Is banking on nature a solution? The risks of the financialisation of nature

This week’s blogpost, which builds on a chapter of our recent report “The ‘EU Climate Bank’ – Greenwashing or a banking revolution?”, looks into the risks associated with green finance and nature-based solutions. With the EIB likely to be a pioneer in this field as part of its commitments on climate and the protection of biodiversity, it is crucial to bring attention to some of these challenges.

Putting a price on nature is increasingly being promoted as an approach to address pressing environmental issues like biodiversity loss. Nature is becoming conceptualised as a collection of “natural capital” assets that provide ecosystem services which can be measured and monetised. This new trend towards green finance, nature-based solutions, biodiversity offsetting and the financialisation of nature bears significant risks and is very often based on problematic assumptions.

A window into the “green” economy

In 2014, the EIB and the European Commission created the little-known Natural Capital Financing Facility (NCFF). This financial instrument was “to prove to the market and to potential investors the attractiveness of biodiversity and climate adaptation operations in order to promote sustainable investments from the private sector”. The NCFF is financed through the LIFE programme of the European Commission, with a total budget of € 100 million for investments, plus € 10 million for technical assistance, using funds that had until now been awarded as public grants.

Proponents of such financial instruments argue that the best way to reorient private capital to address the climate and environmental crises is through the use of public money to incentivise and catalyse private finance, via public guarantees, public subsidies and so-called blended finance.

Shifting from public grant-based funding to these new forms of financing however raises important concerns. These financial instruments require success to become measured in terms of profitability and rate of return rather than on the ability to protect or enhance nature. Moreover, it is arguably not compatible with what science asks us to do in terms of timing and ambition. Promoting these instruments could for instance foster controversial policy tools such as carbon and biodiversity offsetting, which would only worsen the issue.

One of the EIB loans under the NCFF went to CDC Biodiversité, a French bank that generates offset credits for companies to compensate for their impacts on biodiversity. Biodiversity offsets allow companies such as real estate developers, infrastructure and mining companies to offset their destruction of biodiversity by protecting or even “recreating” natural habitats and ecosystem functions at a different time and place. For example, CDC Biodiversité has purchased thousands of hectares of land in the South of France which has been impacted by earlier intensive use, and is seeking company finance for the restoration project on that land. In exchange, the companies receive a compensation certificate that they can use to greenwash the environmental damage caused by their projects.

A reality check for biodiversity offsetting

Offsetting has been rapidly expanding as a promising policy for allowing development and economic growth while achieving a “No Net Loss” of biodiversity. The “Net” is important because it enables destruction or pollution on the assumption that the damage can be offset.

There cannot be ‘No Net Loss’ of biodiversity without biodiversity loss occurring somewhere (Photo: Bigstock/Kletr)

Central to the concept of biodiversity offsetting is the idea that we can reduce any particular aspect of biodiversity into stable, independent and quantifiable units that can be added up, divided and shifted around like figures in a spreadsheet. While this might seem like an appealing idea, it is fundamentally flawed as it separates the “value” of biodiversity from the complex ecological, social and geographic relations that allow that biodiversity to exist, overlooking the uniqueness of habitats and disregarding the importance of nature for local communities.

Biodiversity offsets have shown a spectacularly poor social and environmental track record in practice. A study looking at a broad range of restoration projects around the world found that up to two-thirds of offsets aiming to restore an ecosystem were unsuccessful. The figure was even higher in offsets that created ecosystems from scratch. Another study analysing 558 offset projects between 1990 and 2011 found that despite offset attempts the net loss of habitats was 99%. This demonstrates the enormous difficulty of restoring ecosystems and limited added value of companies’ conservation initiatives.

The sad reality is that whereas biodiversity losses are guaranteed, future biodiversity gains are uncertain, as they are likely to be realised late or not at all. Evidence shows that it is unrealistic to expect offsets to be secured in the long-term, let alone in perpetuity. In the end, this inevitably means a net loss of biodiversity.

Biodiversity offsetting also tends to perpetuate injustices, with many studies revealing cases of land grabbing, community displacements and human rights abuses (see our 2017 report on biodiversity offsetting).

Biodiversity offsetting not only displaces communities to make room for new infrastructures, but the very compensation measures supposed to make up for the impacts of these projects can cause the displacement of other communities, that otherwise would not be impacted (Illustration: Lindsay Noble Design)

Nature-based solutions do not escape these challenges

The trendy so-called “nature-based solutions”, which encompass a variety of conservation and restoration projects, are almost always financed by offsetting mechanisms. These nature-based solutions are being widely promoted by the European Commission, which defines them as “solutions that are inspired and supported by nature, which are cost-effective, simultaneously provide environmental, social and economic benefits and help build resilience”. As the NGO Green Finance Observatory points out, “nature-based solutions” without offsetting are unfortunately unlikely to happen, since their appeal resides precisely in their “cost-effectiveness” compared to curbing destruction, as well as in their ability to provide business opportunities. They are in practice only the new name given to carbon and biodiversity offsetting.

These mechanisms, along with many other attempts to create markets for ecosystem services, all contribute to the financialisation of nature. Rather than a form of environmental protection, pricing natural systems ultimately becomes a means for promoting the privatisation and financialisation of nature and creating new ways for the financial sector to continue earning profits.

Over the last decade, the EIB has been trying to be proactive in engaging with this field of activities and showing that public banks can lead the way in investing in natural capital. The EIB has also been active in supporting carbon markets, through the direct management of several carbon funds and specific funds for the purchase of carbon offsets generated from Clean Development Mechanisms (CDM) projects. The EIB has been at the forefront of carbon market development for example through its support for REDD+ via the Althelia Climate Fund, an investment fund that aims to profit from payment for ecosystem services, including offsets from forests.

But looking back at the experience of the NCFF, while this initiative has been introduced as a means of building a “business case” for investing in nature, the facility seems to struggle to show that cash flows and revenues can be generated through biodiversity protection projects.

Indeed, as of April 2020, the EIB had only financed 5 operations worth € 43.5 million, while 2 other operations were under appraisal. And out of these 5 operations, 2 were not even direct support to projects, but support through financial intermediaries. The EIB and the Commission even had to expand the end of the initiative until the end of 2021 to disburse the funds foreseen under the initiative. Hence, at this stage, it is hard to see how this pilot project could be labelled as a success.

This is not to say that sustainable finance has no role to play in a desirable future, but it should target a reduction in the consumption of natural resources and energy rather than green growth, and prioritise people’s wellbeing and environmental protection over profit maximisation. The EIB should finance projects that mitigate climate change, build resilience and do no harm, while in parallel refraining from entering the new business of offsets and payments for ecosystem services.

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