Nine economic and financial reforms to stop the collapse of nature

A beginner’s guide to transformative change for preserving the habitat of humanity

Our economic system is blind to nature’s destruction. As it is, it can only accelerate the loss of nature and biodiversity, putting everyone at risk. The disruption of natural ecosystems has consequences on human health, on the supply of food and water, and it creates resource shortages. In a not distant future, it could disrupt the functioning of human societies and of the economy, very much like the Covid-19 pandemic did.

In the long run, it could be putting humanity itself at risk. The stakes are too high: our economy needs deep and transformative changes to be aligned with the limits of our planet. Finance can only become a part of the solution if we understand both its potential and its intrinsic limitations.

Here are nine urgent measures to make a difference:

In 2021, the United Nations will start renegotiating international targets for the conservation and restoration of nature to be met for 2030. But economic growth will keep harming nature if governments do not also plan for the transition to a sustainable economy.

To be impactful, international agreements must be binding, calibrated on scientific evidence and widely adopted. But limiting economic activity is politically and financially costly: in the absence of support from the USA, both the EU and China will have to increase their financial contributions to developing countries if a game changing deal is to be adopted.

To know which activities are causing nature-loss, it is not enough that some companies disclose their impact on nature voluntarily; policymakers must require large companies to disclose their environmental impact and to define their transition plans.

Nature-loss is largely caused by the production systems we use. Reversing this trend requires, as a minimum, that companies shift to more sustainable modes of production. Having defined what sustainable is, the EU must establish a reporting framework so that companies’ environmental impacts can be compared and require the most harmful companies to build transition pathways.

Reducing environmental harm should mean just that. Policymakers should refrain from allowing companies to harm nature and then paying compensation. This will encourage a shift from ‘harming nature as a cost of doing business’ to avoiding harm in the first place.

Biodiversity offsetting is a mechanism that allows companies to damage an ecosystem on the condition that they finance, generally elsewhere, a restoration project. Since no two ecosystems are the same, such mechanisms cannot be said to reverse nature loss. It rather perpetuates “rights to pollute” and undermines environmental regulation.

A growing number of savers are keen to invest their money in environmentally sound activities. But not many finance professionals who sell green financial products are able to authenticate their “sustainability” claims.

The EU’s planned Ecolabel for Financial Products should be granted only to products that can be proven to finance sustainable activities or that have a positive environmental impact. For this, we need tools and methods to measure the impacts of the activities being financed on biodiversity and nature as well as on climate.

Private finance always needs sufficient revenue sources, even sustainable finance. But nature projects often have no or low revenue and require a long-term commitment. Reconciling these two logics is, at best, a challenge.

As investors look through a risk/return lens, they perceive most conservation and restoration projects as too risky, too small, illiquid and not profitable enough – if they are able to generate any revenue stream at all. Moreover, financial markets rely on types of benchmarking practices that create herding behaviours and reinforce short-term bias.

Policymakers should ban harmful practices with regulations rather than expecting businesses to change their behaviour by themselves based only on consumer demand or ethical concerns.

Given the importance of the required changes, voluntary standards and market-based approaches will not be enough. Unsustainable processes must gradually be forbidden by law, while a significant part of EU territory should be restored and protected from harmful economic activities. Public subsidies should be mobilised to support a just transition.

Economic instruments such as quotas and environmental taxes can constrain economic activities that overexploit natural resources, but only if they are designed properly and calibrated to nature’s limits.

In theory, economic instruments act by limiting unsustainable practices or by reducing their profitability. In practice, they often have mixed results. As a priority, policy makers should assess the effectiveness and suitability of existing and new economic instruments against their environmental objectives and redesign them accordingly.

Public money still finances activities that harm nature and biodiversity, such as some kinds of farming. Public authorities should better track and measure the environmental impact of their investments and subsidies, and revise them accordingly.

Public subsidies are still supporting harmful economic activities, thereby weakening the impact of already limited green public spending and the EU’s own environmental objectives. Rebalancing the use of public money towards more nature-friendly activities starts by reviewing the EU’s systems for tracking the use and environmental impact of public spending.

Nature-related projects will need public investment, given the limitations facing private financing in this area. European economic governance should therefore expand beyond a focus on enforcing EU fiscal rules to include enforcing the EU transition.

The European Semester should evolve to fully integrate economic governance and environmental objectives. In parallel, EU fiscal rules should be rethought to ensure that Member States can invest in programmes such as Natura2000, in restoration plans, and to support the ecological transition.

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You can also download a short version of our guide in PDF:

 

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