Natural Capital, Investment Banking and Biodiversity

PhD student, Andrew Neill, reflects on his summer placement at the European Investment Bank…

Introduction

If you had asked me a year ago if I had any interest in banking, I probably would have said no. As a natural sciences graduate passionate about sustainable development, it just wasn’t a path I associated with my interests. Yet in March 2019, I set off for Luxembourg to undertake a traineeship at the European Investment Bank (EIB). Not just any bank, the biggest multilateral bank in the world, responsible for lending over EUR 50 billion in 2018 alone.

The reason for this sudden change in direction was discovering a new pilot program at EIB called the “Natural Capital Financing Facility” (NCFF). It seemed like a unique project attempting to use traditional investments to support and conserve Europe’s ecosystems and biodiversity. The interdisciplinary aspect of combining finance with biodiversity, economics with environmental sustainability, really appealed to me and was too good an opportunity to miss. I applied for a traineeship position with the NCFF, crossed my fingers, and a few months later, had packed my bags for Luxembourg!

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Natural Capital and the Business Case for Biodiversity

Natural capital is a tool that captures the valuable benefits provided by nature, termed ecosystem services. These services, such as food provision, water regulation and retention, nutrient cycling, clean air provision and waste decomposition, are the fundamental building blocks for society and economy. The estimated value of these services provided by natured is 125-140 trillion USD per year, over 1.5x the global GDP (OECD, 2019). The global economic system is embedded within the Earth’s stock of natural capital, and so future development and growth depends upon preserving natural capital and its associated services.

Despite the vital importance of ecosystem services, natural capital is being lost and biodiversity eroded away. Over one million species are threatened by extinction making this the greatest mass extinction event in natural history (IPBES 2019). Once natural capital has been lost, it can be very costly or even impossible to replace it. To preserve biodiversity, an investment of USD 150-400 bn per year is required but only USD 50 bn per year is currently mobilised (CBD, 2012, UNDP BIOFIN, 2018). There is a financial gap for nature and biodiversity and until that gap is closed, natural capital will continue to be lost.

While the scale of the problem appears to be insurmountable, the biodiversity financial gap is equal to only 0.2-0.6% of global GDP. The costs of replacing these services provided freely by nature far outweigh the investment required to maintain the natural assets we currently have. There is a clear business case for investing in nature, spending 0.2-0.6% global GDP in order to safeguard the world stock of natural capital that provides over 150% global GDP in ecosystem services!

What is the NCFF project?

The NCFF project housed at EIB contributes to bridging this financial gap for nature in Europe. By acknowledging the financial need to safeguard nature, and the vast potential of private finance, it brings together two disciplines that traditionally are viewed in opposition.

The NCFF is a collaboration between the European Commission (EC) and EIB. It consists of a sum of EUR 125 m to be invested across a portfolio of natural capital based projects in Europe. The key component is a EUR 50 m contribution sourced from the EC LIFE budget (public finance), while the remainder is sourced from EIB’s capital (private finance). The public finance envelope acts as a first-loss guarantee for investments, essentially “de-risking” a project that would traditionally be viewed as too risky for private investors. This is an example of a blended financial model that can combine the strengths and advantages of both public and private financial streams in order to mobilise capital for nature.

But why would a conservation or nature-based project consider an investment from the private sector?

The majority of biodiversity finance comes from public sources such as grants, subsidies or development assistance (Global Canopy Program 2012). While this is attractive because it does not require repayment, it is highly competitive with uncertain supply, and a lack of long-term reliability.  Grant finance often comes with specific targets and objectives that lead to project design optimised for securing grants rather than achieving the best outcomes for nature. On the other hand, private finance can be reliable, flexible, long-term and less competitive to secure. Private sector actors can also unlock a new realm of expertise, networks and resources that would otherwise be unavailable. For these reasons, private finance may sometimes be a better fit for a particular nature-based project.

So far this all seems sensible and straight forward. There are advantages from diversifying investment for nature, and benefits for business and industry to support the preservation of ecosystem services and natural capital assets. But there is one major stumbling block that I am sure has become obvious…

How can private investors earn any returns on their investments? How can nature-based projects repay a loan or equity investment?

This is what makes the NCFF so interesting. It aims to demonstrate how nature-based projects can have sustainable, profitable business models. The value from the benefits derived from nature are internalised and central to the evaluation of these potential investments. This is a shortcoming of traditional economic evaluations that treat the environment (and its services) as an externality. The NCFF outlines four potential models for natural capital focused activities that generate revenue or provide cost savings for business, municipalities, NGOs, financial partners or public bodies (further details here):

  1. Payments for ecosystem services e.g. flood defence.
  2. Pro-biodiversity or pro-climate adaptation businesses e.g. ecotourism.
  3. Habitat banking e.g. offset essential infrastructure projects.
  4. Green infrastructure e.g. green roofs for city cooling.

Since 2015, the NCFF has successfully signed 5 investments totalling EUR 40 m, benefitting environmental projects across Europe. Examples include continuous cover forestry in Ireland, urban climate resilience in Athens, and habitat restoration in France. The NCFF program also includes EUR 10 m as a technical assistance package (a maximum of EUR 1 m per investment) for project partners to fully unlock the potential of their project through appropriate training and resources.

Reflecting on my NCFF experience

As a pilot program, the NCFF was, and remains, an ambitious venture. The first of its kind to demonstrate blended environmental financing at a large scale to tackle some of the biggest challenges for society today. The program is not due to finish its investment window until 2021 but there are some considerations for the future.

First is the financial demand from environmental projects in Europe. The EIB and the NCFF are specialised at delivering large scale investments of EUR 5+ million. However, many environmental organisations and businesses may be better suited to smaller investments or struggle to meet the oversight of such large sums. A more nuanced understanding of the demand characteristics of environmental financing would allow for more tailored solutions. Supporting financial intermediaries that can disburse more specialised investment sizes, finding new ways to connect the demand and supply actors of environmental finance, and building capacity for natural capital investments across sectors will be key considerations moving forward.

Secondly, many environmental business models depend on stable, long-term policy support which is not always present, and can differ within countries or across borders. It is hoped that the new EU Biodiversity strategy 2020+ can provide support and guidance on this issue and further strengthen the united approach to nature conservation across the EU. The recent green-wave observed in the 2019 European Elections is a promising sign combined with the strong sustainability commitment of the incoming European president.

Finally, there is a need to raise awareness and connect different stakeholders that may be unaware of the opportunities within the NCFF. Many stakeholders may be unaware of the opportunities of the NCFF or lack the financial experience to engage with private investors. Creating networks of stakeholders and building capacity within the environmental sector will be important for unlocking new key partnerships and investment for nature. As I have learned over the past year, when thinking of ecology, financial institutions should not be forgotten, ignored or discounted.

Conclusion and Reflection

The five months I spent at EIB opened my eyes to the importance of interdisciplinary approaches to environmental problems. I learnt a lot from working in an office of investment bankers, and I hope I was able to provide some useful insights as a natural scientist. We are inclined to think of nature and biodiversity focused projects as ecologists wearing wellington boots, surveying plants and animals in the most remote wilderness but this is no longer the norm. Important project discussions are going on in offices with people wearing suits rather than wellies (and with much less exciting scenery I must admit). But these less traditional actors for environmental conservation may prove to be vital for closing the gap for nature.

The natural capital concept may not be applicable to every biodiversity focused project, but it can contribute significantly by connecting otherwise unrelated stakeholders. These different groups possess different skills, resources, capital and expertise for the preservation of nature. Success stories from the NCFF signal to the market that these types of investments are viable, profitable and attractive, hopefully mobilising much greater sums of money to safeguard our stock of natural capital.

More Information:

EIB NCFF webpage – here

EC NCFF webpage – here

Investing in Nature Guide – here

NCFF Application Guide – here

Literature cited:

CBD, 2012 Convention on Biological Diversity, Resourcing The Aichi Biodiversity Targets: A First Assessment Of The Resources Required For Implementing The Strategic Plan For Biodiversity 2011-2020.

IPBES. 2019. Summary for policymakers of the global assessment report on biodiversity and ecosystem services of the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services.

Global Canopy Program, 2012,  Parker, C., Cranford, M., Oakes, N., Leggett, M. ed., 2012. The Little Biodiversity Finance Book, Global Canopy Programme; Oxford.

OECD (2019), Biodiversity: Finance and the Economic and Business Case for Action, report prepared for the G7 Environment Ministers’ Meeting, 5-6 May 2019.

UNDP (2018). The BIOFIN Workbook 2018:Finance for Nature. The Biodiversity Finance Initiative. United Nations Development Programme: New York.

 

About the Author: Andrew Neill is a first year PhD student in Prof. Jane Stout’s group, working on a natural capital approach to the bioeconomy, as part of the SFI Beacon centre

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