“Markets are not inherently incompatible with nature regeneration. They simply have not been given the knowledge and tools to recognize the real value of nature nor the incentives to change their behavior,” writes financial economist Ralph Chami.
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By Ralph Chami
Over the past century, the global economy has expanded while the natural world has contracted. This phenomenon is no accident.
Since 1925, global GDP has risen fifteen-fold. At the same time, we have lost half of the world’s coral reefs, witnessed the extinction of hundreds of species, cleared forests, and polluted rivers and oceans. The rise in income, meanwhile, remains highly skewed and has come at the cost of our collective wealth.
It is no coincidence that Adam Smith, the father of modern economy, entitled his thesis “The Wealth of Nations” – and not “The Income of Nations.”
Living nature needs to be acknowledged and recognized for its value and fundamental role in sustaining our social and economic systems. This should be followed by urgent efforts at nature restoration. And restoration needs money.
Between carbon markets, government conferences and philanthropy, however, the funds needed to sequester carbon and revive nature are yet to materialize. Moreover, they are not sufficient to withstand the persistent pressure from well-resourced markets designed for extraction from the natural world.
The nascent carbon credit market, originally intended to channel capital into environmental protection, suffers from poor public perception, and for good reason. Many projects, particularly those focused on “avoided emissions,” have struggled to attract the level of capital needed. Standards vary, verification is patchy, and there is often limited involvement of local and Indigenous communities, who are critical to the success of conservation efforts.
Surprisingly, private capital can be used in a restorative way. Its owners, by realizing the pivotal role of nature in our economy and its impact on their business, would also find it in their best interest to protect and restore nature and reap monetary benefit in doing so. This would also help fill the gap left by governments, NGOs and philanthropists.
To bring in capital in an equitable and nature-positive way, we must adopt a holistic approach to nature restoration that also generates the hard returns that would attract investors to nature restoration. In short, we need a new kind of capital market.
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Capital markets built on raw materials such as timber, fish, and oil are purely extractive. Take timber as an example. The global timber market is a significant economic force, generating some $1.5 trillion annually. Trees gain a price once cut down and processed. However, standing forests provide far more value; they sequester carbon, filter water, promote decomposition and support biodiversity. Yet markets fail to recognize these services.
Markets are built on the work of oceans, forests, grasslands, animals and microbial life – this is the work of the living nature. Every supply chain, manufacturing plant, data center and retail store depends on predictable seasons, fresh water, fertile soil, and healthy oceans. Without regenerating these natural systems, the supply of natural resources becomes volatile and unsustainable. Markets need to recognize the value of these “regulating” services of the living nature.
Price, in principle, should reflect value, an assumption that underpins classical economics. However, there are cases, such as with externalities, where prices fail to do. Ecosystem services, provided by a living nature, are treated as externalities: degraded without accounting for the long-term value they provide. As such, living nature remains invisible to markets, which, in turn, continue their extractive and destructive behavior toward nature.
We are already feeling the financial consequences of this economic blindness. For example, crop failures driven by drought and desertification are already decimating global agriculture markets. According to the UN, desertification and land degradation cost the global economy up to $15 trillion a year.
Markets are not inherently incompatible with nature regeneration. They simply have not been given the knowledge and tools to recognize the real value of nature nor the incentives to change their behavior. Once there is change in mindset, the speed and scale of capital flows will become a powerful force for restoring ecosystems.
Changing the Course
Creating a market for regenerative nature is a matter of translating the value of ecosystem services into a language the markets can understand. It is then about providing data about the condition of the natural asset that the market can trust.
The recently announced deal between Laconic and the Commonwealth of the Bahamas is a perfect example of a “nature positive” market, providing a scalable framework for carbon and nature markets 2.0 to be built on. Laconic will package and sell Sovereign Carbon Securities (SCS) comprising a holistic set of Nationally Determined Contributions commitments – combining the restoration of 150,000 square kilometers of seagrass meadows. These financial instruments can be sold under Article 6.2 of the Paris Accord to “carbon deficit” countries – those needing offsets to reach their net zero commitments, as well as to corporations under Article 6.4, or investors looking to “go long” on carbon.
More on the topic: Explainer: What Is Article 6 of the Paris Agreement?
This deal represents a “system’s approach” towards nature protection and restoration. It does so by avoiding the overemphasis on carbon sequestration as a sufficient metric for the health of nature and its stewards. Instead, it uses a more holistic approach towards nature and its biodiversity and recognizes the role of the government and local communities in the preservation and restoration of blue natural capital. This represents a new social compact that involves the government, the Bahamian people and the Living Nature, where nature and its stewards thrive in perpetuity.
The success of such a project will rest on its “micro-foundations” – a set of principles coupled with state-of-the-art technology and partnerships that allow the deal to happen and for benefits to be realized. These principles include: avoiding the sale of the underlying asset; using the funds from the sale of ecosystem services to protect and restore the underlying asset in perpetuity; ensuring that Indigenous and Local Communities (IPLCs) have management control; that the project benefits from their knowledge; and that they are net beneficiaries of the revenue generated by the new asset.
Beyond the three core principles, the natural asset becomes a tradable financial asset through a series of steps. First, legal ownership of the land was codified into law. Then, technology was used to ascertain the size, historical loss, threats, potential growth and health of the natural asset. Science-based models were then used to project the valuation of the potential carbon that would accrue over time.
All the data that is generated is maintained on a digital ledger that provides real-time data to the markets. These securities – insured against political, operational and hurricane risk, thus immunizing potential investors against risk – can then be resold onto the open market.
New Technologies
In contrast to carbon markets 1.0, this new deal includes robust, transparent, independent and technology-enabled verification. Emerging technologies, such as remote sensing, artificial intelligence, and immutable ledgers are increasingly enabling us to create accurate valuations and projections of living nature. This allows for the production of precise data on ecosystems’ health, biodiversity, and carbon sequestration. Satellite imagery and AI-powered sensors deliver real-time insights into interconnected natural systems, allowing us to accurately measure the true value of these environmental services.
Artificial intelligence can process this data rapidly. Blockchain enables transparent, verifiable transactions for natural capital, avoiding the problem of double counting. These technologies collectively improve our ability to accurately measure asset behavior, report accurately on all activities related to asset protection and restoration, and track all related financial transactions, thereby enhancing trust in nature markets and inducing much-needed private investment.
We are building science-based financial mechanisms that allow markets to recognize value in living nature and in its services. With this increased understanding of the value of ecosystem services and the role of IPLCs in nature’s resilience, private actors can now recognize the impact of their actions on nature and its stewards. This will trigger a change in mindset and behavior, followed by actions including much needed investments in nature protection and restoration that should ensure shared prosperity along with a thriving natural world. A regenerative nature market is born.
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About the author: Ralph Chami is a financial economist with over 35 years of experience, including 25 years at the International Monetary Fund (IMF), where he served as Assistant Director. He is also the co-founder and CEO of Blue Green Future, an organisation dedicated to integrating natural capital into economic systems.
