(Bloomberg) -- Difficult to define and measure. A lack of investment options. A challenge to make money and protect the natural world.
That’s the state of the financial market for biodiversity, according to John Tobin-de la Puente, a 15-year Credit Suisse veteran and early player in the market who’s now a professor at Cornell University in Ithaca, New York.
The question is how do you get profit-loving capitalists to plow money into a niche market that focuses on the well-being of insects, the health of marine species and the preservation of mangroves?
Currently, financial strategies targeting biodiversity are about 10 to 15 years behind those focused on cutting greenhouse-gas emissions, Tobin-de la Puente said.
To boost the market—which includes bonds tied to protecting oceans and debt-for-nature swaps—there needs to be more complex financial contracts and a greater commitment from long-term investors and governments to lure more private money to the sector, Tobin-de la Puente said.
“It’s a great situation to be in if you’re a banker developing products,” he said in an interview.
Versions of such instruments that were pioneered by Credit Suisse are now being explored by many of the world’s biggest banks, including Goldman Sachs Group Inc. and Citigroup Inc. UBS Group AG, which now owns Credit Suisse, is already working on its first-ever debt-for-climate swap.
Then there are credits designed to offset the damage a company might do to its natural environment. These exist in many forms, including so-called mitigation banking credits. Meanwhile, JPMorgan Chase & Co. is among banks creating new roles to figure out how best to monetize biodiversity.
Tobin-de la Puente, who has a doctorate in tropical ecology, trained as a corporate lawyer and worked in banking to become what he calls an “effective biologist.” At Credit Suisse, he advised bankers in structured finance and focused on reputational risks linked to the environment and later nature finance. He helped introduce so-called conservation notes, which are contracts that direct money to conserve land, water and other nature projects. He left the bank in 2016 for academia.
A lot of early experiments in nature finance have so far produced “underwhelming” profits, Tobin-de la Puente said. It’s harder to make money from protecting nature, he explained, because it often runs counter to how a capitalist economy works. “You want to not transform it, not change it, not destroy it, and then try to generate revenue,’’ he said.
Back in 2014, Tobin-de la Puente co-wrote a report that said investors need to direct just one per cent of new and reinvested capital globally to bridge the shortfall in conservation funds.
The effort to shore up nature finance would involve doing more “creative structuring,” such as putting together complex contracts that would make use of tax benefits, monetize future cash flows and deploy guarantees to help reduce financing costs, he said. Financial derivatives and insurance should also be included, as well as blended finance, which combines public and private capital, he said.
When it comes to sheer impact, the “purest” example of nature finance is ecotourism—but it’s hard to grow, he said. Other investments include buying fishing rights and shares of publicly traded companies that are changing their business practices to be less harmful to nature, Tobin-de la Puente said.
His comments come ahead of the next United Nations-chaired biodiversity summit, known as COP16, due to take place in Colombia in October, where participants will discuss progress made on targets they agreed to in 2022.
As part of that agreement, almost 200 nations announced plans to mobilize about US$200 billion annually toward protecting biodiversity, a figure that can’t be reached without considerable private investment. The deal included a goal of protecting 30 per cent of the planet’s lands, rivers and oceans by 2030.
As far as targets go, they’re “somewhat nebulous,” Tobin-de la Puente said. An initiative to measure risks of species going extinct—known as the STAR metric—is a good early attempt, but there needs to be more widely-accepted gauges, he said.
Tobin-de la Puente said he’s optimistic about an effort known as environmental DNA, or eDNA, which seeks to quantify biodiversity and identify species.
Like all new markets, biodiversity is experiencing growing pains. But without more rigor, realism and pragmatism, it’s unlikely to take off, Tobin-de la Puente said. Government policies and regulatory reforms will undoubtedly help the market, he said.
“It’s inherently difficult,” he said of the market. “I’m the first one to point that out all the time. But it’s not impossible.”
Sustainable finance in brief
In the market for private credit, managers are increasingly partnering with banks to help them maintain lucrative contracts with risky oil, gas and coal clients. It’s a model that allows banks to continue doing deals in areas like commodity trade finance, where exposures might otherwise clash with European restrictions on fossil fuels and capital requirements.
By sharing risky exposures with private-credit managers, banks are figuring out how to stay on the right side of regulations without losing access to lucrative commodities markets.
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