HK heads toward nature-positive economy

(LI MIN / CHINA DAILY)

The world is facing a growing ecological deficit, and committing resources toward the conservation and sustainable management of natural capital is key to a sustainable future. The Asia-Pacific region has the most significant biological diversity on Earth, stemming from critical hot spots such as the rainforests of Southeast Asia and the reefs of the Coral Triangle. However, the region also faces the highest rates of biodiversity loss. As nature has underpinned economic growth in the region for decades, ensuring that nature is responsibly managed and restored also presents some attractive opportunities — opportunities equivalent to 14 percent of the GDP of the region. As an internationally leading financial hub with the ability to influence and enable the flow of capital, Hong Kong has a critical role to play in making a nature-positive economy into a reality. With a phenomenal coastline and 40 percent of its landmass constituting country parks and special conservation areas, the city is uniquely positioned to realize attractive opportunities while ensuring that nature is responsibly managed, preserved and restored. 

The World Economic Forum has estimated that more than half of the world’s economic output ($44 trillion) is dependent on nature, with a nature-positive transition in just three sectors presenting an annual business opportunity of $10 trillion by 2030. Every economy, at every stage of development, is reliant on natural resources and ecosystems.

By presenting natural assets as capital, it becomes clearer how the environment is comprised of finite stocks that may be invested to generate or deplete value. This can help clarify not only the regulatory, market and stakeholder risks associated with nature loss, but also the opportunities associated with its replenishment.

Of more than 20 global organizations engaged in the financial-services industry, over 76 percent of survey participants in a recent Deloitte survey are offering or interested in developing new financial mechanisms that seek better nature-based value. Most recently in Hong Kong, in July 2022, Hong Kong Exchanges and Clearing Ltd launched an International Carbon Market Council in order to leverage Hong Kong’s position as a leading global financial center and contribute to the realization of carbon neutrality goals and the development of the green and sustainable finance ecosystem in Hong Kong, the Chinese mainland and beyond.

We can expect greater demand for a broader range of global nature-related investments as part of efforts to meet net-zero emissions targets. Protecting, managing and restoring forests, wetlands and grasslands can lead to the removal of 11 billion metric tons of carbon every year and could, by 2030, contribute one-third of the reductions necessary to hold the temperature rise well below 2 degrees C. In the Asia Pacific, where some of the most significant biodiversity is located, 63 percent of the GDP in the region is at risk of disruption from nature loss.

The predicted finance required for biodiversity conservation alone is estimated at $722 billion to $967 billion annually by 2030, suggesting an annual nature financing gap of $598 billion. To avoid both ecological and economic bankruptcy, we need to better value nature in how we make financial, political and economic decisions. Hong Kong, home to more than 2,300 species of vascular plants, of which about 2,100 are native, as well as beautiful coastal reefs, wetlands and mangroves, must continue its efforts in protecting the biodiversity of the city, in order to ensure nature continues to pay returns in perpetuity.

There is a wide range of ways for a financier to bank on natural capital. Debt represents the largest pool of global capital and is essential in addressing many environmental challenges, with a 49 percent growth in green-bond value annually between 2016 and 2020. However, debt-based instruments can further disadvantage at-risk communities, especially if they deliver lower financial returns than traditional investments.

Green equities can be leveraged to finance nature in three distinct ways: Nature-positive finance employs screening tools and standards to identify ESG (environmental, social, and governance) risks and avoid nature-negative investments. For example, the Euronext ESG Biodiversity Screened Index is the first investable biodiversity index, launched by HSBC in 2021. Besides this, green finance to incentivize investments in nature-positive products and services is becoming more prominent through thematic private-equity and venture-capital funds. Within public and philanthropic efforts, blended finance strategically rebalances the risk-reward profile of investments through redeploying existing public funding to mobilize private-sector financing, overcoming the barriers in nature-positive investments with unprofitable phases or slow financial returns. Hong Kong needs to continue investing in nature to unlock potential market opportunities rooted in truly sustainable returns.

Within market-based mechanisms, nature-based equity exchanges create a marketplace of tradable shares that represent ownership of natural capital under accredited projects. This could provide a scaled financing mechanism from carbon credits, ecotourism, license trading and certified commodities like coffee beans. These shares would generate dividends from the flourishing of the ecosystem, realized from the sale of goods and services generated, while driving job creation, capacity building and poverty alleviation.

The journey to a nature-positive economy requires an understanding of the barriers involved. There is a disconnected demand for nature, with beneficiaries of nature-based services not incentivized to invest in nature without regulatory, liability or stakeholder pressure. There is also a shortfall of high-quality, market-ready natural capital products and standard definitions to encapsulate the value of nature. Finding middle ground in defining nature’s value without oversimplifying nature’s complexity can help balance risk and catalyze investment at scale.

The financial-services industry must stay alert to developments in nature protection. Nature-related property rights are expected to increase in line with government regulatory action. Financiers can mitigate their exposure to nature-related risks by conducting a nature-related risk assessment of their operations and broader value chain. Financiers can also leverage the competitive advantage afforded to nature-positive companies by integrating nature-positive investment screening procedures. They can provide products that incentivize nature-positive operations such as biodiversity-linked agricultural loans.

This is a “Goldilocks” decade for banking on natural capital. Accelerating global action on climate change, growing awareness of the universal risks of nature loss, technological advances, and access to data should enable innovative nature-positive financial products and markets to emerge for the long-term benefit of people and the planet

The author is the lead partner for climate and sustainability services at Deloitte Hong Kong.

The views don’t necessarily reflect those of China Daily