Fund Solutions

Capital Flows not Supporting Nature Commitments

Policy incentives needed, but investors need to broaden scope of nature-positive investments, says UNEP’s Mulder.  

Institutional investors can play a big role in upscaling nature-based solutions (NbS), provided they receive sufficient support and incentives from policymakers in terms of subsidies and regulations. 

“Investors and companies are increasingly setting climate and nature targets, but once those are in place, they need to be thinking more about how to redirect capital [in line with these goals],” Ivo Mulder, Head of the Climate Finance Unit at the UN Environment Programme (UNEP), told ESG Investor. 

However, according to UNEP’s 2023 ‘State of Finance for Nature’ report, released at COP28 on Nature Day, progress on this front has been underwhelming.  

Almost US$7 trillion is invested globally each year in activities that have a negative impact on nature, the report said, which is equivalent to 7% of global GDP.  

Investments in NbS last year amounted to US$200 billion, which Mulder said is comparatively “minor” and is mostly coming from governments; private investors invested US$35 billion in NbS, the UNEP report stated.  

To meet the goals of the Paris Agreement and the more recently agreed Global Biodiversity Framework (GBF), public and private finance flows to NbS must reach US$542 billion a year by 2030 and US$737 billion by 2050. Private finance could potentially increase its share of nature-based finance from 18% to 33% by the mid-century, UNEP predicts.  

But institutional investors still struggle with understanding the entire scope of nature solutions-focused investment opportunities, said Mulder. “NbS isn’t just about tree-planting,” he noted.  

“Beyond protecting national parks, NbS includes thinking about how to realign the agricultural system so it’s more regenerative and ensuring cities are liveable during heatwaves and other increasingly intense weather extremes.” 

COP28 saw the announcement of commitments and roadmaps aimed at enacting the policy and investments needed to make both agri-food systems and urban environments more sustainable and resilient.  

These included a joint statement on climate, nature and people which pledged a “scaling of finance and investments for climate and nature” from domestic budgets, multilateral development banks, multilateral climate and biodiversity funds, and private sector actors. 

The UNEP report included analyses showing the potential long-term returns from NbS to investors. For example, an investment opportunity in sustainable land management could increase fourfold by 2050 based on the long-term profitability of sustainable food and commodity production. 

Market-led initiatives are also helping investors to identify and reduce exposures to negative nature-related impacts. The investor-led Nature Action 100 (NA100) was launched to engage with some of the largest companies globally that are contributing to nature degradation and biodiversity loss.  

Additionally, the finalisation of the Taskforce on Nature-related Financial Disclosures (TNFD) framework in September will allow for investors to better understand their portfolio exposures to nature-related risks and impacts and drive them to seek out opportunities to invest in NbS, according to Mulder.  

“Reorient subsidies” 

Ultimately, the UNEP report argues, policymakers must pull every available lever to scale both public and private finance for NbS while simultaneously reducing nature negative capital flows. 

“Governments can create a level playing field by putting regulations in place and putting a price on carbon, water and other ecosystem services, so it becomes clear to institutional investors how to quantify long-term revenue flows in a predictable manner, which will also make them more willing to put money into this,” Mulder told ESG Investor 

As well as scaling blended finance vehicles targeting NbS, he noted that governments also need to “reorient subsidies”.  

“When it comes to subsidies for coal, oil and gas, those need to be phased out, but with a sector like agriculture, it’s more about better aligning subsidies with nature solutions.” 

The UNEP report said that government spending on environmentally harmful subsidies across agriculture, fossil fuels, fishery and forestry reached US$1.7 trillion in 2022. 

One “significant” example of nature-focused subsidies being geared towards promoting sustainable practices can be found in Brazil, said Mulder.  

In June, Brazilian President Luiz Inacio Lula da Silva introduced the ‘Safra Plan’, which aims to provide US$76 billion in financing to support the country’s medium- and large-sized farmers. Part of the plan includes reducing the interest rate by half a percentage point for producers who adopt more sustainable agricultural practices. 

“It’s providing the right incentives for farmers to invest in sustainability,” said Mulder.  

He also highlighted the importance of governments implementing sustainability-focused rules around imports and exports. 

The EU Regulation on Deforestation-free products (EUDR) bans companies operating across the bloc from trading commodities that are associated with deforestation, such as beef and soy. 

Recent research has warned that the majority of companies at risk of exposure to deforestation have yet to set a no-deforestation policy. The majority of financial institutions that are members of the Glasgow Financial Alliance for Net Zero (GFANZ) or Race to Zero coalitions are also failing to address their exposures to forest degradation. 

“Regulations have to be followed by carrots,” said Mulder. “Whether that’s a reduction on the import tariffs or other incentives that flow along those trade lines to ensure compliance.” 

Policymakers are nonetheless moving in the right direction, he said. 

“The isolation of nature-related risks – and the solutions to address them – from climate change is simply not going to work, and I think this was clearly recognised during COP28 discussions.” 

The statement on climate, nature and people also recognised that the growing and projected impacts of climate change “critically threaten” biodiversity and high-integrity ecosystems, and that the continued loss and degradation of nature equally increases climate vulnerability and contributes to significant greenhouse gas (GHG) emissions.  

Action on climate change, biodiversity loss, land degradation and ocean health must be “ambitious, integrated and synergetic”, the statement said.  

COP28 will provide a “segue” to COP16 next year, noted Mulder, “where we hope to see countries’ biodiversity action plans following the agreement on the GBF”. 

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