25% of the world’s species are currently at risk of going extinct. This is because we are losing species 1,000 times faster than any other time in human history.
If we continue on this path, we will reach the 6th mass extinction caused entirely by us humans! The five mass extinctions that took place before in the last 450 million years have led to the permanent destruction of 70-95% of the species of plants, animals and microorganisms that existed earlier.
This is a big concern for not just the environment but all of life on Earth. Our Environment provides us with an estimated 125 – 145 trillion USD worth of ecosystem services, annually. If we lose our environment, we will lose these ecosystem services (e.g., food, water, flood protection, etc.).
Thus, to revive these ecosystems, the total conservation needs are estimated to be 722–967 billion USD per year by 2030. However, the current funds are sitting at 124-143 billion USD per year. That is a financial gap of nearly 85%!
So, why is there such a large financial gap to protect our environment?
Such a difficult question required experts who could answer them. So, we invited three accomplished speakers to our webinar on ‘Sustainable Finance: Environment’ held on 19th March 2021. Here is the summary of the webinar session.
The Problem
To measure a country’s progress and development, a criterion majorly used is ‘Gross Domestic Product’ (GDP). It measures the monetary value of final goods and services which are bought by the end user in a given period. In laymen terms, it is the net sum of everyone’s income in a country.
This is what Nitin Pandit (Director of Ashoka Trust for Research in Ecology and the Environment) said about using GDP:
“Governments or public finances should not solely look at GDP to determine growth or progress. This is because GDP fails to consider the impact of environmental degradation.”
He cited a 2012 report titled: “Diagnostic Assessment of Select Environmental Challenges in India.” It revealed that the cost of environmental degradation in India amounted to about Rs. 3.75 trillion (80 billion USD) which is equivalents to 5.7% of GDP.
However, even with such declines in growth, public finance still failed to put funds towards environment conservation.
Placing Monetary Value
According to me, one of the major reasons behind this is that we have not put any monetary value on the services that natural ecosystems and the environment provide us. For example, there is no price for clean air or the pollination services provided by insects.
But the market often disrupts these natural services and instead makes space for those services that can be measured and profited from. For example, in certain parts of the world, people remove patches of mangrove forest along the coastline to make space for shrimp farm.
Mangrove forests along the coastlines are home to many land and water species that maintain the biodiversity of the region. On top of this, these very forests provide us with shelter from floods or rising sea level water. In this case, the shrimp farm is seen as valuable and profitable as opposed to the mangrove forest.
However, this approach across the world continues to cost us heavily in the long term.
The reality
All this said and done, the recent wave of awareness towards climate change and environmental degradation has in fact pushed finances and investments into more sustainable projects. But as we have already discussed, the funds going into these projects are extremely low.
As a defence against this staggeringly low fund, people in finance and business state something as ‘return on investments’ or ‘high-risk investments’. What this essentially means is that the investments going towards a sustainable project can either be too risky or there is very little financial return for them. In such cases, these factors stop money from going into sustainable projects.
However, this is not the case today. Sustainable markets have moved over the years from just being an ethical investment to creating an impact. In fact, studies have shown that sustainable investments by companies have a positive financial impact.
Bernd Jan Sikken (Head of Strategy for de Volksbank) said that “a positive social and sustainable performance is good for the return on equity, return on assets, and for reducing risk profile.”
This does not just stop here. Both Nitin and Bernd emphasized that today, customers themselves want to create a positive change through their financial transactions.
“Customers also choose a bank for social purposes. They want to have some sort of connection with the bank. Such behaviour also benefits the companies as it holds customer retention”, commented Bernd Jan.
So, in reality, the more we invest in sustainability, we do not just create a positive impact but also gain a financial return.
Interested to know more about Sustainable Finance? Watch our short animated course here!
The solution
A 2020 World Economic Forum report stated that “a nature-positive economy could generate up to $10 trillion in annual business revenue and cost savings, and create 395 million new jobs by 2030.
So, it seems like a no-brainer to transition to nature positive economy. But how do we do that? Our speakers gave several solutions based on their own research and field experiences.
Preeti Sinha (Executive Secretary for the United Nations Capital Development Fund) emphasized that the “role of guarantees by the public capital should enable private and commercial money to invest in sustainable development. It can be one of the most effective ways to incentivize them to pour money into environment-friendly projects.”
Bernd Jan also commented that such investments by private and commercial money should be incentivized for the long-term return on performance. This is because, the true return on investments in sustainability happens only over time.
In the case of banks, Nitin emphasized that banks and bank officer’s performance on the ground should be measured according to how much sustainability they include in the system rather than how much loan they are able to give out.
Overall, a long-term approach to make an impact is to use public finance to create well-targeting guarantees for transitions of behaviour change. A change that is being adopted by many customers on the demand side of the market. Nobody wants to use plastic straws anymore. So, we now have a market for stainless steel straws. The more market picks up on these behaviour change, the transition to nature positive economy is a possibility.
Valuing the environment
So, the moon-shot idea to decrease the finance gap towards rebuilding our environment is essentially to quantify both positive and negative externalities that affect everyone across the world.
These externalities like pollution, deforestation, loss of species, the rise of healthcare costs etc., need to be placed in monetary terms and bring them into the mainstream markets.
This way our financing mechanisms can easily take them into account for better investments, opportunities and even to develop policy frameworks.
If you want to know more about valuing our ecosystem services, check out our blog: Ecosystem Services – Are you Willing to Pay the Price?
Read More:
- Why is Green Finance Important?
- Sustainability: What to Focus On?
- Sustainable Urban Development: Rethinking Urbanization
References:
A better understanding of impacts is therefore essential for business strategy. PII advocates and develops solutions for impact analysis and management in mainstream business and finance to bring these ideas to life. Read Rethinking Impact Rethinking Impact to Finance the SDGs, our 2018 position paper and call to action, lays out the thinking behind the Initiative.