At the 1992 Earth Summit, although the United States signed the Climate Change Convention, it held back from the Biodiversity Convention, one of the main agreements in negotiation. Although President Clinton eventually signed it, the U.S. Senate has yet to ratify, leaving the United States alone in the United Nations (UN) family of nations not to do so.
Biodiversity hotspot map.
The rest of the world will come together in October 2024, in Colombia at the 16th Convention of the Parties to the Biodiversity Convention, which came into force in 1993.
What’s the agenda? Boldly speaking, a last-ditch effort to reverse biodiversity deterioration and loss, or, as the Convention puts it, to “Ensure and enable that by 2030 at least 30 per cent of terrestrial, inland water, and of coastal and marine areas, especially areas of particular importance for biodiversity and ecosystem functions and services, are effectively conserved and managed.”
Known colloquially as 30 × 30, this is as significant a test of international will to address critical environmental problems as the Paris Agreement on climate change, perhaps even more significant because it calls explicit attention to the “ecosystem functions and services” on which the entire global economy depends and for which, generally, the economy has paid nothing, taking roughly a century-long free ride, if we date from the Industrial Revolution.
Earth’s “services” have long been termed “externalities” by economists, economic variables that remain external to conventional accounting and don’t appear in standard statements of profit and loss, assets and liability. Nature’s services are not only unpaid, but vital—like water filtration, carbon sequestration, pollination, and so forth. Even swamps are invaluable because of their service capturing pollutants and runoff, yet do swamps land high on the land value chain?
Swamps are invaluable because of their service capturing pollutants and run-off.
As I write in my book, Pricing the Priceless…, it’s time to flip entirely our system of valuation so that we at last invest more capital in protecting nature than in exploiting it. A tall order, and a “mind-flip” too, as some might say. Yet without such rethinking, goals such as 30 × 30 are out of reach.
Most of us are by now very familiar with terms like “sustainable investing” and “ESG” investing, but there is a flurry of new financial instruments that go further, and direct capital to protect the so-called intangible “externalities” in tangible terms and price, or cost out, the priceless elements and services provided by a given natural asset.
One of my favorites is the forest resilience bond (FRB), piloted in the Lake Tahoe area of California, as the brainchild of four graduate students at the Haas School of Business at the University of California–Berkeley. They designed a financial instrument that directly applies capital to protect a “priceless” natural service, namely, the resilience of a forest to resist wildfire. In a sense, by protecting that priceless service, the FRB is remunerating nature for that work, by calculating the economic benefits that accrue if forests are not consumed by wildfire conflagration. The FRB format totals costs saved by diverse beneficiaries and the potential revenue gained, and secures investment from public and private investors willing to take the risk that over time the projected benefits will come into being. If they do, contracted beneficiaries agree to pay investors back with a premium. In short, risk is covered in tangible cash terms by investors, repaid in tangible cash terms by beneficiaries—all based on the intangible benefit of forest resilience.
For example, a resilient forest holds water and feeds the water table. Local hydropower companies benefit, because sufficient water in the watershed means sufficient water to generate hydropower and less potential need to buy power from other sources to meet customer demand—a measurable cost savings to the hydropower company.
A resilient forest resists fire, so insurance companies are also direct beneficiaries of resilience, as they would likely face fewer insurance claims, a savings that can also be measured. A resilient forest is safer for recreation, so benefits to tourism companies are also clearly measurable.
Lake Tahoe and forested surroundings.
The state of California was also a beneficiary since its forest service budget was severely strained, as wildfires increased, due to dryness likely related to climate change. Funds intended for prevention of fires had to be diverted to extinguishing them, creating a vicious-cycle shortfall. The FRB’s upfront cash smoothed out cash flow problems so wildfire prevention could get ahead of wildfire risk, again enhancing the core asset of forest resilience.
The first FRB had a face value of US$4 million, and in fall 2023, Blue Forest Conservation, the nonprofit established to administer the FRB, announced investors had been fully repaid as contracted and, thanks to forest prevention treatment enabled by the upfront cash, the swath of forest involved is more resilient than it would have been otherwise—an overall advancement of the stewardship clock, with financial return to those who accepted the financial risk.
A second FRB has been issued with a face value of $25 million, an innovation fund raised an additional $25 million, and a portfolio to aggregate smaller projects is also being established.
There are other exciting new financial tools, such as coral reef insurance that provides upfront funding to repair coral reefs smashed in extreme storms—after all, we highly value oceanfront property but not the coral reefs that protect that property and thereby create its value. The pilot Wildlife Conservation Bond, known as the “rhino bond,” was issued by the World Bank and guaranteed by the Global Environmental Facility (GEF), a joint venture that raised private capital to generate upfront cash directed to support black rhino conservation in South Africa, and related local economic development. Based on the GEF guarantee of payback, investors agreed to defer their annual interest payments until an increase in black rhino populations could be verified so that the capital they provided could be directly applied in real time to actual conservation practice. The risk of conservation failure, meaning that for whatever reason the black rhino population failed to flourish, was born by the GEF. On the other hand, if there was verifiable rhino conservation success, investors stood to be repaid at a premium.
So, what is the actual innovation of these instruments? They make it possible to pay now for benefits later, recognizing nature and its services as critical infrastructure, using the same upfront funding model used to build bridges, airports and other infrastructure where benefits accrue only after the fact.
Once nature is funded and booked as critical infrastructure, then it must be maintained, not spent down, just as all essential infrastructure must be maintained and not allowed to decay. Obviously, valuable infrastructure must be guarded against depreciation, and if you can keep depreciation in check, you are wealthier than if you don’t.
Coral reef and marine life.
For sovereign states, funding and accounting for nature as infrastructure can be pivotal; nations that can demonstrate maintenance of vital economic infrastructure are generally considered more investable, with higher credit ratings to support higher borrowing power and less credit risk. Healthy natural assets reflect healthy economic management overall.
This flip of financial optics and valuation has significant international repercussions. For example, if industrial countries depend on the biodiversity and ecosystem services provided by less industrial countries, many very poor, which nation is the debtor and which the creditor? Eventually, as nature’s economic services are valued, could it be that it is the industrialized North that owes the biodiversity rich South? If yes, would that reversal of capital flow not go a long way to realizing the 30 × 30 dream now at the heart of the Biodiversity Convention?
Black rhino.
Instruments like the FRB are ready to be taken to scale and generate returns for investors, not to crassly declare a dollar value on nature but to illuminate the financial costs of not doing so. After all, those costs will not disappear; they just bounce around the economy, landing on the most vulnerable and, obviously, on nature itself.
Free rides eventually end—and ending our free ride is perhaps the highest calling of the COP-16 conference ahead, and likely its most lasting importance.
A many-banded aracari rests in a tree in the Ecuadorian Amazon. “Eventually, as natures economic services are valued, could it be that it is the industrialized North that owes the biodiversity rich South?”
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Paula DiPerna
Paula DiPerna is the author of Pricing the Priceless: The Financial Transformation to Value the Planet, Solve the Climate Crisis, and Protect Our Most Precious Assets, and is a Special Advisor to CDP.