Nishant Malhotra Founder of Middle Road OPC Pvt Ltd & The middle Road platform talks about the startup

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Episode 26: Social Impact Special on Biodiversity with Nishant Malhotra

Hello,

A very warm welcome to a very insightful and informative podcast from The middle Road platform. This is Nishant Malhotra, your host discussing a special social impact story on Biodiversity.

In today’s educational podcast, I will share an overview of the biodiversity sector, why the persevering biodiversity sector is key to a more equitable future, its impact on the society observed through the financial sector, sustainable finance, tools, metrics used to measure the impact of human interaction and policies on nature conservation and restoration. Recently, The middle Road became a member of the European Union Business @ Biodiversity platform, a global thought-leading platform enabling social change and impact within the biodiversity-ecosystem. The middle Road is a thought leadership terminal blending Media and EdTech for a more sustainable and equitable future. Key sources of references are Finance for Biodiversity Guide on biodiversity measurement approaches, Positive Impact Finance for Business & Biodiversity, EU Biodiversity Strategy for 2030 among others.

Why is Biodiversity so important and what do we mean by the term Biodiversity?  

Biodiversity is defined as ‘the diversity of species, variation of genes and different ecosystems’ (Term used by the Convention on Biological Diversity, CBD).

About a million species are under threat of extinction, and based on World Economic Forum more than 50 percent of the World’s Global GDP are dependent on nature and exposed to the risk of alteration of the natural habitat. This analysis forms the bedrock of the importance of nature for the social development of humanity. International Monetary Fund, World Economic Outlook Database, October 2021, estimates global GDP for selected countries to be $95.6 trillion approximately. According to World Bank national accounts data, and OECD National Accounts data files, the top five countries the United States, China, Japan, Germany, and the United Kingdom’s combined GDP accounted for 52.2 trillion approximately, accounting for 55.2% of the World GDP.  The inequitable distribution of national wealth shows the increasing responsibility of a few nations to drive the sustainable development agenda. Based on a report by Business for Nature & ICC, a nature-based transition could lead to $10 trillion in business opportunity creating 395 million jobs by 2030.

The pandemic has shown the importance of preserving nature for bettering humans’ response to the wellbeing of society. One of the major reports to be published on the economic impact on this subject matter is Das Gupta’s The Economics of Biodiversity: The Dasgupta Review. The above analysis underpins the importance of biodiversity, both social and economic importance to the world. United Nations Conference on Environment and Development (popularly known as Rio “Earth Summit”) started the Convention on Biological Diversity (CBD) on 22 May 1992 where the adoption of the agreed text of Convention on Biological Diversity took place. The proliferation of worldwide drive towards sustainable development led to an accelerated focus towards facilitating policies for enhancing thought leadership for biodiversity.

In the words of CBD “It represents a dramatic step forward in the conservation of biological diversity, the sustainable use of its components, and the fair and equitable sharing of benefits arising from the use of genetic resources.”

Looking at the enormity of the social and economic problem, multiple actors came together to work out a comprehensive plan to develop a framework for understanding positive biodiversity impact within the financial parlance. To devise policies, measure social and economic loss: – policymakers, social impact practitioners, financial intuitions and corporates need to understand the positive impact for financial institutions. To understand more about biodiversity and financial institutions let’s look at Finance for Biodiversity Pledge group. Finance for Biodiversity Pledge launched by a group of six financial institutions on 25 September 2020 , today has 84 members. The members have set minimum standards to achieve by 2024 ( reverse and conserve nature loss)  example collaboration among various actors within the business and social ecosystem, set targets, engage with companies, access impact, and report publicly making the process more transparent.

Positive Impact Finance is defined in UNEP-FI’s Positive Impact Finance Manifesto as “that which verifiably produces a positive impact on the economy, society or the environment once any potential negative impacts have been duly identified and mitigated”.

 

Understanding of positive and negative net gain is the key to deriving biodiversity net gain, a measurement that incorporates Environmental, Social, and Governance aspects within its methodology to evaluate social impact. This forms the backbone for implementing investment strategies for financial institutions with biodiversity and natural habitat as the central tenet for investing. Corporates could focus on increasing biodiversity gain from projects in CSR or innovating products or processes that can lead to a positive biodiversity gain. For example, prioritizing products or suppliers of raw material from the sustainable agricultural sector. Biodiversity lies within the climate change agenda to increase carbon storage through preservation and restoration of forestry example mangroves. Listen to the podcast with Alfredo Quarto for a more nuanced overview of Mangroves. EU through its financial perspective program has started various programs to advance biodiversity. Example LIFE program shares grants within biodiversity, a common agricultural policy that finances green infrastructure among others. Grants are donations that are part of concessionary or better philanthropic funding that focuses on social return rather than economic return. An innovative manner of amplifying and crowding private sector capital for development projects is through blended finance.  

IFC defines blended finance as the use of relatively small amounts of concessional donor funds to mitigate specific investment risks and help rebalance risk-reward profiles of pioneering investments that are unable to proceed on strictly commercial terms. Structured as co-investments with private capital, the purpose is to fund sustainable development projects along with the financial return. Blended finance instruments vary across asset classes from equity, debt, risk-sharing or guaranteed products like first loss guarantee wherein donor capital forms the first layer of loss of capital to absorb initial losses in a project or a program. This form of funding is designed to fund projects targeting underserved or underprivileged sections of the society that otherwise do not attract capital due to market failures within the economy. 

Refer to online courses on The middle Road. Look at microeconomic modules to know more about market failures.  

 

Eco-Business Fund is an excellent example of an entity using blended finance. Eco-Business Fund provides technical and financial assistance to entities in Latin America, the Caribbean, and sub-Saharan Africa. The fund focuses on sustainability in four economic sectors: agriculture and agri-processing, fishery and aquaculture, forestry, and tourism. Financed by both public and private investors and donors, the fund uses both concessionary and non-concessionary funds to fund target groups or intermediaries providing funding and technical assistance. For example, the fund provided a $30 million loan to an entity in Mexico to finance sustainable agricultural products. Since its launch in 2014, the fund has $430 million sub-loans outstanding, financed 120,000 hectares under agroforestry systems, enabled 4.5 million m3 litres of water savings through water-efficient technologies, etc.

Blended finance is an important aspect of sustainable finance. A riveting example in sustainable finance is the recent largest blue bond for ocean conservation issued by the Nature Conservancy (TNC) and Credit Suisse. The Blue Bond proceeds enabled TNC to provide loans to the Belize government to retire outstanding Eurobonds at a steep discount to the face value. Blue Bonds are fixed income or debt instruments that target marine and ocean-based projects. The structure of this financial instrument is more complicated and will be discussed, at a later date.  A good read on this subject is Belize’s Big Blue Debt Deal: At last, A Scalable Model? By Clemence Landers and Nancy Lee, a highly recommended read. A brief about Eurobonds. Eurobonds are external market bonds that are issued in a foreign currency underwritten by an international syndicate. An example is a Euro Dollar Bond or Euro Yen bond. The first Euro bond was in 1963 by Autostrade in Italy.

To know more about Euro bonds and Debt Markets refer to the online courses at The middle Road. Now we come to metrics used to calculate biodiversity footprint. We will not go into detail but share an overview. Financial institutions use corporate loans, listed and private equity, corporate and sovereign bonds as asset categories. Corporate Biodiversity Footprint is calculated using the mean species abundance metric or MSA. Refer to Finance for Biodiversity Pledge for an in-depth understanding of various metrics. MSA measures the average of native species within a habitat compared to that in its original state. It can be both relative and absolute.

An MSA measure of 70 percent means 30 percent of the original native species have been depleted over the time covered. MSA also includes km2 i.e. measures the value of biodiversity within square km of area. The other method known as Potentially Disappeared Fraction uses regression analysis to understand the causal effect of pressure response variables. For example, the causal effect of an increase in temperature by 1 C on biodiversity or the casual impact of the increase in carbon emissions in parts per million by volume ppmv. Although CO2 is the benchmark for calculating carbon footprints, gas like methane and nitrous oxide are even more harmful. According to The Global Warming Potential (GWP), which compares various greenhouse gas emissions in terms of potency measuring how much energy would one ton of a greenhouse absorb as compared to 1 ton of carbon dioxide. Based on this parameter, Nitrous Oxide (N2O) has a GWP 265–298 times that of CO2 for a 100-year timescale. This framework ( Potentially Disappeared Fraction) is used in biodiversity footprint financial institutions. Another framework is STAR (Species Threat Abatement and Restoration).

I thank you for listening to this session on biodiversity. More will be posted on The middle Road platform so keep checking the site. Cheers, see you around. This is Nishant Malhotra, Sole Founder of The middle Road platform a global leader in enabling social change and impact for a better tomorrow. Have a good one.

 

 

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