The importance of defining "risk" in a climate crisis
Evan Bowen-Jones Managing Director
The latest Intergovernmental Panel on Climate Change (IPCC) report released the last month synthesises all their previous work. And, the message couldn’t be much more stark. We are in our final years of being able to limit warming and ensure a “liveable future”. It is now only climate deniers/ climate prevaricators who refute this.
What’s also clear is how much of a contribution the restoration of natural ecosystems can make to addressing climate change, particularly when engineered solutions are not available at scale, and given we need to be using all the tools available to us now.
And, yet, the alleged “wall of money” aimed at the Nature-Based Solutions (NBS) space – including around the voluntary carbon market where Wilder Carbon operates – is moving painfully slowly (bar a few specific deals) despite the potential loss of the entire economy along with a safe living space for humanity.
Why aren’t funds flowing into restoring nature at scale? aka investor defined risk
The other day I had a bit of a lightbulb moment when talking to a colleague who put his finger on something that’s been bugging me for a while.
When we, as ecologists/ climate scientists, talk about risk, we’re talking totally different language to those thinking about financial/ investor risk. And it has significant ramifications.
In financial circles higher risk investments are worth taking if they provide higher returns.
Higher financial returns in an embryonic market?
However, higher (e.g. double-digit) returns on NBS products aren’t necessarily going to be an easy sell when many projects are developed by, or in conjunction with, the 3rd sector.
For many charities, such products may not be competitive as compared to more traditional loans (e.g. from ethical banks); nor will they necessarily equate to achieving good asset value as required from a governance perspective (if one is – effectively – selling one’s carbon cheap into a futures market); and nor will they easily translate into acceptable contractual obligations (this being novel territory for many charities).
And, many private landowners will see things from a similar perspective.
Higher returns may well be more achievable as the carbon price increases, and as the supply, market infrastructure, and sectoral around capacity improves. But, this is a way off.
Lower returns to get the market going?
At Wilder Carbon we, think given the current status of NBS market infrastructure it’s more realistic to think in terms of 4-5% returns from multiple £5-10M project (i.e. smaller scale) portfolios delivered through a network of experienced conservation agencies.
In fact, savvy investors can work with us now to buy / secure promissory carbon units from multiple projects that they help to establish based on selling future verified carbon units to approved buyers who are committed to emissions reductions via future profit-sharing.
There are, of course, multiple risks in guaranteeing financial returns from nature-based carbon. This is, ultimately, voluntary action. And, severe climate breakdown will affect natural habitats. This is where Wilder Carbon’s multi-habitat, biodiverse native habitat focus provides maximised resilience of the carbon units as compared to single habitat schemes or those based on more limited biodiversity.
But, risks remain for investors none-the-less.
The potential for ethical medium-level returns: high-integrity, conservation-grade carbon underwritten by insurers who understand the macro-economic risk
The potential solution comes from insurance companies because they are set up to assess and mitigate long-term risk. Some of them clearly properly understand the potential for nature-based solutions to mitigate global economic risk around climate and biodiversity loss. Some are leading lights in the Task Force for Nature Disclosure (TFND). Others have expressed willingness to underwrite compensation for keystone species reintroductions.
Wilder Carbon thinks that if these insurers underwrite native habitat restoration we should be able to work with forward-thinking investors to co-create mutually acceptable, realistic schemes based on medium-level returns (e.g. 8-9%) courtesy of use of pooled risk buffers.
We already have the required standardised contracts and management agreements. The Wilder Carbon Standard for Nature and Climate, and its independent verification, and match to government Environmental Reporting Guidelines provides the baseline quality assurance. There is saleability through our network of expert practitioners. And our conservation grade units legitimately demand a higher unit price than traditional low-grade offset units.
Wilder Carbon has been established to avoid the real risk: inaction.
We are investment and insurance ready. Get in touch if you are too.