Leveraging the tools of finance to achieve sustainable development

At least half of global GDP is moderately or highly dependent on nature. S&P Global estimates that 85% of companies in the S&P Global 1200 directly depend on nature. More than 75% of food crops rely on pollinators, and healthy ecosystems generate 75% of global freshwater, as noted by the World Health Organization. Yet despite this dependence, human activities are driving an unprecedented decline in ecosystems. We are losing species at 1,000 times the natural rate. According to insurer Swiss Re, one-fifth of the world’s countries are at risk of ecosystem collapse. And we are all interconnected: if the Amazon Rainforest were completely deforested, the impact on weather cycles would reduce Sierra Nevada snowpack by half – a critical water source for Californians and for food supplies across the United States.

Billions of dollars must be redirected to retain all the aspects of ecosystems that provide services essential to sustaining life. Many terms are used for this central challenge of mobilizing funding to address the interconnected global crises of nature loss and climate change. Green finance. Nature finance. Climate finance. Sustainable finance. Governments around the world currently pay 82% of the $200 billion per year going toward nature-based solutions – but they cannot bridge the financing gap on their own.

A meeting held June 12 at Stanford University by the Natural Capital Alliance (formerly Natural Capital Project) brought together representatives from governments and international financial institutions who are driving systemic changes aimed at protecting and restoring nature to better support human wellbeing and livelihoods. This group included the Prime Minister of Bhutan Lyonchhen Tshering Tobgay, Peter Van Kemseke from the Cabinet of the President of the European Commission, Rafael Dubeux from the Brazilian Ministry of Finance, and Safira Vasquez from Belize’s Ministry of Blue Economy.

Together, they discussed a vision for integrating nature into global economic frameworks and generating the necessary funding; shared many key successes; and paved the way for a new center to scale these approaches toward transformative impact.

Nature finance requires nature data

The lack of sufficient funding for nature protection and restoration has led to the emergence of a wide range of innovative finance mechanisms that leverage the tools of capitalism and finance toward achieving sustainable development. These include payment for ecosystem services, biodiversity credits, blended finance, debt-for-nature swaps, innovative loans, and green or blue bonds, also known as “theme bonds.”

Examples of nature finance mechanisms

Biodiversity credits offer credits or certificates for supporting long-term action that improves ecosystems or offsets negative impacts. Unlike the carbon market, there is no single metric for measuring biodiversity. One example is the Savimbo biodiversity credit project in the Putumayo region of the Colombian Amazon. Read more here.
Green or blue bonds raise capital from “impact investors” to pay for land-based (green) or marine and ocean-based (blue) projects with positive environmental, economic, and climate benefits. Green bonds have historically focused on climate change. In the case of Belize’s Blue Bond, the country restructured a portion of its national debt in exchange for marine conservation commitments. This built on years of collaboration with NatCap; the current phase of work is helping to establish nature- and people-positive metrics of success, as well as monitoring, reporting, and verification processes.
Innovative loans issued by development banks provide lower interest rates in exchange for nature-positive commitments. As a result of NatCap’s collaborative work in the Bahamas, quantifying the ecosystem service benefits from coral reefs, mangroves, and seagrasses and conducting an economic valuation of their marine protected areas, the Inter-American Development Bank granted two innovative loans for nature-based solutions in the Bahamas. NatCap helped develop a baseline so changes in benefits from nature could be documented as loan performance indicators. Read more here.
Payment for ecosystem services schemes, such as water funds, have been successfully applied around the world. The goal here is to internalize the costs of nature preservation or restoration. The beneficiaries of ecosystem services pay people or groups “upstream” of them – sometimes literally – for maintaining the integrity of those ecosystems. As an example: through modeling the potential environmental and economic benefits, NatCap’s analyses supported the first water fund in Africa, the Upper Tana-Nairobi Water Fund, benefiting farmers and the more than 9 million who rely on the Tana River for freshwater. Read more on NatCap’s role here.

Over the past 20 years, the Stanford Natural Capital Project’s approaches and tools for valuing nature’s benefits to people have been foundational to these innovations. NatCap’s tools are helping to set targets and track outcomes for finance mechanisms because countries must show actual improvements as a result of investments in nature, metrics that track progress are in high demand. As the groups involved in these efforts have expanded to include ministries of finance, central banks, and more, they have changed the conversation, advocating for nature financing that also targets people and livelihoods (i.e., development and finance that is both people-positive and nature-positive).

This year, NatCap faculty director Gretchen Daily was appointed co-chair of the World Economic Forum’s Global Future Council on Natural Capital, part of the Forum’s recently launched initiative to mainstream natural capital in the global socioeconomic agenda and rapidly scale its application in decision-making.

In a recent post, two members of the council discussed natural capital innovations around the world, saying: “These are not isolated experiments – they represent a new economic logic. Investments in nature yield compounding benefits for businesses and societies. Integrating natural capital into decision-making is becoming the baseline for governance, not a luxury. … Recognizing natural capital is no longer just a conservation issue; It’s a strategic imperative for peace, resilience, and prosperity.”

Read more about the June 12 event in the originally published article from the Natural Capital Alliance.

Daily is also the Bing Professor of Environmental Science in the Department of Biology in the Stanford School of Humanities and Sciences and a senior fellow at the Stanford Woods Institute for the Environment, which is part of the Stanford Doerr School of Sustainability.