Saturday 20 Jul 2024
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This article first appeared in Forum, The Edge Malaysia Weekly on May 3, 2021 - May 9, 2021

At this year’s 26th United Nations Climate Change Conference (COP 26) in Glasgow (Nov 1 to 12), we can expect delegates to dedicate a significant portion of their deliberations to the mounting rate of biodiversity loss from unsustainable exploitation of land and sea for food and industrial materials production.

These resources, or natural capital, include the planet’s stores of environmental assets such as geological reserves, soil, air, water and living organisms. Quantifying the true value of these assets and making users pay accordingly for their consumption will be critical to our success in limiting climate change.

Unsustainable consumption

Today, humankind consumes the planet’s natural capital 1.75 times faster than it can be regenerated — an ecological footprint of 1.75 planet Earth. More than 50% of the world’s GDP, about US$44 trillion, depends to some degree on nature.

This astonishing total includes intensive agriculture, which drives habitat destruction and threatens microorganisms, insects and plant varieties. Population growth and rapid urbanisation are accelerating demand for food in developing countries in Asia and beyond, not to mention demand for manufactured products and resource-intensive services.

In just one example, our reliance on meat for dietary protein — an increasing trend in emerging markets — often drives deforestation and land and water degradation. It can also release more greenhouse gases into the atmosphere. Raising cattle for food, for example, accounts for 65% of all livestock emissions.

In the oceans, overfishing and destructive harvesting techniques are causing irrecoverable losses of species. Reducing the sum of life in the oceans also diminishes their capacity to sequestrate carbon.

Counterintuitively, this ongoing industrialisation of food production will lead to food poverty in the future as resources become exhausted and severe weather events become more frequent.

Loss of biodiversity reduces the resilience of the planet’s ecosystems by creating overdependence on a narrower range of resource types. At a genetic level, biodiversity means a healthy, balanced interaction of species, which provides a robust defence against threats. As the mid-19th century Irish potato famine demonstrated, over-reliance on a single strain of crop leaves no alternatives if a pathogen should devastate the species — with terrible consequences.

Asia-Pacific alone is home to 17 of the world’s 36 biodiversity hotspots and more than half of the world’s remaining fertile mangrove areas. Its freshwater ecosystems support more than 28% of aquatic and semi-aquatic species, 37% of which are threatened by overfishing, pollution, infrastructure development and invasive alien species.

Calculating the cost

To limit climate change and extensive economic loss, this unsustainable rate of consumption must be reversed and our natural capital restored. The cost of such comprehensive long-term initiatives will be considerable: the World Economic Forum (WEF) expects that US$2 trillion of capital investment a year is needed between 2020 and 2030 for effective ecosystem restoration.

The returns should also be substantial though. The WEF estimates that restoring global ecosystems can create annual business opportunities worth US$10 trillion over the next decade.

But funding the restoration of our natural capital is not yet commercially attractive to investors. While green financing and transition financing tools for large infrastructure projects are becoming mainstream, the timescale for ecological restoration projects is simply too long to emulate this progress. Investors require a quicker return on their capital than these projects can provide.

In addition, the scale of remediation initiatives is too great for individual institutions to take on — and the inherent risks are too concentrated for most investors’ appetites. Undertakings of this magnitude will require major changes in the way natural capital is valued and fundamental changes to consumer habits if we are to succeed in reversing the potentially disastrous overconsumption of the Earth’s resources.

What it’s worth

As we seek to tip the balance toward an economy which keeps consumption and recovery of the planet’s resources in equilibrium, the first challenge is valuation. Investors increasingly expect businesses to recognise the true cost of the natural resources they consume, evaluating the full lifecycle of a product, including all externalities resulting from its production, distribution, consumption and disposal. As negative externalities are factored in, a shift in what constitutes a viable business model will force a shift in pricing.

We need to create methodologies that gauge the full environmental impact of products and services such as the Natural Capital Protocol: a global standardised framework to measure and value impacts and dependencies on natural capital.

Government subsidies that support polluting businesses, which are still common in Asia, will need to be phased out. Instead, governments and supranational bodies could direct real capital or guarantee support to projects that ameliorate damage to our natural capital. Individuals and businesses will also need to accept that sustainably sourced raw materials and products will likely cost more in the future, compelling purchasing choices that are based on holistic valuations.

Making it work

Templates for success already exist. A 2015 project initiated by Michelin and Barito Pacific Group in Indonesia demonstrates how stakeholders can cooperate in establishing a sustainable business that also promotes ecological and social benefits.

Under the auspices of the Tropical Landscapes Finance Facility (TLFF), a rubber plantation covering 88,000ha is being developed on land previously devastated by deforestation. About 50% of the area is reforested with sustainable high-yielding rubber trees, with the balance, bordering on national park territory, left to regenerate. In addition, the project creates 16,000 jobs, ensuring local communities share in the benefits. BNP Paribas was proud to be involved, securitising loans from the TLFF platform so that fixed-income investors could buy them.

As preparations for COP26 continue, unsustainable exploitation of the planet’s resources and threats to biodiversity will feature on many countries’ agendas. More action like that project in Indonesia is needed to address the unsustainable deterioration of our natural capital, and find ways to finance its restoration.

Humankind’s long-term prosperity, as well as the health of the entire planet, depends on it.


Chaoni Huang is head of sustainable capital markets (Asia-Pacific) at BNP Paribas

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