The commons, not the market

If 2019 was the year that climate finance went mainstream, 2020 promises to give nature a seat at the green finance table. Biodiversity loss was flagged as one of the top five global threats at this year’s World Economic Forum. Investors are moving “beyond carbon” to assess companies’ biodiversity outcomes. Central bankers and regulators know the economic threats of ecosystem destruction and are working on a nature-focused expansion to the Task Force on Climate-related Financial Disclosure framework.

Initiatives to restore biodiversity have funding problems. A McKinsey report found that conservation projects need $400-billion a year, yet receive only $52-billion, mostly from philanthropic and public funding.

Green finance initiatives see such funding gaps as an example of market failures. Nature- and climate-related risks are perceived as underpriced in financial markets, resulting in negative externalities borne by society. Disclosures of better environmental information are seen as the solution to “fix” the market for investments and, hence, optimise capital allocation. Relying solely on market mechanisms to resolve the climate emergency has been criticised.

Biodiversity is difficult to shoehorn into a market-based financial framework. The political and ethics-riddled reality of conservation raises questions about privileging private finance as a dominant actor, and reveals problems inherent in an information-based approach to resolving the ecological crisis.

Natural capital approaches, which assign monetary valuations to the resources and services provided by nature, are market-based frameworks. Applying the logic of financialisation to nature is controversial. Simplifying complex economic phenomena to monetary valuations embeds a false equivalence between natural and manmade “capital”. Moreover, natural capital approaches rely on the notion of “efficient markets”. But markets are designed to optimise for profit, usually in the short term, and financial models are poorly suited to capturing the nonlinear tipping points, feedback loops and systemic connections that characterise ecology.

Unlike low-carbon infrastructure investments, biodiversity-related projects may not yield returns that are monetisable. Wetlands restoration can deliver economic benefits — flood defences, carbon sequestration, water purification and storage — but these are not easily translated into an income stream. High transaction costs and returns that may take decades to materialise are an unappealing risk-return profile. And the small and localised nature of many projects render them difficult and costly to incorporate into investment vehicles such as green bonds.

The extension of markets into nature has had darker, human consequences. Market-based schemes such as the UN’s Reducing Emissions from Deforestation and Forest Degradation have fuelled land grabs in the Global South, where people were evicted from their lands as companies privatise forest for conservation. Markets require private property regimes to function. But such regimes are often incompatible with people whose cultures and means for prosperity are embedded within surrounding ecosystems. It is hard to see such a trend as anything other than environmental colonialism.

Research led by Nobel prize winner Elinor Ostrom has shown that people have developed their own commons governance systems to sustainably manage natural resources for the long term. Instead of the top-down, data-oriented methods advocated by green finance, such approaches use a sophisticated combination of local knowledge, local rules and adaptive management to steward complex ecosystems. Commons-based systems are necessarily inclusive and participatory political institutions.

There are the limitations and dangers in letting private-sector initiatives dominate solutions to the biodiversity crisis. Many aspects of nature are public goods or part of the commons and would be better served by a multistakeholder approach to mobilising finance.

The public sector is a source of long-term capital and can embed democratic, participatory processes to foster commons governance. Moreover, incorporating ecological concerns into mission-oriented public policy establishes long-term certainty in the policy landscape and can “crowd in” and direct private investment to the right ends. Instead of fixating on the availability of information and prediction as a precursor to action, as market-fixing approaches do, effective public policy can build ecosystem resilience and avoid irreversible tipping points. For, as the precautionary principle states, informational uncertainty is no excuse for delaying urgent action when the consequences of ecosystem collapse would be catastrophic.

The biodiversity crisis reveals uncomfortable truths for green finance. Financial disclosures and metrics are ill-suited to capturing ecological phenomena and cast a veneer of neutrality over political and ideological issues, excluding those who have a right to be part of the decision-making process. Ahead of the United Nations’ Conference of the Parties in China later this year, it is time for policymakers and green-finance players to build inclusive, multistakeholder approaches to resolve the biodiversity crisis.

This is an edited version first published on Open Democracy


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