Can we put a price tag on nature? Valuing the carbon services of plants and animals is essential to bridging the gap between finance and conservation, says Professor Connel Fullenkamp, the leading academic working at the intersection of science and economics. Here, Fullenkamp speaks to LUX about the importance of engaging capital markets in biodiversity financing, and why necessity is the mother of invention

Professor Connel Fullenkamp

LUX: You have spoken profoundly about the value of natural assets.
CF: We’re bringing economics, finance, and business into an area where it really hasn’t been brought in before. We start with the approach that says these natural assets have a lot of value, but we don’t necessarily know how to put a price tag on that value. So, we start only with the things that we can find a market price for. This is because we want to speak the same language as investors and policymakers who have to keep their eye on the bottom line all the time.

When we go out and try to put a value on a natural asset, be it an elephant or a mangrove forest, we’re really thinking about this as trying to attach the lowest, believable value. We’re trying to convince people that the value is way more than that. That has got a lot of people’s attention, because it acquaints them with the tremendous value that resides in many natural assets.

LUX: Can there be a system that’s devised for transferring payments? For example, if a company destroys a coastal mangrove plantation, who does it pay for that lost value?
CF: Part of the desire behind this is to prevent the destruction from happening in the first place. But we’re living in a world in which we already have those kinds of swaps going on. So, what we’re trying to do is put an adequate value on that. We are also trying to create the impression that the contributions to things like biodiversity are worth even more. In many cases, of course, it’s the government that owns these assets, so we have to inform them what they are worth.

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For example, we were approached by the UK Environment Agency to help them value their salt marshes, given that they have diminished by 90% in the last century or so. If we can put a price tag on these things, we can help governments make the argument that, firstly, you shouldn’t destroy these things in the first place, and secondly, if you do harm these assets, there’s going to be a steep price to pay.

LUX: How hard is it to find a valuation when there are so many different factors? For example, with a salt marsh, you have to incorporate the carbon storage or the flood protection, and then the ecosystem’s biodiversity.
CF: It’s difficult to put a total valuation on most of these natural assets because it has proven to be difficult to value something like the contribution to biodiversity. It’s hard to even define what biodiversity is. Biodiversity in a desert is very different to that 1,000 or more kilometres south in rainforests.

LUX: What opportunities are there in terms of constructing a financial pathway for investors?
CF: This is something we’re very keen to create. Ideally, we’d have investors who are interested in investing in natural capital services, such as carbon sequestration, because there’s a fairly well-established market for it. These investors would like to purchase either carbon offsets or have other reasons for wanting to hold carbon credits. They would pay for certificates that would deliver the carbon credits, and then the proceeds would function like a sovereign wealth fund.

Read more: Professor Nathalie Seddon On Biodiversity And Climate Resilience

Hopefully, the main use of that money would be, of course, to establish conservation restoration programmes. This is a long pathway between the financial markets all the way to the people on the ground doing conservation restoration. But unless we create that pathway, I think we’re missing out on a huge opportunity.

LUX: Which opportunities should investors be looking towards, in terms of creating the new financial system to support this?
CF: There are two things that should create excitement. They’d be investing on the idea that these are natural resources will continue to deliver these different environmental services, like carbon sequestration. We’re betting on the recovery of those things. Also, they’re betting on the plus in which carbon will help us understand what the biodiversity benefits are, that can also then be priced. If we get good at establishing these carbon markets, we kind of wrap in these biodiversity services as a plus.

LUX: What are the main hurdles to be overcome?
CF: Governments are very reluctant to think about selling their natural assets to the private sector. And so, our first hurdle is to convince them that, no, you’re not selling the assets. We’re trying to get you to sell the services of the natural assets; in fact, governments need to retain ownership of these assets.

We have to establish a conduit that will help governments protect these assets so that they can continue to generate services and support: mainly the beauty and culture of their countries. Governments are naturally reluctant because this is a brand new thing that they’ve never seen before. The markets are sceptical for similar reasons, and because there are some less-savoury actors out there who’ve already been trying and failing with certain initiatives.

Also, there is, especially in the case of wild animals, scientific uncertainty. So many of these species are facing near extinction across the board. We don’t have time. We need people to say, okay, the science is good enough. We’re willing to believe in it and bet on it.

LUX: Are these outcomes possible?
CF: I’m optimistic. The reaction we get when we talk to people has been overwhelmingly positive. When you get the capital markets involved, you can unleash a tremendous amount of financing that can do a lot of good, hopefully for conservation and restoration.

It is hard to imagine being able to cover that biodiversity financing gap without the participation of the financial markets. So, one of the things that drives my optimism is the fact that necessity is the mother of invention. For addressing climate change, this is one of our best chances. The trick is to put everybody together and get them to work together toward this common goal.

LUX: Will there be developments in attaching more specific prices, in terms of the science around biodiversity and nature-based capital?
CF: Absolutely. I think there’s a lot of excitement in that research. In particular, for example, one of the leading seagrass researchers is very excited about our work and is writing a paper for us. Seagrass is again one of these unsung heroes of blue carbon that sequesters a tremendous amount of carbon. We still don’t know what the full extent of seagrass coverage is anywhere, because nobody’s really had the money or the gumption to go look for it. So just finding out where the seagrass is, how much it covered it can sequester and where it can be restored: those kinds of issues are the type of research that we see coming out of this in the short term.

LUX: Are there accessible ways of investing in natural capital in the way that you’ve outlined?
CF: What we’ve got in mind is a bit different from, say, the sustainability linked bonds or green bonds that we see out there. There again, I think these are they’re all great and part of the solution here. But really, when you’re investing in something like a sustainability linked or a green bond, you’re basically a bond investor. You’re hoping that the money gets put to a certain type of a purpose. And in some cases, you’re going to get some either yield pick up or yield penalty depending on the performance. But really, you’re not making a direct investment, so to speak, or a direct bet on the actual natural capital itself. You’re really not investing in environmental services. That’s to me, in my mind, that’s a really big difference here, that what we’re what we have in mind and what we’re trying to create is really an asset backed market. And the asset that is being used to back the market is the natural capital services.

Read more: Dimitri Zenghelis on Investing in the Green Transition

LUX: In an optimistic scenario, how do you see this looking in 10 years’ time with the landscape?
CF: This will be just another asset class that people have available to them to invest in and it will have certain properties. Hopefully it will be sufficiently uncorrelated with other types of market returns to make it attractive as a diversification tool, if not for its own sake, and what it represents in terms of investment in the environment. So ideally, that’s what we’d see people would say. Well, I’ve got some of my portfolio in stocks and bonds, real estate alternatives. And one of the alternatives is going to be these natural capital assets.

Connel Fullenkamp is Professor of the Practice and Director of Undergraduate Studies in the Department of Economics at Duke University 

Find out more: duke.edu

Alex Mustard photographed healthy reefs in the Maldives

As our oceans warm up, the spectacular coral reefs of the Maldives archipelago are dying. Michael Marshall reports on the new philanthropic project aiming to make them more resilient to climate change

Beneath the glittering cerulean waters of the Maldives archipelago, trouble is brewing. The extraordinary coral reefs that encircle these islands are being damaged by climate change, threatening the country’s very survival.

Fortunately, help is at hand. A local research and conservation institute has bold plans to strengthen the reefs by breeding the most resilient corals and seeding them in the waters of the Maldives. With the help of a new philanthropic initiative, led by Deutsche Bank, the project is ready to set sail.

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The Maldives is one of the countries most affected by climate change. “You couldn’t find a place more in the front lines,” says Callum Roberts, Professor of Marine Conservation at the University of Exeter.

As the Earth’s temperature warms, driven by greenhouse gas emissions, the oceans are being reshaped. Most obviously, sea levels are rising – and for low-lying islands like the Maldives that is an existential threat. But there’s more: seas are warming, the water is becoming more acidic and low-oxygen zones are spreading. These changes threaten all marine life.

Climate change poses a particular threat to corals. These tiny animals live in huge colonies underwater, and over thousands of years the skeletons of dead corals build up to make vast structures called reefs. The Maldives themselves are coral reefs that grew until they reached the surface, and the country’s islands are ringed by underwater reefs. These are home to an extraordinary range of animals, from sharks to starfish.

More photography by Alex Mustard of healthy reefs in the Maldives

“Your first experience of a coral reef is completely unforgettable,” says Roberts. “You dive over the reef crest and into that area where it’s just a huge blaze of fish of all varieties and colours.” It’s utterly immersive, he adds; you can “feel yourself being completely consumed by an ecosystem”.

Corals are particularly vulnerable to warming. “It doesn’t take more than a rise of about 1°C above their normal thermal maximum for corals to get into deep trouble,” says Roberts. “That’s what’s been happening.”

Callum Roberts

In 1997-98 and 2015-16, spikes in ocean temperature caused mass coral bleaching events. The corals expelled the algae that live inside them and that they depend upon for nutrients. As a result, the corals turned ghostly white. The first bleaching event killed an estimated 95 per cent of shallow corals. They then underwent a partial recovery, before the second mass bleaching event caused about 65 per cent mortality. “That level of coral death is extremely worrying,” says Roberts.

In a 2018 report, the Intergovernmental Panel on Climate Change stated that “coral reefs would decline by 70-90 per cent with global warming of 1.5°C, whereas virtually all would be lost with 2°C.” So far, the Earth has warmed by an estimated 1.1°C.

To save the corals, and by extension the Maldives, the country’s former president Mohamed Nasheed founded the Maldives Coral Institute (MCI). The MCI aims “to help coral reefs to survive and adapt to the changing climate”. Roberts is one of its scientific advisers.

Alex Mustard also photographed bleached, dead corals highlighting the abundance of sea life at risk if corals are left to decline

The MCI is now being financially supported by Deutsche Bank. In November 2021, the bank launched its Ocean Resilience Philanthropy Fund, which is intended to support nature-based solutions to marine conservation problems. Deutsche Bank committed an initial $300,000 and hopes to raise $5 million over the next five years. The MCI was brought to the bank’s attention by Karen Sack, Executive Director and Co-Chair of the Ocean Risk and Resilience Action Alliance.

Jacqueline Valouch

“The lack of funding is one of the big recognised barriers to nature-based solutions,” says Jacqueline Valouch, Head of Philanthropy at Deutsche Bank Wealth Management in New York, who was involved in setting up the fund.

“We’ve got this massive problem, the Maldives Coral Institute has a mission, and Deutsche Bank is funding a really important piece of work to begin with,” adds Roberts.

The funding will enable the MCI to launch a project called the Future Climate Coral Bank (FCCB). The idea is to find corals that have proven resistant to climate change and breed them in a controlled environment, creating more resilient strains. “We’re going to have a living propagated coral farm underwater in which the idea is to explore and test ways of assisting evolution,” says Roberts. These resilient corals can then be reintroduced to the ocean, particularly to reefs with a poor supply of coral larvae. In the long run, this will hopefully mean the Maldivian corals become more resilient.

The MCI works on conservation projects including this one at Fulhadhoo, where divers installed a silt screen to prevent sediment from nearby construction from damaging the corals

“The magnitude of that impact to us was unmatched in many ways,” says Valouch. She says the FCCB “could last for many generations,” which is crucial, because her philanthropic clients want “to make an impact on the causes they care about”. “They’re multigenerational families coming from many different regions of the world and they have their family members living in different parts of the globe.”

Valouch and her colleagues plan to spend much of 2022 talking to donors. “We are looking to kick all that off now,” she says. A key element will be introducing prospective donors to the project team, so they can appreciate the talent and passion of all involved. Deutsche Bank is also recruiting a panel of experts who will advise on which projects to fund. “To be able to have that kind of innovation and creativity sit at the table with us is just extraordinary,” Valouch says.

For her, philanthropy can provide the seed funding for ambitious projects such as the FCCB. “It allows other donors to come in,” she says, and enables organisations like the MCI to recruit enough staff to become sustainable.

“I think the private sector has a greater appetite for risk,” says Roberts. That’s especially true for projects such as the FCCB. “This is not research that ends when you publish a study. This is something that has to make a difference on the ground and in the water.”

The hope is that, with the right investment, the corals of the Maldives will thrive for decades to come.

Five approaches to regenerating the world’s coral reefs

1. Reducing agricultural runoff into the sea improves water quality and coral health.
2. Coral IVF grows baby corals in the lab and seeds them on damaged reefs.
3. Artificial reefs can be sunk in oceans to provide homes for corals and other sea life.
4. Corals can even be given ‘probiotics’ to help boost their health.
5. Most importantly of all, limiting climate warming to a maximum of 1.5°C and lowering global greenhouse gas emissions to net-zero will minimise the threat to the world’s coral reefs.

— Michael Marshall

Former President of the Maldives and environmental activist Mohamed Nasheed discusses climate change with children at the Maldives Coral Institute’s Coral Festival in 2020

A partnership of positive steps

The Ocean Risk and Resilience Action Alliance (ORRAA) is helping to drive a global response to ocean-derived risks. Backed by organisations ranging from the World Wildlife Fund to Deutsche Bank as global lead banking partner, it wants to save the oceans by deploying the power of the financial world.

Read More: Jean-Michel Cousteau: Choose Life

Its mission is “to pioneer new and innovative financial products” that will tackle climate change, protect ocean biodiversity and help coastal communities become resilient, says Karen Sack, Executive Director and Co-Chair of ORRAA.

Karen Sack

“We aim to drive at least $500 million of investment into coastal and marine natural capital, or ‘blue nature’,” says Sack. She argues that this is in everyone’s interest. The global ocean economy has a total asset value estimated at $24 trillion, but in the past decade only $13 billion has been invested in sustainable marine projects. “We need to change that,” says Sack. “And we need to act quickly.”

Hence the Maldives project. Deutsche Bank were looking for ways to have a positive impact quickly, as well as over the long term, and Sack suggested supporting the MCI. “Lessons learned in the Maldives will help heal and strengthen coral reefs around the world.”

Michael Marshall is a renowned science journalist specialising in the environment and life sciences

Find out more: deutschewealth.com/oceanfund

This article appears in the Deutsche Bank Supplement of the Summer 2022 issue of LUX

Mangroves protect coastlines from erosion and flooding, sequester carbon and provide a home to species not found elsewhere

If human beings are going to create a sustainable economic system, we must recognise the true value of living ecosystems and the services that they provide to society, and price this into our financial decisions. In the long term, the benefits will far outweigh the costs, says Markus Müller

Markus Müller

Our enthusiasm for economic development has detached us from nature. With our focus on the production of goods, we have forgotten that there literally is a natural limit to our endeavours. If we value nature purely in terms of the raw materials it provides, we fail to appreciate the many ‘ecosystem services’ that living creatures and plants provide to society, and research suggests the markets would price these at about $140 trillion.

The world is fast-approaching a point where its natural capital is so depleted that it can no longer provide us with these services. As a species, we are acting rather like a company owner who operates their machinery 24/7 without maintenance, then acts surprised that their production line is no longer able to deliver the goods. The difference with nature is that there is no option of buying a new machine.

Humans, economy and society are embedded in the environment. This applies to food, but also to areas such as medicine. We know, for example, that many of the organisms living in the sea have contributed to the development of cancer treatments and other crucial drugs. It is reasonable to suppose that similar discoveries are waiting to be made in the world’s most biodiverse habitats such as rainforests and coral reefs, and if we kill our planet’s biodiversity then we will undoubtedly kill many such opportunities.

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What does this mean for us in our daily lives, for companies, and also for the economic and financial markets? If we look at the numbers alone the issue of sustainability may appear to already be centre stage. Around the world we see growing regulation, not only in creating transparency but also guiding money flow. Now accounting for more than 36 per cent of funds under management globally, environmental, social and governance (ESG) investments have established themselves as mainstream.

However, while the ESG concept divides up current business activities into three specific categories, making the transition to truly sustainable business practices requires more than just an appreciation of financial risk and return. The ultimate objective must be to promote the health of planet Earth for the benefit of generations to come. As Gro Bruntland, the former Norwegian prime minister, said in 1987: humanity has the ability to make development sustainable to ensure that it meets the needs of the present without compromising the ability of future generations to meet their own needs.

When discussing the economic opportunities around biodiversity, I always provide a caveat. What we are dealing with is a global common good. We can’t deal with it in the same way as a private good, which is a product we can manufacture. In terms of business opportunities, we need to be careful when we speak of a global common good – like biodiversity, clean air or even the ocean – as there is a risk of doing business as usual, and exploiting these fundamentals of our wellbeing.

The good news is that with the right governance, we can move quickly from over- exploitation to repair and rejuvenation. Take mangroves, for example: they are difficult to plant, but can be reinvigorated easily. And when they are healthy they act as an effective natural carbon sink, as well as lifting the ground level by collecting and storing soil. They represent a cost-effective ‘nature-based solution’ to both climate change and rising sea levels – and, therefore, a potential business opportunity.

Simultaneously, broader economics must be considered. ESG-based investments are increasingly being incorporated into governmental social and economic policies, and should boost economic growth by encouraging more responsible management of the world’s natural resources. The concept of natural capital – valuing living things like other assets, in order to conserve them – is gaining ground with economists, and when industrial leaders begin to realise its significance then it will completely change the way they do business.

As the awareness of biodiversity loss grows, it should become an increasingly important part of corporate strategy and political policy, drawing more attention to shortcomings in existing evaluation approaches while also prompting solutions. Biodiversity loss gives rise to risks (physical, transition, and liability) for companies in myriad ways. Any decision, be it in investment or finance, therefore needs to encompass the entire product life-cycle and examine the whole supply chain.

Read More: Gaggenau: The Calming Influence of Biophilic Design

The framework we use to evaluate biodiversity preservation is likely to evolve, which will have direct implications not only for investors but also for policymakers and economists. Also, the question of property rights will need to be considered in the context of local political and cultural priorities – a tension that may be difficult to resolve. Solving the geopolitical dimension is likely to be even more difficult, as this will require the financially strong First World to demonstrate the will to obtain goods from sustainable production. All this will come at a cost, but it’s most definitely a cost worth paying to ‘protect our portfolio’. The concept of natural capital could herald the beginning of a big story – one of an innovative and equitable economic model – that is worthy of the 21st century. To reiterate my opening message: if all things were similar then there would be no development. The outcome, instead, would be destruction. Let’s embrace this challenge and adapt to a new future, embedded in nature.

Markus Müller is Global Head of the Chief Investment Office at Deutsche Bank’s International Private Bank

Find out more: deutschewealth.com/esg

This article appears in the Deutsche Bank Supplement of the Summer 2022 issue of LUX