By Dr Manuel Piñuela, CEO and Co-Founder of Cultivo, a fintech that enables investment in nature.
It was not long ago that ‘biodiversity’ was a relatively unknown term. While the climate crisis has dominated many front pages in the past few years, the global decline in biological variety and variability of life on Earth has taken a back seat. This is now changing. Thanks to a considerable increase in media coverage and excellent documentaries such as A Life on Our Planet from David Attenborough, awareness is building. Consumers, businesses, and politicians alike are waking up to the reality of the biodiversity crisis and how important it is to the world’s ecosystem.
One of the keys to fixing the crisis will be strategic investments that are purpose-built to restore and protect biodiversity around the world. But are they a worthwhile investment?
The answer is yes. The belief that environmentally focused investments don’t deliver a strong bottom line is outdated. Financial institutions and investors can now invest in projects that deliver a ‘triple win’ with financial, ecological, and social returns.
But how do we allocate capital to ensure we maximise our financial returns? Or in other words, how do we make sure projects that restore and protect biodiversity are a profitable investment?
The first step is to identify projects with high-quality natural capital: an emerging asset class that values the natural world and the benefits it provides. Computational power, satellite imagery, and sensors can now be used to cost effectively identify projects with high quality natural capital helping to reduce transaction costs for investors.
Financial returns can then be generated through biodiversity offsets, carbon offsets, water offsets, and natural infrastructure once a project receives investment. Financial returns aren’t the only benefit though – the projects also protect and improve biodiversity, create jobs and enhance the livelihoods of local communities. This approach creates long-term resilience and in turn reduces risk.
Many excellent case studies for this type of investment are coming to light every day. One of my favourite examples from Cultivo is a farmland regeneration project in Mexico that has an expected MOIC (Multiple on Invested Capital) greater than 2.5x. This translates into an implicit IRR (Internal Rate of Return) greater than 20%. Carbon credits will drive the cash flow to begin with, with future cash flows coming from biodiversity preservation, water, and other services. From a biodiversity perspective, the project supports the reintroduction of American Bison to its native habitat, and is part of a biological corridor that is important for migratory birds and the golden eagle. The focus on biodiversity is now starting to improve other important elements of the natural capital stack, such as climate resilience, specifically preventing fires in the region. This in turn is driving new stakeholders and actors to the push to protect biodiversity, such as insurance and reinsurance businesses and investors.
The financial returns for this type of project are attractive, but these ‘nature-based solutions’ are also worthwhile for other reasons. First and foremost, they are highly effective for protecting and restoring biodiversity. Secondly, they are excellent for carbon sequestration; in fact, natured-based carbon capture can provide at least 30% of the CO2 mitigation goals by 2030, yet they receive only 3% of the funding allocated to carbon capture.
Thanks to intelligent use of data and financing mechanisms that unlock natural capital, this type of investment is now a reality and profitable. As a result, the number of investors that recognise the multiple benefits of biodiversity investments is growing quickly. This is good news for the world’s ecosystems and for those who seek this opportunity as part of their investment strategy.
However, this is just the beginning of a massive green wave of investment sweeping across the world. In 2020 alone, we saw compelling evidence that green investments (including biodiversity offset projects) deliver strong financial returns and continue to create value. On top of that, the number of companies with a net-zero target more than doubled from 2019 to 2020, and now the UN is already calling on finance giants to set clear biodiversity targets and aim for ‘net-positive’ impact. This is exactly what we need to see and another reason why investing in biodiversity now is so important. The demand for nature-based projects and offsets is growing, so let’s invest in the supply side now and enjoy the financial, ecological and social benefits.