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Restoring Nature
Restoring Nature

The Natural Capital opportunity

February 21, 2022
Team Cecil

We know that our relationship with nature must change. For too long, our economic systems have recognised only positive outcomes from the depletion of natural assets, and none of the negative outcomes. We stand on the verge of tipping points that threatens to breakdown the economic and social fabric of global society.

Nature-based projects that conserve natural ecosystems can play a critical role in meeting global climate commitments to avoid this fate. However, to fund nature restoration and close an estimated $4.1 trillion financing gap needed to deliver necessary net emission reductions by 2030, we need to scale effective market-based solutions that integrate natural capital into our global financial system.

What is natural capital?

Natural capital is the term to describe the world’s stock of natural assets, including its biodiversity, air, forests, soil, and water. It is effectively the planet’s balance sheet, providing ecosystem services (food security, fuel, clean water), regulating environmental conditions (natural hazards like floods, forest fires and controlling pollution) and supporting recreation and other societal activities. It lies at the foundation for all life on Earth. Without it, modern civilisation would collapse.

The problem

Human activity is rapidly degrading the value created by natural capital assets.

“Climate change accelerates the depletion of natural capital and ecosystem services as it alters major geophysical conditions—average surface temperatures, ocean body temperatures, precipitation patterns, the oxygen content and acidity of seawater— too quickly for natural systems to adapt. When these changes reach thresholds that ecosystems can no longer sustain, natural capital and ecosystem services often degrade along a nonlinear path.”

The issue is exacerbated by our current measure of economic success. Traditional economic measures such as GDP discount natural capital by recognising only positive outcomes from the depletion of natural assets, and none of the negative outcomes.

The opportunity

With estimates placing the total value of natural capital at above US$150trillion, investing in nature has become one of the biggest financial opportunities in history.

Major financial players, including global private equity firm KKR, are investing in the emerging market for natural capital. The Task Force on Nature-Related Financial Disclosures, a group aiming to create global reporting standards for how companies disclose their nature-related risks, described this opportunity as follows:

“Nature loss poses both risks and opportunities for business, now and in the future. More than half of the world’s economic output – US$44tn of economic value generation – is moderately or highly dependent on nature. Currently, financial institutions and companies don’t have the information they need to understand how nature impacts the organisation’s immediate financial performance, or the longer-term financial risks that may arise from how the organisation, positively or negatively, impacts nature.”

The path forward

The global financial system needs to shift its success metrics to represent sustainable economic growth, by accounting for the impact of production on nature. We must transform of our financial system by increasing public and private financial flows into projects that enhance natural assets and inhibit investments made into those that degrade them.

Global carbon and ecosystem markets that incentivise decarbonisation and account for value created by improving biodiversity, are vital financial mechanisms to support such capital flows. To ensure these markets scale at a pace and magnitude that is proportionate to the challenge, help will be needed through:

  • Collaboration tools to support teams working to set up and invest in quality nature-based solutions
  • Data that aligns price to quality and risk, accelerating the development of effective market-based solutions

On a planet where natural capital and the global economy are mutually reinforcing, effective financial mechanisms can deliver greater climate resilience, biodiversity, and sustainability development co-benefits for generations to come. With momentum building amongst technology providers, policy makers and local communities across the world, radical hope exists in the belief that this climate challenge can be overcome.

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