Creating a race-to-the-top for a resilient economy
Part of the GEC Insights series
9th Jun 2020 by Tracey Cumming · Guest Authors
The GEC Insights series is a curated collection of online articles at the intersection of environment and economics, each written by leading thinkers from the worlds of business, government and civil society. Part of our Economics for Nature project, they bring together diverse perspectives to answer the question: how can we re-design our economies to protect and restore nature?
In this article, Tracey Cumming, Technical Advisor at the UNDP’s Biodiversity Finance Initiative (BIOFIN), argues that safeguarding nature requires more than just conservation spending - and explores how the economic rules of the game must be transformed to properly incentivise sustainability.
The last few years have seen the emergence of impact investing for biodiversity outcomes, green bonds, and the piloting of more sustainable ways of producing food and fibre. On-the-ground efforts have been extremely important in demonstrating the benefits to communities and business through increased reward and reduced risk, and can make a profound impact to those directly involved.
However, these efforts often struggle to thrive and scale up in an environment where broader systems are stacked against them. For practices like these to become the norm, not the exception, the next ten years needs to see deep and sustained changes to our wider economic systems.
The recent Global Assessment Report on Biodiversity and Ecosystem Services sends a strong message that nothing short of transformational change within governments, economies and society is needed to halt the loss of biodiversity and ecosystem functions. It calls for a “fundamental, system-wide reorganization across technological, economic and social factors, including paradigms, goals and values”.
Luckily, we already have a good understanding of which fundamental actions need to be taken by governments, the finance sector, and the business sector in order to build more resilient economies.
How do we create transformative change in our economies to protect nature?
The CBD Expert Panel on Resource Mobilisation offers a framework to navigate this complex journey, made up of three fundamental components:
Firstly, reduce and redirect resources that are causing harm to biodiversity. In simple terms – spend less on things that cause damage to our natural systems. This is the biodiversity equivalent of reducing investments in fossil fuels to address climate change. We need our economies to divest from activities that are inherently harmful to biodiversity, and redirect investments to activities that have at least ‘net neutral’ impact.
Secondly, generate additional resources for biodiversity-positive outcomes. This means more direct flows of funding for biodiversity from public sector budgets; more viable opportunities for the private sector to invest in biodiversity projects; and maximising biodiversity co-benefits for related environmental investments, such as nature-based solutions for climate change.
“The systems that society has created over hundreds of years need to be examined, and we need to have the collective courage to change what no longer serves us.”
Thirdly, enhance the effectiveness and efficiency of resource use – in other words, do better with what we have. For example, designing effective results-based budgeting systems, or building collaborations between communities, the private sector and the public sector to manage protected areas.
This three-pronged approach will not succeed with only piece-meal, project-based interventions, and while individual action is necessary, it will not be sufficient. The rules and systems that society has created over hundreds of years need to be examined, and we need to have the collective courage to change what no longer serves us, as a global community concerned with equity and inclusiveness.
We scramble for billions to save biodiversity, while spending trillions to destroy it
Governments spend far more money on subsidies harmful to biodiversity, than they spend on conserving and restoring ecosystems. The private sector displays similar cognitive dissonance. While a subset of consumers are increasingly demanding sustainable products, and there is a growth in companies with green credentials, there will always be consumers and producers happy to forgo sustainability concerns for a cheaper product; a higher profit margin; or a larger share of the market. ‘Greener’ businesses may find a niche market, but environmental destruction will continue, as other companies fill the gap.
And – in our current economic environment – that’s arguably the best-case scenario possible. In fact, in many cases, product differentiation based on sustainability is not possible, and corporations and the financiers backing them are driven by short-term priorities. Here, businesses choosing more sustainable pathways are penalised by the market, as competitors willing to sacrifice environmental scruples will win on short-term profits and market share, in a ‘race to the bottom’. First movers are being penalised by failed markets, making it difficult to take sustainability into account.
How do we encourage a race to the top?
Governments play a large role in creating and maintaining the rules of the game. Even in a relatively “free market”, there are rules governing property and taxes; incentives encouraging actors to invest or to spend, and what to spend on; and protection and advantages for some, but not for others. And, as they currently stand, these markets inherently fail to take into account biodiversity-related externalities.
The rules of the game that drive our economies need to be changed, and governments have an important role to play in changing them.
This includes strengthening and properly enforcing regulations that guide investments in potentially harmful activities, and creating a fiscal policy that supports sustainability. Countries need to look at existing subsidies, and ‘green’ or reduce those causing harm to biodiversity – starting with those supporting agriculture, fisheries, forestry, infrastructure, mining and energy. Harmful actions should be regulated and taxed, and actions with biodiversity-positive outcomes should be supported and rewarded. Governments are taking steps towards greening their economies, and biodiversity should be central to this process.
Development banks are created, part-funded and guided by governments, and exist to support wider public goals. Therefore, these banks have a responsibility to support government efforts to accelerate this economic transition. Development banks should lead in integrating biodiversity risks and opportunities into their strategies and policies, and ensure that lending results in biodiversity-positive or at least biodiversity-neutral outcomes.
Development banks should not only adhere to sound lending frameworks and compliance with appropriate social and environmental safeguards, such as the World Bank’s Environmental and Social Standard 6, or the International Finance Corporation (IFC) Performance Standard 6, but should also appropriately audit and report on compliance with these safeguards.
Central banks, with the ability to influence entire banking systems in a country, are in a unique position to respond to the systemic risk of environmental destruction. Risks related to biodiversity and ecosystem services should be included in stress tests, and central banks should require that the financial entities they regulate disclose their own biodiversity-related financial risks regularly.
Central banks can apply credit ceilings for biodiversity-harmful activities, and, in turn, encourage biodiversity-positive investment by providing a lower required reserve rate on privileged “green” assets, and providing subsidized loan rates for biodiversity-positive sectors.
Integrating biodiversity risk, dependencies and impact into investment decisions requires good metrics, and strong action is needed to develop and incorporate biodiversity metrics into the finance sector. Actors in the finance sector itself are already calling for impact measures to be developed.
As governments and the financial sector move to transform the rules of the game, they will find that there are already leading players in the private sector working to create change, such as the One Planet Business for Biodiversity coalition. In our current economic system, initiatives such as Madre Tierra, a regenerative agriculture project with strawberry producers in Mexico led by Danone, are trailblazing pilots. With systemic change, these pilots can be scaled-up and become business-as-usual.
“Our strength is our ability to approach the task with curiosity and humility, to learn and adapt, together. And this takes courage.”
The business sector can help to change the way consumers and producers behave by adopting good biodiversity-relevant green standards, certification and impact measurement practices, and building transparent reporting systems on biodiversity impacts along entire value chains. This is being made increasingly possible by advances in technology, such as the use of blockchain to create an open platform for traceability.
None of the actors mentioned above can do this work on their own. The changes we need require collaboration - not just partnerships, but also trust. There is a powerful role for NGOs and international organisations in bringing together different actors, bridging divides, translating needs and crafting solutions in order to create resilient economies that value and protect biodiversity.
The UNDP Biodiversity Finance Initiative is one example of an approach that brings together ministries of finance, development, environment, primary production and others, along with key partners in the private sector, such as tourism and forestry, to create systemic change.
We need to learn new languages, and create new frameworks. We need to move away from what we have always done, out of our comfort zones, into uncharted territory. Here, no one is an expert, but all of our expertise is invaluable. Here, our strength is our ability to approach the task with curiosity and humility, to learn and adapt, together. And this takes courage.
- Tracey Cumming, Technical Advisor BIOFIN, United Nations Development Programme, and member of CBD Panel of Experts on Resource Mobilisation