Valuing the Essential Ecosystem Services that Support Life on Earth

Green Finance
July 12, 2022
Birgit Aru

Ecosystems are in rapid decline globally. The systemic undervaluation of living nature has led to a significant funding gap of around 4.1 trillion by 2050 in nature. Not to mention that small private land owners earn little to no income from maintaining valuable ecosystems, such as forests. Forests are essential ecosystems for their capacity to capture and store carbon and host a wealth of species. In contrast, destroying forests to harvest timber provides immediate revenue for the land owner. 

Ecosystem valuation, which attempts to put a price tag on nature, is a difficult task and has been criticized. Nevertheless, there is growing recognition of the need for ecosystem valuation and for increased (private) funding to maintain the provision of services such as climate regulation, water provision and biodiversity protection. Let’s dive into some of the most interesting recent developments driving the appreciation of nature and the emergence of “nature markets”.

The problem: systematic undervaluation of and underinvestments in nature

While nature has intrinsic value and we as humans have a moral obligation to preserve it, a more pragmatic approach to valuing nature is assessing the “ecosystem services” it provides to humans. Often called “nature’s benefits,” these services include climate regulation, pollination, soil formation, habitat provision and food and fiber provision.

Today’s rapid and often irreversible destruction of ecosystems is largely caused by the systematic undervaluation of nature and its vital contributions to human well-being and to all life. Many  ecosystem services are regarded as public goods, and despite some progress in ecosystem accounting, the cost of these services is still largely absent from national and private sector calculations and decision making. Furthermore, sustaining ecosystems generates little to no income for land owners and land stewards who are directly responsible for keeping nature alive and in good condition. Instead, many governments still subsidize activities that harm nature more than those that conserve it.

In his landmark report, professor Sir Dasgupta argues, “Nature’s worth to society — the true value of the various goods and services it provides — is not reflected in market prices because much of it is open to all at no monetary charge. These pricing distortions have led us to invest relatively more in other assets, such as produced capital, and underinvest in our natural assets.”

To illustrate the shortcomings of our current economic success metrics, such as Gross Domestic Product (GDP), consider the example of clearing a forest to build a factory. While GDP accounts for the increase in produced capital, it does not account for the destruction of the “natural capital” and the associated loss of the biodiversity hosted, carbon captured and stored, air purified and temperature regulated. In addition, the decline in these services increases costs in health care, climate change mitigation and adaptation efforts.

Various national programmes involving payments for ecosystem services have been deployed to varying degrees of effectiveness. One of the most long-standing and successful of these is in Costa Rica. While there has been some progress in designing such schemes, their scope is nowhere near what is needed today.

The limited recognition of the diverse benefits of nature has led to a massive funding gap in nature conservation and restoration. The 2021 UNEP report, State of Finance for Nature, calls for investments in nature-based solutions to at least triple by 2030 (double for forest-based solutions) and quadruple by 2050 to meet biodiversity, climate change and land degradation targets. By 2050, forest-based solutions alone will require an annual expenditure of USD 203 billion globally. Half of this needs to flow into the preservation, management and restoration of forest assets. Planting new trees is necessary but costly; preserving existing forests is a much more cost-effective solution that is readily available. 

In fact, there is great potential to attract private investments to nature. These investments currently account for only 14% of total nature spending, according to the UNEP report. Nature-based solutions offer an opportunity for private investors to reduce costs, increase resilience and enhance reputation and purpose. Also, governments and international organizations can boost the investment case for nature with policies and regulations that drive nature’s recovery, by facilitating stable and predictable markets for ecosystem services and financial de-risking. 

Hopeful signs: increasing recognition of the role of nature and emerging nature markets

“The solution starts with understanding and accepting a simple truth: our economies are embedded within Nature, not external to it.” —Professor Sir Dasgupta 

The growing destruction of ecosystems calls for a transformational shift in how we value and reward nature in our economies. However, this transition will take time, and there is a clear need for immediate solutions and tools to scale up funding, especially private investments in nature conservation and recovery within the most critical decade up to 2030. Luckily, there is increased recognition of these issues in the international, public and private spheres. 

Some of the most interesting recent developments driving the valuation of nature and catalyzing payments for biodiversity and ecosystem services include the following:

I Drivers behind growing appreciation and valuation of nature

Building on the white paper by the Taskforce on Nature Markets, the mainstreaming of valuing nature has been largely driven by the following:

Increased public awareness and risks to equitable prosperity and health. 

Public awareness is increasingly fed by media coverage of nature destruction and deforestation, plastic pollution and nature’s links with the COVID-19 pandemic. It’s also hard to underestimate the role of the respected broadcaster and biologist Sir David Attenborough in inspiring love for nature and raising concerns over its loss. Furthermore, landmark reports such as those on climate change and land by the IPCC (2019), the famous Dasgupta Review on The Economics of Biodiversity (2021) and the economic rationale for investing in nature in “The Economic Case for Nature” (2021) by the World Bank have increased awareness of the importance of ecosystem conservation and recovery.

In most of the literature addressing climate change and environmental destruction, concerns over economic prosperity and equity in its distribution arise, as these issues are strongly intertwined. For instance, climate justice and equity have recently become the top demands of the “Fridays for Future” youth movement, coinciding with the increasing desire for social justice in environmental movements, as explained by Politico.

Goals and targets. Leaders of governments (see the statement by G7), businesses and civil society are increasingly calling for the world not only to become net zero (climate neutral), but nature positive by 2030. Though the term lacks sufficient clarity, it is increasingly being used by these leaders as well as corporations and financial institutions. Nature positive broadly refers to enhancing the resilience of our planet and societies to halt and reverse nature loss as described by the World Economic Forum, and is subject to the ongoing discussions on the Post-2020 Global Biodiversity Framework under the Convention on Biological Diversity (CBD). This marks a paradigm shift from the previous damage reduction principles (“do no harm”) to a more proactive approach which enhances ecosystems. 

The United Nations-led Post-2020 Global Biodiversity Framework will hopefully be adopted at the second part of the COP15 conference in Montreal, Canada at the end of 2022. Its draft text calls for new and larger protected areas, better governance of natural resources and the sectors that utilize them, stricter enforcement of existing rules and regulations and increased investments. The new framework is expected to become a “Paris Agreement for nature,” inspired by and hopefully enjoying similar recognition and support as the Paris Agreement for climate. 

Furthermore, the importance of nature in addressing climate goals, notably its capacity to capture and store carbon, was recognised at the 2021 UN Climate Change Conference COP26 in Glasgow. As one of the highlights of the conference, 120 world leaders from countries covering over 90% of global forests, including Brazil and the Democratic Republic of the Congo, committed to halting and reversing forest loss and land degradation by 2030 — an important pledge now awaiting delivery.

Business risks and opportunities and disclosures. There is growing recognition of the risks and opportunities associated with nature in the business community. Some emerging global and regional standards and requirements, underpinned by credible data, should compel businesses and financial institutions to integrate nature-related considerations (besides climate) into their decision making and financial disclosures. 

For instance, the Taskforce on Nature-related Financial Disclosures guides organizations to report and act on evolving nature-related risks. In the EU, the sustainability reporting requirements for financial market participants requires companies in the financial services sector to report any adverse impacts on biodiversity-sensitive areas. This will likely also be required of large- (as of 2024), small- and medium-sized (as of 2027) companies as part of the upcoming regulation. In parallel, the protection and restoration of biodiversity and ecosystems is one of the six environmental objectives of the EU Taxonomy for sustainable activities.

II Catalyzing private investments through emerging nature markets

As defined by the Taskforce on Nature Markets, nature markets or nature-positive markets have two essential features: they attribute monetary value to nature, or its functions, i.e the services it provides, and they generate nature-specific revenue as an integral part of the trade.

The Taskforce proposes a preliminary three-way classification of the types of nature markets:

  1. Intrinsic nature markets, which involve the trade of nature itself, for instance, seafood, nature-based medical products, wood products, sand, earth and coarse minerals.
  2. Offset nature markets, which include investments and/or trade in aspects of nature to offset a negative impact elsewhere. However, in contrast to carbon offsets, where one ton of CO2 emitted in China has equal climate implications as one ton emitted in Estonia, it’s impossible to compare, for example, the biodiversity loss in one location to that in another.
  3. Derivative nature markets, referring to the trade of instruments that represent the value of nature in the form of underlying economic assets and enterprises, for instance, non-fungible tokens (NFTs) and other forms of tradable nature-linked tokens.

Though a work in progress, this classification illustrates the breadth and diversity of what we call nature markets. 

The following are some of the most recent initiatives and reports supporting the development of nature markets (offset and derivative) to leverage private funding for the benefit of nature:

The Finance for Biodiversity (F4B) initiative, established in October 2019, helps integrate biodiversity considerations into financial decision making and thus better align global finance with nature conservation and restoration. Their workstreams cover market efficiency and innovation through better data availability and nature-related financial disclosures, biodiversity-related liability and catalyzing markets for nature-based services. In March, they launched a global Taskforce on Nature Markets, which serves to ensure that emerging nature markets deliver nature-positive and equitable outcomes. The taskforce kicked off its work with the publication of a white paper (referred to previously) outlining the challenges and opportunities associated with the surge in monetisation of nature. The taskforce follows an ambitious work programme and is worth keeping an eye on for further analysis and recommendations on nature market design, governance and its effective delivery.

Another important report on Scaling Investments in Nature was published by the World Economic Forum in February this year. It is estimated that a nature-positive pathway could generate over $10 trillion in new business value and create 395 million jobs by 2030. While nature-positive investments have a clear economic case, only a handful currently offer a positive market return on investment. The report argues that businesses should take the lead by mainstreaming investments in nature that already demonstrate a positive business case and calls on governments to create an environment that makes such investments more attractive. 

The Financing Nature Recovery UK initiative, established in November 2020, provides a promising example of a comprehensive nation-wide approach to catalyzing private investment to help fill the UK’s annual £5.6 billion financing gap for nature recovery and “make the UK a highly attractive market for nature-based investment”. Their recent report, published in June this year, includes recommendations from over 300 experts for tackling barriers to private investment in nature, such as undervaluation of nature, lack of standards and tested revenue streams, mis-aligned and complex environmental regulations and expertise and capacity gaps. The recommendations focus on market design, including new drivers for nature investment such as nature-based targets, reform of existing regulation and better regulation and provision of independent market oversight. They also call for rigorous standards for measuring and accrediting environmental services, data improvement and the creation of appropriate market infrastructure. 

Key takeaways

Though much remains to be done in terms of internalizing the value of living nature and its vital services in our economies, there have been positive developments in the right direction. 

Firstly, there’s growing recognition of the impacts of ecosystem destruction and the need for urgent action thanks to increased public awareness and piling scientific evidence. Global and regional biodiversity and climate-related goals, reporting requirements and frameworks should facilitate action. The emergence of the term “nature positive” in global policy discussions and statements emphasizes the need to halt and reverse the destruction of nature. 

Secondly, the emerging nature markets, if designed around integrity and impact, could be paramount in leveraging the much needed private investments in nature. This decade will be pivotal for curbing nature’s loss.

Single.Earth as a novel tool for funding nature preservation

Single.Earth is an emerging player in derivative nature markets, providing a new and accessible way to invest in nature. We help scale investments in the preservation of biodiverse forests under threat of harvest. 

Considering the scale of ecosystem degradation and biodiversity loss globally, it is much more cost-effective and scalable to conserve existing nature than it is to restore it once damaged or lost. We take a progressive approach to nature conservation by allowing forests to grow into their full ecological potential through limited intervention — a term called proforestation.

Single.Earth assesses the ecological value of specific biodiverse forests with our in-house scientific Digital Twin models, and timestamps and packages the assessment results into tradeable MERIT tokens. By buying and using the tokens, for example, for an ESG contribution (corporates), for payment or as an investment, the buyer provides a financial incentive for the respective land owner to keep their forests intact. Single.Earth continuously monitors the forest coverage using satellite imagery and issues tokens only for as long as the forests are kept intact, without any long-term commitment from the land owner.

The mission of MERIT tokens is to become the world’s first digital nature-backed currency.

Single.Earth is on a mission to help preserve and restore existing ecosystems.

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