We are proposing a session to explore investment models that allocate capital, at scale, to nature and biodiversity in cities. We would introduce the panel by outlining the three systemic gaps that act as roadblocks to raising the massive amount of capital necessary to address the crisis of nature and biodiversity in cities. These systemic gaps are:
System Gap 1: Capital Market’s Inability to Finance Nature
Currently, governments and philanthropy finance the protection and enhancement of natural assets. Woefully insufficient nature-funding continues to shrink as governments grapple with budgets stretched by the costs incurred to fight the Covid-19 pandemic. And, the public sector has to find the required monies to repair and expand gray infrastructure to provide for burgeoning populations.
Banks, pension funds, insurance companies, money managers, family offices, trusts, and other investors all share similar criteria. They have obligations to their depositors to:
– evaluate risk
– ensure the liquidity of their investments
– and, earn fair returns.
Most countries have no proven market to trade financial instruments that invest in nature. Also, very few sizeable transactions exist that allow for the evaluation of the risks and consideration of the mitigating factors of nature-based financing. Few transactions means even fewer trades of the underlying obligations – so no depth of market and very little liquidity. Perversely, investment continues into industrial agriculture, mining, the fossil fuel industry and other industries that have a direct detrimental impact on biodiversity and nature. However, these sectors have market maturity, proven track records, and high levels of liquidity that make investment opportunities attractive.
System Gap 2: Public Investment Creating Private Wealth
Nature enhances the value of private assets. Privately held real estate captures most of that value. As stated above, governments and philanthropy finance almost all investment in natural assets. Only a fraction of that investment is recouped through existing mechanisms such as taxes.
Akin to infrastructure, nature requires significant upfront investment and provisions for annual maintenance. Yet, nature does provide benefits. But those benefits are challenging to assess and monetize due to the lack of any recognized accounting standards.
System gap # 3: Absence of Viable Community Governance Mechanisms
Currently, governments pay for the development and maintenance of city parks and other natural assets such as rain gardens, biodiversity patches, urban forests, rivers, and ponds. Accounting’s historic cost concept and depreciation do not recognize the true value of natural assets on city balance sheets. They are often recorded at nominal value. As such, they are particularly vulnerable to the vagaries of changing government policies and shifting budget priorities.
Other than for altruistic reasons, private landowners have little motivation to be good guardians for natural assets they may own. Maintenance costs are a drag on operating income and parkland preservation reduces development capacity and profit.
Once we outline the systemic gaps, we will challenge the audience by stating that blended finance solutions address the first system gap but leave out the second and the third. This means that our current impact investment thesis is woefully insufficient to create the type of mechanism that not only catalyze private and institutional capital but that ensure that the value created by investing this capital towards nature based solutions is captured back by the public stakeholders, including community.
We will then invite the panel to weigh in on this provocation. As a next step, Anastasia will share the concept behind the Civic Infrastructure Bond that Ombrello Solutions is developing in order to get the audience to reflect in practicality on the opportunities and challenges of structuring a systemic investment mechanism. Specifically, the Civic Infrastructure Bond requires a close collaboration and orchestration between unusual stakeholders: private developers and property owners; impact foundations and family offices; pension funds; conservation managers and municipalities. This adds complexity and delays to the structuring of a transformative capital instrument. Anastasia could share the four prototypes that are currently being structured in Canada as a portfolio of urban nature and biodiversity assets where $200million Civic Infrastructure Bond is being deployed, showing how these challenges are being addressed.
