to reduce or eliminate their impacts and dependencies. Once that happens, nature-positive commercial activity becomes the norm. All we need to do is make it easier and cheaper for companies to start reducing and removing their dependencies and impacts on nature.

At the heart of this goal is a need to commoditise each ‘piece’ of nature so that it neatly fits into the economic model. Each unit of nature is transparent, easily priced and easily traded. Sounds simple, and that’s the problem: there is no such thing as a unit of nature.

The global climate crisis demands that we reduce atmospheric carbon and we have responded with a market to trade a literal ‘ton of carbon’. Whether you extracted that ton of carbon by establishing a forest in Australia, or from some new direct capture technology in Brazil - it doesn’t matter. One less ton of carbon in the atmosphere is a good thing for the planet as a whole. The ‘commodity’ approach makes sense.

But nature doesn’t work that way. A collapse in biodiversity in England can’t be offset by a rewilding project in Poland. Huge water stress in South Africa can’t be offset by water management projects in China.

There is no commodity called ‘nature’.

Global Stewardship

Global trade and the financial market have - and will continue to - fail us. Even if we believe that the idea of transparent prices could work, there are no ‘players in the market’ with enough incentive to make the changes we need right now.

The idea of commoditisation surfaced recently in a great debate on Linkedin between Jessica Smith and Paul Clements-Hunt. Jessica is the Head of Nature at United Nations Environment Programme Finance Initiative (UNEP FI). She made a compelling argument against the commoditisation of nature. I’d like to paraphrase her key points below.

• The vast majority of the world's remaining biodiversity - concentrated in tropical forests in the Amazon, Congo Basin and Southeast Asia - has been defended primarily by indigenous people and local communities. These communities, through traditional agricultural and conservation practices, and social or spiritual beliefs, have demonstrated higher effectiveness at preventing biodiversity loss than state-led or market-based approaches; not by conventional conservation and not by the markets.
• Privatisation and conventional markets fundamentally don't work well for managing natural resources. Commodification disembodies nature from place and community, assigning untethered exchange values that can alienate the very stewards who have protected it. Why put the fate of nature into the hands of traders, instead of the stewards who have a track record of success?
• But that doesn't mean we can't use economic valuation as a policy tool to help us target incentives and prioritise conservation. But we can do this without treating ecosystems as privately owned commodities. Securing land rights for indigenous peoples is therefore the single most important action we can take for biodiversity. Incentive schemes can provide income to stewards - often those same local communities mentioned above - for maintaining or enhancing ecosystem functions, without privatising those ecosystems. We must incentivise the act of stewardship and the flow of services, not create property rights over nature itself. We can put a value on the services - clean water provision, carbon sequestration, or flood protection - and pay to maintain the forests and wetlands that provide these services. A forest guardian should be wealthy given her or his planetary contribution.
• We don’t need to commodify the forest or river into a tradeable asset. It makes more sense to treat natural capital as infrastructure rather than as commodity. Just as most countries maintain roads, water systems, and energy grids as essential public infrastructure that underpins all economic activity, ecosystems continuously provide vital services upon which everything else depends. Infrastructure thinking emphasises long-term stewardship and sustained investment for public benefit rather than short-term extraction.
• When we commodify, nature's value is consistently underestimated or ignored until it's too late - leading to depletion and ecosystem collapse. On top of that, the real risk is that 'the market may never give back a commoditised planet' - exactly why we must get this right from the start. Once nature is fully commodified into tradeable assets, those with capital can accumulate ownership over our shared life-support systems. But when we recognise nature's infrastructure role, we can integrate it effectively into policy, planning, and … finance. There is a positive role for finance for nature, but we need to be precise about the mechanism. We make money by serving healthy ecosystems and rewarding their stewards, not by owning and trading nature itself.

My conclusion

In a perfect world, the consumer would pay the right price for goods and services. The money would be efficiently split across the supply chain and a healthy slice attributed - and paid - to the communities that look after our natural resources. For the reasons we have discussed here, there are too many obstacles to make this a reality in the current economic model and in the needed time frame.

Given the urgency and with this ‘nature as infrastructure’ view, we need to actively intervene in the market. In just the same way that we maintain and improve our existing national infrastructure, we need to allocate funds to protect and grow our natural infrastructure.

My conclusion is to reject the idea that nature can be commoditised, traded and ‘owned’. Valuing the impact and dependencies of nature on our commercial activity is an important tool in the reporting and prioritisation of nature remediation and restoration projects. But we should not allow financial markets to use this data to create and trade financial instruments that necessarily require a commodity/ investor mindset. We need our governing institutions to see this potential land grab for what it is and guard against the wholesale takeover of our natural infrastructure by the financial markets.

We therefore need to do a lot more to support governments to enact and enforce the needed regulation and tax regimes to get commerce and industry to start adapting to the new reality before the financial markets become the last remaining option.

Practically, this means:

• we must continue to push for legislated transparency in financial reporting across global supply chains.
• we should change the basis of how taxes are collected to ensure any step in the supply chain that is extractive, polluting or impacting on the environment is taxed appropriately.
• we should change the allocation of tax revenue away from polluting and extractive industries, to natural infrastructure projects. For example, to end and reallocate the current £18bn in explicit tax breaks and indirect subsidies to the oil and gas industry (Tax Justice).
• we could demand a percentage of everyone’s pension funds (the financial expression of providing for our future) are allocated to nature restoration. In the UK, just reallocating 1% of our collective pension assets could raise ~£30billion to fund local and global programs.

The sooner we stop putting our hopes in discretionary private investment to restore natural systems under a failing economic model, the faster we can act to prevent collapse. It’s a bitter pill to swallow, but swallow it we must. And while this change starts to take effect, we must - as consumers and voters - start acting more consciously about what we consume, what we are willing to pay for things and who we vote for in our elections.