We spoke with Katie Kedward, Research Fellow in Central Banking and Sustainability at the Institute for Innovation and Public Purpose (IIPP). Katie talked to us about her research into market-based mechanisms that address biodiversity loss, and her recent co-authored publication ‘heavy reliance on private finance alone will not deliver conservation goals’
About the work
Our project explores financial instruments that aim to reverse biodiversity loss, by protecting and restoring ecosystems. There is now an influential narrative that positions mainstream institutional investors – pension funds, asset managers, insurers – as the main actors responsible for financing biodiversity. This ‘mainstreaming nature as an asset class’ perspective has become almost a hegemonic narrative whose claims have not been widely evaluated. So the paper that we’ve recently published came about because we wanted to unpick nature-related financial instruments and look at the academic evidence on how successful these have been in history, including what problems have arisen, in order to understand if this aim of mainstreaming nature asset classes is the right strategy.
This ‘mainstreaming nature as an asset class’ perspective has become almost a hegemonic narrative…we wanted to unpick nature-related financial instruments and look at the academic evidence on how successful these have been…
What did you find?
The main point is that that there are inherent conflicts or trade-offs involved in attracting large-scale private financial actors such as institutional investors on the one hand, and on the other hand ensuring that their investments achieve ecological outcomes that are effective for conservation and local communities. In fact, the evidence suggests this trade-off is currently skewed towards delivering market outcomes rather than ecological outcomes, and this conflict is downplayed from a policy perspective. Lots of policymakers are prioritising the mobilisation of private finance, and are under-acknowledging that there is still an important role for public bodies to play in ensuring these instruments are effective.
…the evidence suggests this trade-off is currently skewed towards delivering market outcomes rather than ecological outcomes, and this conflict is downplayed from a policy perspective.
At their core, many conservation projects are providing what economists call ‘complex public goods’ – that are difficult to encapsulate within market mechanisms and hence will always be quite poorly provided for by the private sector. Restoring ecosystems that are severely degraded implies that you at least in part need to withdraw or minimise economic activity taking place on it, or else any economic activity is not likely to be the most profitable use of the land. Even those conservation projects that might generate returns for investors, such as ecotourism, might not produce returns for a very long time.
Certain types of conservation projects are going to need long-term, patient investment, a very high tolerance for uncertainty, and with robust governance and monitoring of ecological outcomes.
This means that certain types of conservation projects are going to need long-term, patient investment, a very high tolerance for uncertainty, and with robust governance and monitoring of ecological outcomes. Importantly, these financing mechanisms also need to include local communities, with adaptation to specific contexts. All of these things are well discussed in the sustainability literature and are well understood by environmental NGO’s and people who work on the ground with these projects. By contrast, large-scale investors tend to have potentially competing requirements. They need to achieve competitive market returns, invest in very large transaction sizes, have standardised criteria, and on top of all of this, they don’t like uncertainty or taking on large amounts of risk!
It’s no surprise then that when we looked back on a range of impact evaluations or previous attempts to scale up small conservation projects into these big financial vehicles, there’s not a lot of evidence of good outcomes being achieved in terms of demonstrating actual gains for biodiversity. In some cases, the evidence showed really poor outcomes, where biodiversity losses actually increased. This was because of lack of investment in governance and the focus being more on delivering market returns rather than achieving the underlying conservation objectives.
What does good governance look like?
It’s hard to talk about this one without getting into specifics so I’ll talk a little bit about biodiversity offsets, which are the new hot thing, and we talked about these a lot in our paper. These are good examples of how poor governance works.
Biodiversity offsets are instruments bought by companies who are seeking to offset damages to biodiversity generated by their corporate activities. The money spent by the company on the offset instrument is then channeled into a conservation project which promises to restore ecosystems and hence deliver gains in biodiversity, thereby offsetting the loss.
In the impact evaluations we looked at, the studies with disappointing outcomes also had under-resourced and underfunded governance systems, often with no powers of enforcement.
For this to work properly the offset credit has to be delivering an additional gain in biodiversity – in other words, gains that wouldn’t have occurred anyway. This is really difficult to demonstrate unless you have good monitoring and governance from independent third-party bodies, such as public environmental regulatory agencies. In the impact evaluations we looked at, the studies with disappointing outcomes also had under-resourced and underfunded governance systems, often with no powers of enforcement. Overall this is part of the long-term story of underinvestment in environmental governments more broadly. Biodiversity offsets are just one kind of instrument where we see that playing out.
You need to have strong proactive regulatory public bodies, taking an active role in ensuring that these instruments deliver.
Our paper calls on governments who are turning to implement the global biodiversity framework and thinking about their own biodiversity strategies. It calls on them to recognise that if they’re going to rely on private financial instruments, they need to understand that it doesn’t mean a reversal of the role of the state. In fact, you need to have strong proactive regulatory public bodies, taking an active role in ensuring that these instruments deliver. This involves environmental regulatory agencies on the one hand and also central banks and financial supervisors on the other hand. The flip side of poor governance is not just failing to deliver on the conservation project, it’s also potentially a financial mis-selling scandal, i.e., greenwashing. The latter falls firmly within the remit of financial authorities and so what is necessary is policy coordination between different sorts of regulatory bodies, including financial authorities to help these markets work.
