1 of 17

������POLICY ACTIONS MINISTRIES OF FINANCE CAN TAKE TO MANAGE NATURE-RELATED RISKS��Preliminary Recommendations��6TH SESSION OF THE INTERFACE DIALOGUE ON FINANCE AND BIODIVERSITY (IDFB)��

PRESENTED BY: SAMANTHA POWER, SUSTAINABLE FINANCE SPECIALIST

(SPOWER@WORLDBANK.ORG)

​

2 of 17

THE ECONOMY IS EMBEDDED IN NATURE

3 of 17

MARKET FAILURES & VALUATION

​

  • There are a range of drivers of nature loss, including market failure and valuation complexity, which limit private investment flows to ensure ecosystem maintenance and continuous provisioning of ecosystem services.

​

  • Some causes of market failures include:
    • the presence of a public good (e.g., carbon sequestration by natural forests),
    • common access to resources (e.g., fisheries),
    • externalities (e.g., water pollution),
    • and information asymmetry.

​

4 of 17

GROWING AWARENESS

  • G7
  • G20
  • One Planet Summit – 30x30 commitments
  • Central banks – banking sector nature risk exposure assessment
  • Financial institutions – nature risk assessment and management; commitments to natural capital investments

5 of 17

NATURE-RELATED RISKS

Physical Risk

Stems from the degradation and loss of natural capital and the disruption of the ecosystem services it provides.

Transition Risk

Stems from changes in economic policy, regulation, technological advancement, and shifting consumer preferences as well as reputational damage as a result of activities that are harmful to biodiversity.

Liability Risk

Stems from litigation, regulatory fines, and penalties for violations of the law.

6 of 17

POTENTIAL RISK TRANSMISSION CHANNELS

7 of 17

ENDOGENEITY OF NATURE-RELATED RISKS

  • Nature-related risks are not predetermined but can be reduced by altering the economy’s impact on the biosphere
  • Whether and to what extent risks for MoFs will materialize depend on:
    • actions to reduce the impact of economic activities on nature and to drive conservation, restoration, and sustainable use of nature (limiting nature-related physical risk),
    • and actions to drive a smooth economic transition (limiting nature-related transition risk).

8 of 17

POTENTIAL POLICY ACTIONS FOR MINISTRIES OF FINANCE

Ministries of finance play a pivotal role in mitigating and managing nature-related risks through their policy, regulation, planning, and budgeting decisions.

Structural economic changes to more sustainable production and consumption practices, accompanied by large-scale ecosystem restoration and connection, are required.

9 of 17

POTENTIAL POLICY ACTIONS FOR MINISTRIES OF FINANCE

Economic & financial policy reform

Integration of nature-smart planning and nature-based solutions into sectors

Mobilization of finance for nature

Development of metrics & decision-support tools

10 of 17

ECONOMIC POLICY REFORM

  • Integrate pathways to reversing nature loss in development strategies, national plans, NBSAPs, and NDCs.
  • Address market and governance failures that facilitate unsustainable production and consumption practices.
  • Drive environmental fiscal reform.
  • An estimated $500 billion in subsidies annually flow to activities that are harmful to nature (OECD 2020).

11 of 17

FINANCIAL POLICY REFORM

  • Targeted policy in the financial sector can also ensure systematic integration of nature risk and opportunities in financial decisions and align financial flows with sustainable development goals.
  • Action in four areas would be transformative:
    • (1) taxonomies and labelling;
    • (2) supervisory and risk assessment;
    • (3) promotion of disclosure of nature-related information;
    • (4) international networks to facilitate knowledge exchange and standardization of new approaches to green the financial markets.

​

12 of 17

INTEGRATION OF NATURE-SMART PLANNING AND NBS INTO SECTORS

1

Support better integration of nature-smart planning into sectors with the greatest environmental footprint.

    • food, land use, and ocean use;
    • infrastructure and the built environment;
    • and energy and extractives.

2

Support the uptake of NBS by the private sector by integrating nature considerations into upstream sectoral planning and strategic investments.

3

Provide adequate public funding for integrated landscape and seascape management.

4

Establish incentives for conservation at the local level, such as:

    • ecological compensation mechanisms,
    • payment for ecosystem services schemes,
    • and market-based instruments (such as offsets).

13 of 17

MOBILIZATION OF FINANCE FOR NATURE

  • Provide blended finance support to help develop a pipeline of bankable nature conservation, restoration, and sustainable use projects for the private sector to invest in.
  • Support the development of financial instruments through both regulatory frameworks (eg green bonds, funds) and investment guidelines.
  • Leverage PES markets to help fund public conservation and restoration projects.
  • Support sub-national environmental bond issuance
  • Begin sovereign nature-related reporting
  • Issue sovereign sustainability linked bond

​

See Mobilizing Private Finance for Nature report for more.

14 of 17

SOVEREIGN DEBT AND NATURE

Framework for Selecting Key Performance Indicators for Sovereign Sustainability-Linked Bonds

    • Adjusted savings: net forest depletion (% of GNI)
    • Average proportion of Marine Key Biodiversity Areas (KBAs) covered by protected areas (%)

Potential areas KPIs could fall under

BLOG - Striking the right note: Key performance indicators for sovereign sustainability-linked bonds

15 of 17

DEVELOPMENT OF METRICS & DECISION SUPPORT TOOLS

  • Support the development of metrics and decision support tools that better integrate the value of nature in the private sector.
  • Leverage geospatial, AI, machine learning, and eDNA technology to develop improved understanding of the value of a country’s natural assets.
  • Use this information in national planning and provide the information to the public so it can be used in private sector decision making.
  • Support the development of macroeconomic and financial modelling to inform public and private risk assessment and decision making.

16 of 17

VALUATION

  • Natural capital accounting (NCA) can provide detailed statistics for better management of natural resources that contribute to economic development.
  • It can help governments design a management strategy that maximizes the contribution to economic growth while balancing tradeoffs.
  • MoFs can ensure that national NCA data is accessible to the public, particularly so that the private sector can consider it in their decision making.
  • MoFs can support the uptake of corporate NCA tools.
  • MoFs can consider measures of environmental and social well being alongside GDP.

17 of 17

THANK YOU!