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Almost 20 years ago, economist Nicholas Stern said climate change was “the biggest market failure in history”. But Harry Boyd-Carpenter, the European Bank for Reconstruction and Development’s (EBRD’s) managing director for climate strategy and delivery, says the scale of the market failure when it comes to nature is “really terrifying”, and may be more difficult to ‘solve for’ than climate.
He made the remarks just days before the multilateral bank unveiled its strategy for nature during Nature Day at COP28, which outlines how the bank plans to invest in and protect nature (which includes ecosystems such as land, ocean, freshwater, atmosphere, and their biodiversity) as well as disclose nature-related information.
The Stockholm Resilience Centre’s latest planetary boundaries concept, which outlines nine interrelated boundaries within which humanity can continue to thrive, shows that six have already been crossed, increasing the risk of large-scale or irreversible environmental change. “The climate crisis is only one dimension of the nature crisis; pollution, freshwater, land use and biodiversity are also all in critical states,” said the EBRD in announcing its strategy.
What risks does this present to society at large and business? More than half of the world’s gross domestic product — an estimated $58tn — is moderately or highly dependent on nature, according to financial services firm PwC. More than half (50.6%) of the market value of listed companies on 19 major stock exchanges are also exposed to material nature risk, it adds.
Pointing to “the overexploitation of public goods, the mispricing of nature in economic systems and a lack of appropriate regulation to redress this”, the EBRD says addressing the biodiversity crisis is in line with the multilateral development bank’s transition mandate. Article 2 of the agreement establishing the bank commits it to “promote[ing] in the full range of its activities environmentally sound and sustainable development”.
“What we’re really trying to do is walk this tightrope between on the one hand recognising that this is, frankly, a truly terrifying crisis,” says Mr Boyd-Carpenter. “But on the other hand, we need to be realistic about what with the specifics of our operational model we can do because the last thing you want to do is say to everybody: ‘Here we are, we’ve come to solve a problem. Don’t worry, you know, we’re on it’, when actually it’s very difficult, even more difficult than climate change.”
Markets not structured to conserve natural resources
While the EBRD bills itself as one of the largest investors in environmental projects — including €19.9bn it has invested in energy efficiency in its countries of operations — NGO CEE Bankwatch points to the EBRD’s and other multilateral development banks’ (MDBs’) (the Asian Development Bank and IFC) investments in the Zarafshan, Bash and Dzhankeldy wind projects in Uzbekistan, as an example of renewable energy projects that could have catastrophic consequences for nature and biodiversity.
CEE Bankwatch says the wind projects have been placed in important biodiversity areas that are home to globally threatened species, including falcons and vultures. In both the Zarafshan and Bash projects, CEE Bankwatch says the wind turbines are being built too close to the nests of endangered species such as saker falcons and Egyptian vultures. It says transmission lines for the Dzhankeldy and Bash projects run through prime habitat for the Asian houbara bustard.
Although there has been some progress in recent months, especially on strategic environmental assessments for future projects, CEE Bankwatch says the four aforementioned projects remain quite problematic and urgent action is needed if they are to be shown as good examples of renewable energy. “We support investment in renewable energy, but investors should ensure that alternative (potentially less damaging) locations are considered and that cumulative impact assessments are carried out — especially as such projects are mushrooming across the country,” says a CEE Bankwatch spokesperson.
While there is much to learn from the climate change effort, McKinsey points out that nature-related risk is more difficult to address and “key differences will require new thinking, data, and tools”.
Some of the challenges include the lack of well-functioning markets for nature, which the EBRD says makes commercially driven investments a challenge. “Only a fraction of nature’s value to the economy is priced by markets, and most markets are not structured to conserve or sustainably manage natural resources,” it states.
“We’re a market-based bank, so our job is to address market failures,” says Mr Boyd-Carpenter. But given that the market failures are so persistent across the globe, and economic systems fail to reward ecosystem services, or put a cost on environmental and ecosystem damage, he says it is really hard to generate bankable opportunities.
“For a long time, we’ve been able to do a relatively small but consistent volume of pollution prevention and pollution clean-up projects. The challenge we’re setting ourselves now is how can we go further and expand that towards things like nature-based solutions, blue-green infrastructure, especially embedding that in our green cities programme?”
The EBRD also has a role to play in shifting corporate behaviour on nature, says Mr Boyd-Carpenter. “How do we get corporates to think about what their net exposure to nature risk is? We have a very strong agribusiness franchise and are one of the MDBs most active in that sector. Agriculture as a sector has, by far, the largest impact on nature. What are the ways that we can help our clients shift towards more regenerative agriculture?”
Nature strategy framework
In addition to leveraging the EBRD’s environmental and social policy, which will be reviewed as part of the bank’s new strategy on nature, and people within the bank with experience in assessing biodiversity impacts and mitigating them, the EBRD says its nature strategy will be guided by the goals and targets of the Kunming-Montreal Global Biodiversity Framework (GBF). The framework was adopted at COP15 to deliver on the commitments set out in COP26’s joint MDB statement on nature, people and planet.
Key steps the bank plans to take as part of its new strategy on nature include:
- Protect nature, by reviewing its Environmental and Social Policy to maintain good international practice in safeguarding and leveraging environmental due diligence to identify opportunities for Biodiversity Net Gains.
- Invest in nature, by exploring new models for financing in three main areas: blue-green infrastructure, pollution prevention and the circular economy, and nature governance. This will include engaging in policy dialogue and working with donors to address market failures, incentivise better operational practices and develop new nature finance models.
- Disclose nature-related information, by observing relevant disclosure standards and timelines for reporting on nature impacts and dependencies, and working closely with other MDBs to align on definitions and reporting principles. The EBRD will also support its clients in making nature-related disclosures and sharing biodiversity baseline data through the Global Biodiversity Information Facility using a technical guidance document that the EBRD recently developed.
The EBRD says Biodiversity Net Gains (leaving the natural environment in a measurably and materially better state), are a requirement on bank projects that have the potential to cause the most harm to nature, but could be more widely applied in both extent and scope. “This application would contribute, in particular, to the achievement of Target 2 of the GBF, which calls on world governments to restore at least 30% of degraded ecosystems by 2030,” it states.
At COP28, MDBs published a set of common principles for “nature-positive finance”, which will be integrated in existing environmental sustainability tracking methodologies. The principles are one of the key deliverables stemming from the COP26 Joint MDB Statement on Nature, People and Planet, in which multilateral development banks agreed to ramp up efforts for the protection, restoration and sustainable use of nature in support of the Kunming-Montreal GBF.
