Closing the Investment Gap for Nature-Based Solutions: Key takeaways from the UN G20 Report

The rise of environmental, social, and governance (ESG) policies within both small and large businesses has been established in almost every sector. From manufacturing and industrial, to healthcare and professional services, this is a trend that will continue to grow as climate change and environmental disasters transform from long-term to short-term concerns for the upcoming generations.

Polestar has been heavily involved in the ESG market for quite some time now (read some other blog posts here and here). We examined one of the key themes for this year will be ESG in our 2023 Sector Valuation. Just last year, Polestar supported the transaction of Bridges Fund Management, MSCI and Farview Equity backing Evora Global to advance sustainable development goals in the global real estate industry.

ESG is a huge focus for us as a firm, with the wider Sustainability sector now sitting at the heart of our sector wheel. In fact, we recently wrote a blog post on another UN Report centred around Global Risk, and how climate change is the biggest risk society is due to face.

For this reason, it is important to understand what and where investment, both from the public and private sector, has transitioned, and what we will need to do as a society to close the investment gap for climate change. It is important to put your money where your mouth is.

What are NbS?

The United Nations published a report analysing previous investment and future investment needed within the ESG market, or what they call “nature-based solutions” (NbS). The report defines NbS as “a category of assets in which businesses, governments and citizens can invest in order to work with nature instead of seeing it as a barrier to economic development and progress”.

These can be solutions such as carbon sequestration on agricultural lands and peatlands, defence from flooding by restoring mangrove populations, or the protection of global biodiversity through forest and other land conservation.

The International Union for Conservation of Nature (IUCN) states that NbS can address climate change in three ways:

1. Decrease greenhouse gas emissions related to deforestation and land use
2. Capture and store carbon dioxide from the atmosphere
3. Enhance resilience of ecosystems and, as such, support societies to adapt to climate hazards such as flooding, sea-level rise, and more frequent and intense droughts, floods, heatwaves, and wildfires

In the private market, Polestar has engaged with companies focused on sustainability more broadly. For example, EVORA Global is a leading sustainability consulting firm that offers ESG solutions for commercial real estate. Its software, SIERA, helps organisations find an optimal path to reducing carbon emission to zero.

Another example is Hughes and Salvidge (H&S), which is one of the UK’s leading decommissioning companies. It has a large focus on recycling and the environment, as it aims to recycle in excess of 95% of its waste.

E-green is another example which focuses on “smart packaging”, a new section of the paper and packaging sector. The company began its success with wooden products and, over the years, has developed an extensive range of paper and recyclable plastic items to meet market needs.

Although these companies do not work directly with nature, they work towards the same goals as NbS: to address issues of greenhouse gas emissions and environmental pollutants.

How much money has currently been invested?

According to the UN, $120bn was invested in NbS in 2020 by the G20 countries. This can be broken down into two categories: (1) public sector and (2) private capital and Public ODA.

Of this total spending, $105 bn is allocated internally towards domestic government programs, a third of which is invested in programs to promote the protection of biodiversity and the landscape. The other two thirds of domestic government investment ($67 billion) funds water management, pollution abatement, general environmental protection, and measures for agriculture, forestry, fishing and hunting.

There is a stark difference when looking at the private sector. In 2020, the private sector contributed $14bn to Nbs; the private sector makes up 60% of total national GDP in most G20 countries, yet contributes just 12% of total NbS investments, leaving the other 88% to the public sector and its taxpayers.

What about the future?

The WEF report has some startling numbers for the future. By 2050, global NbS spending will need to increase to $536bn to achieve all global sustainability targets. This would require more than quadrupling the current total global NbS investment.

Focusing on G20 countries, the organisation estimates that internal annual NbS will need to increase 140% (an additional $165bn) by 2050.

The rest of this will need to come from non-G20 countries to meet the remaining $235bn. This is 58% of the additional total global NbS, however, non-G20 countries only make up 20% of the world’s GDP. This will pose a great challenge as these countries who may not have enough fiscal headroom to meet the future targets. The report states two reasons for these:

1. “All G20 members except India have investment-grade sovereign debt, while most non-G20 countries do not. This means that it will be more expensive for non-G20 countries to borrow money on capital markets, limiting their fiscal bandwidth to fulfil NbS investment.
2. The larger the government debt-to-GDP ratio, the greater the annual NbS future spending need, revealing the challenge of funding NbS investment outside the G20. The G20 countries tend to have a lower government debt-to-GDP ratio compared to future spending needs than non-G20 regions.”

Closing the Investment Gap

G20 countries carry out a majority of global economic and financial activity so their capacity for leadership and decisive action will be key in the future investment.  According to the report, the world would benefit from a transition from investment in current unsustainable use of the Earth’s resources towards activities that support the sustainable use of natural assets.

The report lists out steps that can help close the investment gap:

1. The first step is the simplest: “G20 countries could align economic recovery post Covid-19 with both the Paris Agreement and future agreements on biodiversity, focusing economies on being consistent with the 1.5°C warming above pre-industrial levels, as well as halting and reversing the loss of biodiversity.”
2. From a public-funding perspective, G20 countries could pledge to: “a) increase ODA spending to help developing countries reduce the NbS investment gap; and b) increase domestic expenditure for NbS-relevant sectors, including through repurposing agricultural subsidies. Other opportunities relate to: c) requesting multilateral development banks (MDBs) to expand NbS-relevant lending or debt relief to developing countries by supporting the issuance of IMF Special Drawing Rights (SDR); or, d) creating and expanding results-based financing schemes, such as nature performance bonds.”
3. In terms of the private sector: “ (1) Governments can create stable, predictable revenues from ecosystems such as forest carbon to entice private investment in NbS (2) Members of the G20 could work together to develop new and innovative investment products and nature markets (3) The G20 could help to close the finance gap by engaging the private sector and unlocking investments and (4) To guide future investments, the G20 could consider models that have an intersectional approach to the gender-NbS investments in support of women as drivers of net zero, nature-positive and resilient economies to scale up NbS finance.”

Conclusion: put your money where your mouth is

There is a large need to up the ante when it comes to the private sector and NbS. Gathering and then spending $500bn a year to meet targets will be a challenge, but not impossible. Today, we see a large number of corporations with their focus on “ESG” and “sustainability”, but we need this to be more than greenwashing. The future generations will depend on this.

Whilst it is obvious that corporations are trying to meet the needs of a changing consumer base who are more knowledgeable about the environment, it is also obvious that the private sector can be doing a lot more for NbS when compared to governmental spending.

At Polestar, we completed three deals just last year in sustainability. ESG is now a key focus of ours because we see this as the way of the future; the rise in the ESG market shows us that the private sector is heading in the right direction.

With the rapid rise in demand for this space, this could be a good time to explore your options for raising funding or securing a valuable exit. If you want to get in touch about anything ESG related, don’t hesitate to do so. Like always, if you have any interest, do reach out.