Submission to House of Commons Environmental Audit Committee

Inquiry on Biodiversity and Ecosystems




Our submission response will discuss debates within the economics and financing of biodiversity, in particular addressing the following questions from the call to evidence:

-          How can funding be mobilised to support effective nature-based solutions to climate change?

-          How can the private sector be encouraged to contribute to funding?


The movement to integrate biodiversity and other non-climate environmental issues into green finance initiatives has gained momentum over recent years, encompassing private sector initiatives[1] as well as the EU’s sustainable finance action plan.[2] The Bank for International Settlements has warned that environmental threats such as biodiversity loss pose a systemic threat to the stability of the financial system.[3] A Taskforce for Nature-related Financial Disclosures (TNFD) was launched this year, aiming to expand upon the existing Taskforce for Climate-related Financial Disclosures (TCFD).[4] A number of papers in recent years have called for the creation of new ‘asset classes’ for nature in order to mobilise private finance towards conservation and restoration.[5]


Many of these green finance initiatives take a ‘market-fixing’ conceptualisation of resolving nature loss, where it is assumed that a lack of information about environmental costs and benefits prevents efficient price discovery and resource allocation.[6] It is argued that promoting environmental information disclosure by corporates and forward-looking scenario analysis by financial institutions will facilitate the internalisation of these negative externalities, thereby stimulating a reorientation of capital towards sustainable investments. 


A new Working Paper published by the Institute for Innovation and Public Purpose demonstrates that there are important reasons to question whether market-led initiatives alone are capable both of mobilising sufficient capital for nature restoration, and of managing the systemic financial risks associated with nature loss.[7]


Firstly, the highly complex system dynamics of biodiversity loss, alongside other environmental threats, render it ill-suited to conventional financial risk and valuation frameworks. The ‘market-fixing’ paradigm of current green finance initiatives assumes that nature-related costs and benefits can be measured, or at least assigned a probability. Yet measuring and tracking biodiversity is an inherently less manageable task for financial analysis: unlike CO2 emissions, which are fungible, biodiversity gains in one location cannot offset losses elsewhere.[8] Simplifying complex ecological phenomena to monetary valuations embeds a false equivalence between natural and human-made ‘capital’, implying – for example – that concrete flood defences are an adequate replacement for mangrove destruction. Biodiversity loss also has no historical precedent upon which to form any calculable probability and unpredictable reactions between different market players means future outcomes are inherently unknowable. As such, we argue that nature loss subject to radical uncertainty - representing an ‘unknown unknown’ to which probabilities cannot be assigned.[9]


Secondly, the constraints of private finance inherently limit its ability to fund nature restoration on a large scale. Unlike many low-carbon investments, conservation and restoration projects may not yield returns that are monetisable in the conventional sense. Environmental protection often requires minimising human claims upon nature, which implies a reduction of economic activity. Wetlands restoration, for example, delivers significant economic benefits — flood defences, carbon sequestration, pollinators — yet these are not easily translated into an income stream. On the other hand, monetisable activities, such as tourism, may undermine the effectiveness of restoration. Even where returns are tangible, environmental protection is a challenging sell for private investors. High transaction costs and returns that may take decades to materialise make for an unappealing risk-return profile. And the necessarily small and localised nature of many projects renders them difficult and costly to incorporate into large- scale investment vehicles such as green bonds.[10]


Thirdly, the extension of markets into nature has darker human consequences that are rarely acknowledged in green finance narratives. Many ecosystem services have the characteristics of public goods (non-rival, non-excludable, e.g. flood defences), common goods (rival, non-excludable, e.g. fishing populations), or complex goods (no one-to-one relationship between ecological benefit and services it provides). Yet monetary valuation depends upon market-like characteristics. In the absence of a market, valuation becomes difficult or inaccurate, or requires the problematic imposition of property rights. There is mounting evidence that market-based environmental schemes such as the UN’s Reducing Emissions from Deforestation and Forest Degradation (REDD) have fuelled violent land grabs, indigenous community displacement, and human rights abuses in the Global South, as Western companies privatise vast swathes of forest for conservation.[11] The top-down data-oriented methods advocated by green finance fit uneasily with the complex political ecology of conservation, which requires inclusive and participatory political institutions.[12]


Instead of relying upon market-based approaches to quantify nature-related risks and benefits, we argue that policymakers should focus on ensuring the financial system is enabling – and not hindering – the transition to an economy that functions within planetary boundaries. This is an increasingly pressing task. Through their lending, investing, and advisory activities, financial institutions are not only exposed to nature-related risks, but they also facilitate the business activities that lead to environmental breakdown. This concept of ‘double materiality’ has been recently used by the European Commission in its Non-Binding Guidelines on Non-Financial Reporting for corporates but has been largely ignored market-led initiatives such as the TCFD and TNFD.[13] This is a serious omission. The Dutch central bank has estimated that the impact of Dutch financial institutions on biodiversity represents the loss of over 58,000km2 of pristine nature, an area 1.7 times larger than the Netherlands.[14]


A critical characteristic of financial risks associated with nature loss, therefore, is that they may emerge endogenously from behaviours within the financial system itself. The failure of financial actors to cease facilitating harmful corporate practices risks ‘locking in’ future impacts, especially as nature loss approaches critical ‘tipping points’. Given the financial system does a poor job at managing systemic, endogenous risks (as the 2008 financial crisis revealed), it falls, at least to some extent, to central banks and financial supervisors to manage nature-related risks where they intersect with the financial system. In our paper, we argue that financial authorities should use a ‘precautionary approach’ to influence the directionality of activities facilitated by the financial system. Such an approach should prioritise immediate preventative action and a qualitative approach to managing risk above quantitative measurement and information disclosure. In the first instance, financial and monetary policy should aim to discourage the financing of clearly harmful business practices. We call for financial authorities to work with relevant government departments to identify an ‘exclusion list’ of damaging activities that can then inform both regulatory and monetary policy toolkits. Going forward, the effective management of nature-related risks will inevitably require significant coordination with other actors as part of a broader sustainable industrial strategy.


To read our recommendations in more detail, please refer to the full Working Paper:-


Kedward, K., Ryan-Collins, J. and Chenet, H. (2020). Managing nature-related financial risks: a precautionary policy approach for central banks and financial supervisors. UCL Institute for Innovation and Public Purpose, Working Paper Series (IIPP WP 2020-09).

Available at:








[1] Such as the Natural Capital Finance Alliance:

[2] European Commission. (2018). Action Plan: Financing Sustainable Growth (Link).

[3] Bolton, P., Després, M., Pereira da Silva, L., Samama, F. and Svartzman, R. (2020). The green swan: Central banking and financial stability in the age of climate change (Link).

[4] The TNFD is at present an informal working group comprised of private financial institutions, civil society groups, the UN Environmental Programme and the UN Development Programme. See

[5] The Nature Conservancy. (2019). ‘Investing in Nature: Private Finance for Nature-based Resilience. (Link). Paulson Institute. 2020. ‘Financing Nature: Closing the Global Biodiversity Financing Gap. (Link).

[6] Christophers, B. (2017). Climate change and financial instability: Risk disclosure and the problematics of neoliberal governance. Annals of the American Association of Geographers, 107(5), pp. 1108–1127

Ryan-Collins, J. (2019). Beyond voluntary disclosure: why a ‘market-shaping’ approach to financial regulation is needed to meet the challenge of climate change. SUERF: The European Money and Finance Forum. (Link).

[7] Kedward, K., Ryan-Collins, J. and Chenet, H. (2020). Managing nature-related financial risks: a precautionary policy approach for central banks and financial supervisors. UCL Institute for Innovation and Public Purpose, Working Paper Series (IIPP WP 2020-09). (Link).

[8] Chenet, H. (2019). Planetary Health and the Global Financial System. Rockefeller Foundation Economic Council on Planetary Health. (Link).

[9] Chenet, H., Ryan-Collins, J. and van Lerven, F. (2019). Climate-related financial policy in a world of radical uncertainty: Towards a precautionary approach. UCL Institute for Innovation and Public Purpose. (Link).

[10] For more see Hache, F. (2019). 50 Shades of Green: The Fallacy of Environmental Markets [Online]. Green Finance Observatory. (Link).

[11] Re:Common. 2019. Turning forests into hotels – The true cost of biodiversity offsetting in Uganda. (Link); Friends of the Earth. 2019. New tricks: biodiversity offsetting and mining. (Link); International Institute for Environment and Development. 2013. ‘Land grabbing’: is conservation part of the problem or the solution? (Link); Ahmed, N. 2014. Carbon Colonialism: How the Fight Against Climate Change Is Displacing Africans. Vice Magazine. (Link).

[12] See the huge body of work by Nobel prize winner Elinor Ostrom for more, e.g. Ostrom, E. 1990. Governing The Commons: The Evolution Of Institutions For Collective Action. New York: Cambridge University Press.

[13] European Commission. (2019). Guidelines on reporting climate-related information [Online]. Brussels. (Link).

[14] DNB. (2020). Indebted to nature Exploring biodiversity risks for the Dutch financial sector. De Nederlandsche Bank. (Link).




September 2020