Financing Nature-Based Solutions Can Pay Dividends
Financing Nature-Based Solutions Can Pay Dividends
Head, Sustainable Finance, Products and Strategy
John Uhren is Managing Director and Head, Sustainable Finance, Products and Strategy, at BMO. He leads product development and strategic initiatives across the ente…
Associate, Sustainable Finance
May Lim is Associate, Sustainable Finance, at BMO Capital Markets. May advises clients on ESG strategies and opportunities in sustainable finance to help advance th…
John Uhren is Managing Director and Head, Sustainable Finance, Products and Strategy, at BMO. He leads product development and strategic initiatives across the ente…
VIEW FULL PROFILEMay Lim is Associate, Sustainable Finance, at BMO Capital Markets. May advises clients on ESG strategies and opportunities in sustainable finance to help advance th…
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At this week’s 15th Conference of the Parties (COP15) to the United Nations Convention on Biological Diversity (CBD) held in Montreal, participants will seek to establish an action plan around protecting nature and stopping biodiversity loss around the world. A key call for action will be around narrowing the financing gap in investments in nature-based solutions, a critical tool for climate change mitigation and adaptation.
In recent years, greenhouse gas emissions management has quickly risen to the tops of agendas at many businesses, financial institutions and governments, under a shared understanding that urgent and collective action is needed to mitigate the increasing risks of changing climate. A silver bullet for curbing emissions does not exist, but there is an informal hierarchy of mitigation approaches that categorize and prioritize different alternatives for tackling the issue. The pyramid structure below visually depicts the importance of avoidance and reduction initiatives over substitution, sequestration and use of offsets for emissions that cannot be eliminated otherwise, because it recognizes that adjusting the business-as-usual activities before compensating for the gap is fundamental.
Figure 1. Carbon Mitigation Heirarchy
Among the different decarbonization levers currently available, one stands out for its ability to both prevent and remove emissions: nature-based solutions. The International Union for Conservation of Nature (IUCN) defines nature-based solutions as “actions to protect, sustainably manage, and restore natural or modified ecosystems that address societal challenges effectively and adaptively, simultaneously providing human well-being and biodiversity benefits.”[1] These ecosystem conservation, restoration and improved land management practices not only offer opportunities to avoid or absorb emissions, but also add buffers against the impacts of climate change facilitated by greenhouse gases. Climate action is mitigation in hand with adaptation; nature-based solutions can help with both.
Figure 2. Examples of Nature-Based Solutions Across the Carbon Mitigation Hierarchy
The UN Climate Change Conference (COP 27) that took place last month hosted a “Biodiversity day” to highlight the interlinkage between biodiversity loss and climate change and to discuss nature conservation in the context of climate solutions. According to a study led by The Nature Conservancy, nature-based solutions could provide up to 37% of the emission reductions required by 2030 to achieve the Paris Climate Agreement goal of holding global warming to below 2°C.[2] However, scientists say the current trajectory we are on is a 10.6% increase in emissions by 2030 compared to 2010 levels.[3]
According to a May report by the United Nations Environment Program (UNEP), the world needs about US$8.1 trillion of investment in nature by 2050 – or an annual investment of US$536 billion – to tackle the interlinked climate, biodiversity, and land degradation crises.[4] Today, the voluntary carbon market provides one of the most critical infrastructures for directing capital into nature-based solutions. A growing number of companies have pledged to achieve net zero emissions, and many have also set accompanying nature-related targets (McKinsey reports approx. 85% of Fortune Global 500 companies have quantitative targets across multiple dimensions of nature.[5]) According to Ecosystem Marketplace, in 2021 nature-based carbon credits were double the price of renewable energy offsets in voluntary carbon markets, with many buyers willingly paying a premium for the co-benefits often observed in nature-based projects, such as community economic development and biodiversity conservation. Nature-based solutions now account for around 40% of retired (i.e., paid and accounted for) carbon credits in voluntary carbon markets, up from only 5% in 2010.[6]
Despite the uptick in demand and interest from businesses, investors and governments, nature-based solutions such as a form of carbon offsetting have invited critique, particularly around risks of greenwashing. For example, poorly designed carbon projects – such as planting monocultures of fast-growing commercial timber species – can undermine the ecosystem health overall and its long-term capacity to absorb carbon. Wildfires destroying forests whose conservation had already been paid for, and sequestration benefits accounted for, also raise questions around the legitimacy of voluntary carbon markets. These shortcomings around the integrity, standardization, traceability and additionality of voluntary carbon credits[7] will continue to pose important questions in the next couple years, but there are already efforts to create governance systems and enhance accountability, such as the Integrity Council for the Voluntary Carbon Market (ICVCM). Credible carbon offsets can deliver a practical vehicle for investing in conservation, restoration and land management projects across borders, and with the help of efforts to improve transparency and quality of these offsets, they have an indisputable impact on decarbonizing the economy globally. On the other side, any company’s or country’s reliance on these offsets without concrete actions to reduce emissions from existing operations and value chain – in other words, skipping to the bottom of the mitigation hierarchy – will be increasingly scrutinized.
Further innovative market-based mechanisms and initiatives exist today and are gaining traction, with some examples highlighted below:
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A proposed pilot program of Environment and Climate Change Canada (ECCC) intended to generate government-backed biodiversity certificates in return for capital investments in conservation projects.
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As far as back in 2002, Peru and the U.S. government arranged for a debt-for-nature swap, that relieved Peru of debt payments in exchange for the preservation of its tropical forests.[8]
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In France, a recent decree under Article 29 of the French law on Energy and Climate requires French financial institutions to disclose how their financial activities depend on -as well as impact - biodiversity and climate.[9]
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The Government of Indonesia published the Guideline on Blue Finance Instrument Development just last month, while a Japanese seafood company offered a ¥5 billion (US$35 million) blue bond whose proceeds will fund sustainable fisheries.
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In 2020, the Science Based Targets Network – the same group of organizations behind the Science Based Targets initiative (SBTi) – published an initial guidance for businesses around setting science-based targets for nature.[10]
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The Taskforce for Nature-related Financial Disclosures (TNFD) is refining its framework for companies to disclose their management of nature-related risks and opportunities. In October this year, 23 companies, with a total market value of US$1.3 trillion, announced their participation in a pilot to test and try the TNFD beta framework’s components and provide feedback.[11]
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The UK’s Biodiversity Net Gain mandate in its 2021 Environment Bill that requires a minimum of 10% biodiversity gain in development and land management projects, also includes creating a statutory biodiversity credit scheme wherein developers can purchase credits to pay for habitat creation.[12]
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Earlier this year, the World Bank issued a five-year US$150 million “Rhino Bond”, that includes a potential performance payment from the Global Environment Facility to help protect and increase black rhino populations in South Africa.[13]
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The International Finance Corporation has developed a Biodiversity Finance Reference Guide building on the Green Bond Principles and the Green Loan Principles, to help identify potential investment projects and activities that advance natural resources protection and management.[14]
It is indisputable that nature is a key stakeholder in our collective transition to low-carbon, sustainable ways of doing business and living life. Innovative financing for nature-based solutions can accelerate the capital flow needed to meet global decarbonization goals as well as to abate climate risk mitigation costs.
At BMO we provide tailored financing solutions aligned with various sustainability objectives, including nature-related goals and projects. Last week we also announced the completion of the acquisition of Radicle Group Inc., a Calgary-based leader in sustainability advisory services and carbon credit development, as part of our continued commitment to be our clients’ lead partner in the transition to a net-zero world. To learn more about opportunities in leveraging nature-based solutions as part of a climate and decarbonization strategy, please reach out to our Sustainable Finance team at Sustainable.Finance@bmo.com.
[1] https://www.iucn.org/theme/nature-based-solutions/resources/iucn-global-standard-nbs
[2] https://www.nature.org/en-us/what-we-do/our-insights/perspectives/natural-climate-solutions/#:~:text=Research%20led%20by%20The%20Nature,30%25%20more%20than%20previously%20estimated
[3] https://unfccc.int/news/climate-plans-remain-insufficient-more-ambitious-action-needed-now
[4] https://www.unep.org/news-and-stories/press-release/world-needs-usd-81-trillion-investment-nature-2050-tackle-triple
[5] https://www.mckinsey.com/capabilities/sustainability/our-insights/where-the-worlds-largest-companies-stand-on-nature
[6] https://www.mckinsey.com/capabilities/sustainability/our-insights/why-investing-in-nature-is-key-to-climate-mitigation
[7] A voluntary carbon credit is a tradable permit generated from avoidance, reduction or removal of carbon emissions
[8] https://home.treasury.gov/news/press-releases/po3202#:~:text=The%20debt%2Dfor%2Dnature%20swap,preservation%20of%20its%20tropical%20forests
[9] https://tnfd.global/news/frances-article-29-biodiversity-disclosure-requirements-sign-of-whats-to-come/#:~:text=Under%20Article%2029%2C%20French%20financial,alignment%20with%20international%20biodiversity%20goals
[10] https://www2.deloitte.com/content/dam/Deloitte/fr/Documents/risk/Science-Based-Targets-for-Nature-Initial-Guidance-for-Business.pdf
[11] https://www.wbcsd.org/Overview/News-Insights/General/News/TNFD-pilot-program
[12] https://www.local.gov.uk/pas/topics/environment/biodiversity-net-gain-local-authorities/biodiversity-net-gain-faqs
[13] https://www.worldbank.org/en/news/press-release/2022/03/23/wildlife-conservation-bond-boosts-south-africa-s-efforts-to-protect-black-rhinos-and-support-local-communities
[14] https://www.ifc.org/wps/wcm/connect/74307fa1-4e33-42f1-b7e4-5f0b2f240f97/IFC+Biodiversity+Finance+Reference+Guide+Nov+2022+-+with+branding.pdf?MOD=AJPERES&CVID=oho1cOb
