NatureFinance@Oxford Seminar Series

Abstract

There is growing interest in developing generalisable, standardised measurements of biodiversity, in particular to help the business and financial sectors to quantify biodiversity impacts. In our recent paper, we created a framework to explain how such units are defined in the rapidly growing voluntary biodiversity credits market. In this talk, I will present this framework and use it to discuss the many measurement challenges that are faced in trying to reduce something as complex as biodiversity to a single unit, and what this might mean for biodiversity credit markets.

Abstract

International negotiations emphasise the importance of private capital in supporting the protection and restoration of biodiversity and natural ecosystems. However, there is limited understanding of the conditions under which private capital can effectively address these critical issues. In other transitions, derisking has proven to be a valuable policy tool for enabling investment in socially desirable initiatives. This paper will analyse biodiversity finance deals and propose a framework to assess whether derisking could be a viable strategy to mobilise finance for biodiversity.

Abstract

Large-scale ecosystem breakdown may pose systemic macroeconomic and financial risks due to the loss of key ecosystem services, including carbon sequestration, upon which swathes of economic activity relies. Yet there has been little empirical work identifying the financial flows - as opposed to equity holdings - that support activity associated with such ecosystem degradation. In this paper, we examine financial flows in two ecosystems, the Brazilian Amazon rainforest and tropical peatlands in Indonesia, where breaching ecosystem ‘tipping points’ could have systemic and irreversible impacts.

We use supply chain data to identify 39 companies linked to significant land use change in these ecosystems and connect this to a newly constructed granular dataset of financial flows – covering lending and capital markets (equity and debt issuances) activities – over the past decade. Flows to these companies were facilitated by a relatively concentrated group of commercial and investment banks, presenting a possible intervention point for influencing sustainability transitions. In the case of the Brazilian Amazon, flows were headquartered mainly in Global North financial hubs. In contrast, for Indonesia, the majority of flows were domestically based or from the surrounding East Asian region.

To assess the potential impact of regulatory restrictions on these flows through changes to the cost or availability of financial capital, we undertake an initial exploration of the financial vulnerability of the larger companies in our sample and find significant heterogeneity. Whilst targeting financial flows could be impactful for some companies, such as those in the Brazilian beef sector, others have comparatively high retained earnings and low debt burdens. This may insulate them from (macro)prudential regulations. This latter case, combined with the challenges of connecting a globalised financial system to on-the-ground impacts through networks of multinationals and their subsidiaries, suggests (global) policy coordination across financial, fiscal and environmental policy spheres will be needed to decrease harmful economic pressures on ecosystems with tipping points.