Why innovation is key to unlocking more investment in natural capital
Economic models have so far failed to take proper account of natural capital. So what needs to change? Image: Courageous Land
- Economic models fail to take proper account of natural capital - the world's stock of natural resources.
- A change in focus and increased investment, particularly from the private sector, in nature-positive business models is critical.
- A new World Economic Forum report explores trends in natural capital investing and the opportunities for change.
Natural capital underpins all socioeconomic activities, but it is undervalued in economic models, argues a new World Economic Forum report in collaboration with UpLink – the Forum’s open innovation platform.
The world's stock of natural resources - natural capital - provides a range of vital benefits to humanity, from food to cultural value. Indeed, more than 50% of global GDP is either moderately or highly dependent on nature, and experts are increasingly pushing policymakers and business leaders to recognise that society entirely depends on nature for essential sustenance and protection.
But despite its critical importance, economic models do not systematically account for this value, "creating perverse incentives to destroy natural capital at the cost of economic growth".
Investing in Natural Capital: Innovations Supporting Much-Needed Financing for Nature outlines the need for a change in focus, support for innovation and an investment ecosystem to grow these nature-positive business models.
What is natural capital?
The term 'natural capital' stems from ecological science and refers to the world's stock of natural resources, both renewable and non-renewable, that generate a flow of benefits to humanity. It's critical to global GDP and as such the health of natural capital is directly related to economic and social health.
However, economic models have failed to take into account the value of natural capital and instead have prioritized growth at its expense. It's estimated that between 1992 and 2014, the global stock of natural capital per person fell by nearly 40%, while produced capital per person nearly doubled. Nature-negative financial flows totalled nearly $7 trillion in 2022, while investment in nature-based solutions totalled just $200 billion.
The report's authors argue that, as a result, "business-as-usual is clearly no longer feasible". So what needs to change?
In short, investment and incentives to invest.
Investing in natural capital
The nature-positive economy needs $2.7 trillion of capital investment every year until 2030. However, current funding falls significantly below these levels. Direct investment in the protection, maintenance and enhancement of nature, which is a component of the overall investment figure, currently lags by over $700 billion annually.
The primary investor in nature is the public sector, with private finance flows very limited. These are estimated at just $35 billion last year - a small fraction of global private markets, which exceed $10 trillion in value, and an even smaller fraction of global equity or fixed-income instrument markets that exceed $100 trillion each.
Barriers to private capital flow to natural capital include a lack of motivation and 'pull' factors. There's also a perception of 'poor' return profiles. Equally, because data on natural capital and the costs of nature degradation are not systematically included in balance sheets, the value and benefits of keeping nature intact are not included in calculations.
But there are positive signs, with innovation across the investing value chain giving opportunities and incentives for private investors to invest in nature. The report flags four key areas where innovation is already taking place and opening up opportunities for investors:
- Technological advances: Startups applying emerging technologies like sensors, satellite imagery, and AI are creating a vibrant 'nature tech' ecosystem that presents investment opportunities in start-ups globally.
- Financing instruments: From an emerging market for biodiversity credits to new concepts such as nature asset companies, these are increasingly appealing to a range of potential investors.
- Business models: The Forum has identified more than 60 business models in a nature-positive economy that could be worth $10.1 trillion by 2030. Crucially, these opportunities offer comparable or better financial returns than business-as-usual models, in addition to reversing nature loss.
- New investors: A combination of the 3 factors above is attracting new investors to deploy capital across the financing for nature value chain.
Building on these factors to further encourage and enable investment in nature-positive business models is now vital. Otherwise, the momentum they've generated is at risk of being lost. As the report's authors emphasise: "Ultimately, these innovations cannot, and will not, take place in a vacuum – an innovation ecosystem is needed to strengthen and scale their impact."
To conclude, the report identifies five critical areas that can be developed to support this greater investment in natural capital:
- Improved accessibility and affordability of technological advances in nature monitoring, and embedding these deeper in decision-making.
- Development of sophisticated nature capital markets infrastructure to ensure transparency, accountability and the efficient flow of capital.
- Improved valuation and pricing of natural capital, so that natural capital investments can compete with traditional business models.
- More patient and catalytic capital that aligns with the speed of nature, allowing for both impacts and returns to be achieved over a longer time horizon.
- Inclusion of local peoples - living and depending on nature - as active participants and decision-makers, and beneficiaries in projects, businesses and initiatives.
Bringing innovation and funding together
As the international organization for public-private cooperation, the World Economic Forum is committed to mobilizing this finance for nature.
This is embodied by the Forum's UpLink and financing for nature initiatives, which provide platforms for collaboration. For example, UpLink's Innovation Ecosystem is helping to drive progress on the UN's Sustainable Development Goals, and has run 17 nature-related innovation challenges since 2020. These have engaged with over 200 ecopreneurs - businesses that put the environment at the heart of their business model.
The report itself offers nine case studies that bring innovations in the nature-investing value chain to life. This includes investors across the spectrum of capital, from institutional investors and large asset managers to VC funds, private equity investors, and impact investors. Examples from the case studies include Pivotal's work in nature data aggregation, ARC Marine's work in supporting marine biodiversity and Funga's impact on replenishing the forest microbiome.
Further collaboration is essential, though. Investors, ecologists, technology innovators, entrepreneurs, financiers and local communities have a unique opportunity to pivot the global economy to one where ecology and economy go hand in hand.