Commentary

Time for True Collaboration

Richard Burrett, Chief Sustainability Officer at Earth Capital, says ignoring biodiversity and nature-based solutions threatens financial stability.

Preserving natural resources and climate resilience was a sticking point at the World Economic Forum’s Annual Meeting in Davos last month, as companies committed to reporting on their impact on nature. The current Task Force on Climate-Related Financial Disclosures (TCFD) and Taskforce on Nature-related Financial Disclosures (TNFD) are starting points. However, frameworks and reporting alone will struggle to achieve the deep transformation that we need.

Companies may have acknowledged the importance of biodiversity and value of natural capital, but questions still remain. Why are nature-based solutions, for example, rarely considered a priority in sustainable investing and its returns? We need a radical reset – not just for humanity, but also for business.

To really change the system, national governments, not companies, need to move beyond their current disclosure addiction towards changing the rules, paradigms and incentives on which the investment system as a whole is based, investing in robust solutions and introducing watertight regulation. This change can certainly be kickstarted by fast-growth companies and innovation, as key solutions so often are.

A question of value

Investors will not invest in a company or solution without evaluating its financial value. For real change to occur, the value of biodiversity and climate-resilient solutions to investment needs to be defined, which up to now has fallen to the sidelines. To recognise the importance of biodiversity to financial stability, we need to define new limits and rules within which markets can operate, recognising the value of biodiversity so that regulation can be implemented.

The economic value of healthy and diverse ecosystems has already been proved by the Dutch Central Bank, which found Dutch financial institutions worldwide to have €510 billion in exposure to companies with dependencies on one or more ecosystem services. Private markets have also started to recognise the value of nature. In 2020, HSBC launched a natural capital fund with Pollination Group to recognise natural capital as an investment class, investing in nature-based solutions.

Markets and the economy have proved time and again that they can adapt quickly to new limits, but only if they are made aware of them through regulation, which has so far not been addressed.

A question of regulation

This is not to say that industry-wide regulation and behaviour change is impossible. The automotive industry is one success story, and now from 2035 manufacturers can’t sell a car in the UK unless it’s electric. This does not have to be an anomaly – there are many courses of action for biodiversity impact that can be taken to set a clear course of direction, beyond the investment community setting its own agenda.

To be successful, we need thoughtful governance around biodiversity and its value so that it can be managed properly within private markets. The UK began to do this in 2012, when the government set up the Natural Capital Committee, which advised on the UK’s natural capital and pushed the financial value of biodiversity onto the national agenda. However, it was dissolved in 2020, with much of its functions transferred or diluted into the Office for Environmental Protection.

This puts the priorities of the government into question. Failure to understand the value of biodiversity and nature makes it difficult to put steps in place to protect it, let alone direct investors to back nature-based solutions through regulation. We need a collective reset, and a collective sense of urgency to the issue.

The case for collaboration

The UK government has proved it can move with urgency in times of crisis – the Bounce Back loans and Future Fund for businesses during the Covid-19 pandemic is a case in point. These were planned and launched in a matter of weeks as the future of UK business was unknown. Are we not in a state of emergency now? We are currently facing an extinction rate that is tens to hundreds of times higher than the average rate over the last 10 million years, and it’s accelerating. In Davos and elsewhere, business leaders have acknowledged we are in unprecedented times, but lack the sense of urgency and agility to take immediate action.

Collaboration between governments and corporations is needed to bring about true change. The UK has a track record of collective decision-making and action leading to successful and innovative outcomes. The venture capital investment compact as part of the Mansion House Reforms aims to unlock billions in investment from pension funds into fast-growth companies. And our best-in-class life science sector shows the power of collaborative and dynamic thinking.

This starts with large corporations changing the status quo from the inside out. Often, these companies are open to change, but are slow to innovate and collaborate with their peers. By embracing intrapreneurship within and extrapreneurship across companies, innovative ways of realising natural capital and how to preserve it will come about.

To bring about the real institutional change required for effective regulation in support of biodiversity, corporations must actively engage with governments and policymakers to support system change rather than lobbying against it in support of profits. The UK has already shown this can be done successfully with the life science sector through collaborative investment and policies, and the financial value of biodiversity has already been proved by studies. Now, it’s time for true collaboration.

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