Bonding With Nature: Demystifying Biodiversity Finance with Nat Duffus and Harrison Carter

In this episode of the Nature Recovery Podcast, Stephen Thomas is joined by Nat Duffus and Harrison Carter to unpack the often confusing world of biodiversity finance. Harrison introduces his new paper, Demystifying Biodiversity Finance, and explains why conservationists, ecologists and investors need a shared language to make sense of bonds, loans, equity, credits and risk.

The conversation explores:

•  what biodiversity finance actually means in practice 
•  how bonds can support nature recovery, and where they fall short 
•  why project-level, social and ecological risks matter for investors 
•  the importance of monitoring, reporting and verification 
•  why scepticism is not the same as negativity when trying to finance nature 

The episode makes a strong case for honest, practical collaboration between conservation and finance, with the long-term goal of creating more effective and more durable support for nature recovery.

You can find the paper here:

https://naturerecovery.ox.ac.uk/outputs/demystifying-biodiversity-finance/

The Leverhulme Centre for Nature Recovery is interested in promoting a wide variety of views and opinions on nature recovery from researchers and practitioners.

The views, opinions and positions expressed within this podcast are those of the speakers alone, they do not purport to reflect the opinions or views of the Leverhulme Centre for Nature Recovery, or its researchers.

The work of the Leverhulme Centre for Nature Recovery is made possible thanks to the support of the Leverhulme Trust.

Transcript

Welcome to the Nature Recovery Podcast.

We're going to take a closer look at some of the solutions to counter biodiversity decline, and we'll find out more about the people behind these ideas.

Hello and welcome to the Nature Recovery Podcast, and I'm joined today by two fantastic guests.

With me, listeners will remember Nat Duffus.

Hi Nat, how are you doing and where are you working at the moment?

Thank you for having me. It's great to be back on the podcast. I'm currently working at the UK Centre for Ecology and Hydrology on the Integrating Finance and Biodiversity Programme, IFB. And I'm very interested in nature finance, nature markets, biodiversity net gain. But I would like to learn a little bit more about some other aspects of biodiversity finance, for example, bonds, which is why I'm joined today by the very wonderful Harrison Carter.

Welcome to the podcast, Harrison. Maybe you can tell us a bit about yourself and your recent work.

Oh, what a wonderful intro. So my name is Harrison Carter. I'm doing my PhD here at Oxford with the Nature Positive Hub and WildCru. And today we're talking about a new paper, Demystifying Biodiversity Finance: loans, equity, bonds, credits, risk - what does it all mean?

So Harrison, your new paper is about demystifying biodiversity finance. Can you explain a bit about the purpose of this paper and who it's intended for?

Yeah, absolutely. So biodiversity finance is a confusing term, I think. It's hard to know where you could engage. And for me, when I wrote this paper, coming from an applied project background, I thought, well, I want to write this for people that are worried that they're missing out on something. I want to write this for the conservationists that have been running their programmes and they hear about all these millions and billions of pounds that are apparently flowing around and they're not getting their hands on, and why not? So I kind of wrote this for the conservationist. And the intention here was to say, in human language, such that my mates who aren't at all doing what we do could understand, how does biodiversity finance work? What are the different mechanisms? What are the primary functions of those mechanisms? And then what are the project, i.e. real, risks that basically underpin how these things work? Because I don't find that to be an obvious thing that we otherwise see in the literature. So we just put together this paper, Demystifying Biodiversity Finance, and hopefully that's one of the things we get to in this.

Brilliant. So my background is as an ecologist and as an entomologist, and in my experience, ecologists can often be, let's say, quite sceptical of biodiversity finance. So why do you think that it's important for ecologists and conservationists to understand financial terminology and systems?

100%. This is a great question. And I think what's worth recognising is this is not a level playing field, really. We bring our biases into this discussion. We think about conservationists or ecologists understanding the natural world, protecting, supporting the natural world. And we think about finance typically as a system that is deriving economic value from the allocation of scarce resources, i.e. natural resources often. And so we come at this with our biases. These are not always the groups that have been holding hands in a joint endeavour to save the world. And now they're going to have to be. And that's where skepticism comes in.

I think at the core of this scepticism is expectations. When we hear about new products for nature, we do not hear about them in the first instance with a good amount of nuance, with some healthy scepticism and optimism. We hear about them as absolute silver bullets: all the money that's going to be coming in, all the growth that's going to be happening, fixing nature. Don't worry about it, we fixed this one. But really, we need to be careful about overshooting here. It is, I think, really important to think about not just how can we protect nature in a cordoned-off area of the world somewhere, but how do we meaningfully integrate it into our lived human economic systems?

And that means talking about this honestly. That means highlighting where things may not be the best fit, where better fits could come, and what it means to be innovative in this space. That really means pointing out challenges and then moving forward. So I think making sure that we approach this discussion with a level of optimism and progress is great, but we can't overshoot the expectation because when these products inevitably fail to some degree, because trying to commodify a unit of nature is perhaps the hardest thing anyone could ever do, these things are probably not going to work overnight, at scale, in the way that they're sold. And so how do we reframe that discussion, bring back optimism, bring conservationists, ecologists, finance, legal teams, an interdisciplinary group into the room, and try and make these things work? And I hope that's what our paper brings out.

Brilliant. So your paper is really bringing those sceptical conservationists along for the nature finance ride. I could also see this paper playing a role in supporting investors, helping them to understand the ecology behind this or the project-level risks. So would you say that this paper maybe serves as a bridge between investors and conservationists?

I hope so. I mean, I myself came from a background working in London, either investment management or management consulting. And when I did my master's degree to transition into this space, I remember quite clearly for the first few months being surrounded by these incredibly smart biologists. We're talking about richness and abundance and ecosystem services, words which, you know, we use every day as though they're routine. But at the first time, for me, I was like, oh my gosh, I don't belong here. My words, my terminology doesn't fit. What's an ecosystem service? Why would you care about a butterfly when you could care about a lion?

Whoa. I will not be taking vertebrate bias on this podcast.

Broadly, yes.

But it was not obvious to me at first. I think we forget that because of course we know how essential butterflies and other insects and pollinators and bugs and the health of our soil and all these things are, but that might not be obvious if you spent your time in London. And so this paper not only breaks down how the financial mechanisms work for conservationists in simple terms, it also unpicks the project-level risks of actually running an intervention to restore nature or to conserve nature under threat.

And these risks are commonplace for us. We see them all the time. We're aware of how nature doesn't move in linear directions, and how the human-level risks at a local site are essential for how we think about building something that is actually wanted and useful, and has the chance for permanence. We do think about these things all the time. And I think if the investor class understood really about these risks, these project realities that underpin how their investments work, we could simply design these investments with more flexibility, with more ability to be adaptable to the changing nature of the world, and hopefully give these financial mechanisms the chance to be successful under certain conditions. And then we can increasingly improve this.

And one other thing I'd mention at this point is: we may have forgotten the gravity of the task that is facing us here. The history of the world is making money and developing at the cost of nature. The challenge we're talking about today is how do we create value from not doing those things? This is, I think, the most ambitious target we could possibly set ourselves. And when we talk about projects not working or failing, sometimes to me it can feel like, or come across as, "oh, silly finance, they've not understood our world." But the truth is, what we're hoping to achieve here is extraordinarily tough. And I think we should frame this as: well, of course it wasn't going to work. Look at what we're trying to do.

And when there are some instances, some evidence that something is working, how incredible. What can we learn from this? How can we build on this? So when I approach this in the paper, there are lots of critiques about how these mechanisms don't work, but there's all sorts of evidence of progress and where science can get engaged to make them more effective, where hope sits. Because if there's no hope and if we frame this with the wrong energy, then I think the future of nature is worse, not better. And engaging in these things and how they work is essential for us.

I think what's really coming through talking to you and also in reading the paper is that you take quite a commercially pragmatic stance on this matter, which I think could be seen as quite controversial. So why do you take this kind of stance?

Well, when we think about risks for nature finance, there are obviously a range of risks that are essential to talk about: legal risks, moral risks, ethical risks. And that's been really well covered in the literature and in our great literature and our news reports. But what I felt from reading this was that there was not always a translation into the kind of language that might influence how our investor class are thinking. And what really burns a hole in that pocket is this commercial risk.

So it's saying that social risk and ecological risk are not unrelated to commercial risk in the context of nature finance. If you break down all the gobbledygook and the jargon, these risks are underpinning your commercial return. So you can't only just discontinue. You have to understand these things in brilliant levels of context. And then as you group things together, you have to have a really sophisticated thematic understanding of how these things work.

And so in this paper, we talk about social risks and ecological risks. We talk about how, when these things go wrong or social issues, ecological issues come up, these are wrong for a range of reasons. We also do draw back to how this influences the commercial risk. Because for me, and I think about this, it is to say: how is this fundamentally going to influence your investment or your donation or the claim that you're making? Could that have reputational repercussions? Could this affect the future of these markets?

And it's really, really important. But not only do we talk about these obvious risks, and we should talk about them, but also linking it back to that commercial component, if we're curious about building this bridge between these two classes. And we definitely are here. And so we do make that link.

Great. So it seems you're very passionate about building this bridge between the investors and the conservationists and helping them speak the same language. So to help our listeners, I was wondering if you could start to do this process of demystifying biodiversity finance. In the paper, you focus a lot on bonds. And I was just wondering if you could explain a bit about what bonds are, what they do, how they finance biodiversity. Give us a whistle-stop tour.

Yeah, bonds, nature bonds, that's what we're talking about here. And you can think about bonds in a very basic way as a sort of large loan. And of course, it's not a large loan, it's a bond, it's totally different. But we think about bonds as having that loan: it's a debt-based financing mechanism. And there are different types of bonds that have been applied to try and achieve a change in some kind of component of green or nature.

Typically we have use-of-proceeds bonds, things like green bonds. So basically you are attracting finance by leveraging debt to do something that you argue is in the green narrative. And that's a way of getting that finance because the investor is keen to support a green transformation.

Or something like a sustainability bond where the rate at which you have to repay your lender is correlated or directly linked to some nature target. For example, there can be a sovereign sustainability bond and the rate of your return can reduce if you are nailing your forest cover, for example.

And then the type which I think at least I'm really excited about in this paper is impact bonds, which, you know, are not really emerging as a literal typology, but they are coming out now, which is sort of returning investors' capital in exchange for conservation outcomes that have come from raising debt. And that involves a couple more stakeholders. It's a little bit more complicated. And I wish listeners to this podcast could see our beautiful figures in the paper. I soon they will be able to.

But that really helps kind of demystify the flows of capital and where the money in and the returns come from and who's all involved and where things like transaction costs make these things difficult. And I'm really excited to talk about not just bonds, but loans, equity, credit, but bonds absolutely, to talk about what the exciting components are for these things and also maybe where there are some drawbacks. Cost, making them cheaper, how they scale, who can issue debt. All of these things are going to be really important for us to understand.

Thank you. That's very, very helpful. What I'm interested in is how nature finance links to different ecological outcomes. So under the Global Biodiversity Framework, we have these targets to upscale different sources of finance to achieve the really ambitious goals of the framework. But what we see is that different sorts of finance deliver different ecological outcomes, depending on how they're structured and what kind of outcomes investors want.

So I was wondering, how do you see bonds contributing to the financing of nature recovery? What kinds of things are we seeing bonds deliver?

So bonds basically offer the ability, in my mind, and ability is really, really important because what you could do and what is done are often quite different things. But bonds offer the ability to circumnavigate issues that we see in other financial mechanisms for nature, things like credits, where you have to distil the complexity and the value of nature into a single unit, some sort of impossible silver bullet. And bonds don't make you do this.

Bonds are basically up for bespokeification. You can make them relative to your site. You can make multiple measures. You could actually construct a really sophisticated evaluative model. Now, is that done? No, at the moment we can't say there's strong evidence, or evidence at all, of this taking place. But it could happen.

And so the big pro of bonds in my mind is this sort of bespoke component about how you measure your ecological outcomes, how you evaluate them, how you're making sure that all that impact that you reckon you're having, you're dead sure about it. That could happen to a much higher degree in a bond in terms of its ecological relevance.

But then there are challenges also with bonds, which is that they're really, really expensive, and that most groups actually engaging in the project work are way too small to be issuing debt if they even can issue it at all, which means you have to rely on the bigger players, whether that's the World Bank or some other large multinational group that can issue debt on your behalf. And then you have to find people that are willing to pay for those outcomes. This would be a sort of pseudo revenue structure. It's more like a contract payment. But you have people who are willing to pay, people who actually care about the outcome that comes from that project. Normally it's somewhere local, where they're benefiting from an uplift in nature that perhaps provides some resiliency. Or it could just be someone from further afield that wants to engage in something positive. And then what does that mean? What kind of claims can they get? So that gets really, really complicated.

And the other component of bonds which is challenging is sustainability. So on one hand, this is a very sustainable tool. You can get investment into a green transition, or you can have green success as a way of managing your payback or your rate of return. But you have to talk about the financial sustainability of this product. They don't last forever, especially not the big impact ones. Maybe you have 5 to 10 years.

And my background being project-based and mostly with large carnivores or venomous snakes, and the importance of engaging people living in these coupled human-natural systems into a solution, well, if you kind of pull on the thread of that jumper, it gets a bit complicated. You have money coming in, perhaps you can scale your project, perhaps you can make improvements to the way that project is done. The benefits might get bigger, the incentives could get stronger. And this increases over your 5, 10 years. Perhaps even in an ideal world, your project is working. You have local, relevant metrics. You're showing a real uplift. You're showing better engagement. Some of these social metrics are improving. People have been engaged in the design.

But now your funding has stopped. Now what do you do? You have raised the game and you are unable to continue the path. You basically built half a bridge. And no one likes getting stuck on a bridge in traffic, not when you can't turn back around. And the other option is far worse. And so I think there's a genuine risk that if we can't find financial sustainability for this really quite cool, innovative structure, we can't be too high and mighty, I think. People that design these things are really making a fantastic contribution, but it's not the whole journey.

There comes a point here from a financial perspective that says, well, where is the revenue? Where is the sustainability? Where is the financial continuity that would allow, in theory, for a wonderful project to continue its work, to develop, to expand? How does scale work? How does competition work?

So when we think about bonds, we can think about them as an interesting place to start, but they are definitely a burning platform. And if we don't think about that continuity, there is a risk that they end up not nailing the long-term outcomes, but even maybe inviting long-term risk into a project that could bring some insecurity unless it's managed really well. That's just an honest, pragmatic view.

But I think this bit is really, really exciting. It doesn't mean we just stop this now because this is a terrible idea. No, it's just not an idea for the whole thing. It's a way in. And that's better than not having one.

Thank you. I think you really succinctly summarised some of the advantages and disadvantages of using bonds. And it's interesting to see some of the potential parallels with nature markets here. So nature markets often use very coarse metrics which don't reflect the local complexity of biodiversity, and this can cause unintended outcomes. For example, in the biodiversity net gain system, we're seeing lots of projects delivering the same habitat type that delivers the most units in the metric.

So it's interesting to hear that bonds could be using more locally complex metrics, but maybe aren't because they're difficult to implement or they're costly. And I worry that this could lead to some negative outcomes from these projects if we're choosing things that are easy to measure. One thing that you didn't touch on that I'd like to ask about is monitoring, reporting and verification. MRV is very important within nature markets.

The trees, but actually managing them. We know within a tree context, managing these trees and making them locally valuable, that's a central component here. You might also think about complex financial tools like options or futures contracts. I've seen that pop up in a UK example recently.

So really there are a range of interesting bespoke elements that can be plugged in to these mechanisms. But it's bespoke-ery we might not know about unless we talk to people across the fence.

And I would make a final point, having spent time in that group, in that team, and I would say that at an individual level, be surprised at how similar human intentions are for what they want to do with their impact. It's at a corporate level that these things change. So if you know someone that works for a group that you might not like, ask them about this. And sure, there are some ideological differences perhaps on both sides of the fence. But if you peer over and ask someone about a question that might sound silly up front, we all know those are the best questions, you may come away with a different plug-in, an interesting reflection that makes an incredible nature project that you're working on, or that someone you know is working on, slightly more investable, which could be something that you take forward or not.

Or you might find as a way of saying, well, I can give you some critical feedback. That wouldn't work. What a terrible idea for nature. This is a terrible assumption. We have to talk more, and we have to talk more in simple terms. We both understand a bit more knowledge of what we each do. And I hope that's something the paper delivers.

Brilliant. Thank you, Harrison. I have certainly learned a lot from talking to you about these mechanisms. I found it incredibly interesting to hear about the potential for these mechanisms to deliver really fantastic ecological benefits, but potentially some areas of uncertainty and future work needed.

So before we wrap up, I want to ask you: what are the key messages that you would want sceptical conservationists and ecologically minded investors, respectively, to take away from this paper?

Okay, there are a few things.

Number one, we have to be speaking similar language. I hope this paper dispels, demystifies I should say, given the title, some words that finance uses to talk about how these structures work. I also hope the risks that we frame in here as underpinning commercial success give applied project-level examples of why it's important for investors to understand nature and to understand projects that attempt to affect a change in nature, and all of the weirdness and difficulty it is to do that and evidence it.

I would also say that scepticism is not necessarily linked to negativity. We should be sceptical. We are trying to do the impossible here, and I feel like we've forgotten this. So I would expect these things basically not to work. And then with that baseline, how can we engage in them? And when we have evidence of success, we're not worried about overclaims. We can be really excited and we can look to draw down lessons. What worked here? My goodness, I can't believe that's lined up. What are the correct policy drivers that we need to build a market? What are the right kind of financial plugins to make these mechanisms more aligned to nature? How can we bridge this gap between our human economic systems, which are real, and nature, which fundamentally underpins the whole lot of us?

We all have a vested interest in this, but we just have to think about it together in terms we both understand, with a view that we both get the other side of the coin, and you need them both to make it work, and importantly to make it work for the long term in a sustainable manner.

So who has a voice? And that means in design, whether that is from local communities, indigenous peoples at the site, all the way through to investors, both have immense value in making sure these things have a chance of working.

That's great. And I think you're so right. I think that scepticism or distrust in these systems should be turned into curiosity and exploring what nature finance is, how it affects your system, how it could benefit your species or your habitat of interest. And I would encourage ecologists and conservationists to apply their expertise to make these projects as good as they can be.

Thanks, Nat.

Thank you, Harrison. And if anyone listening out there would like to learn a bit more about biodiversity finance or to see the very beautiful figures, I believe your paper is out now, Harrison?

It is out now. And I have to say, before we finish, I have to give a massive shout out to all of my co-authors. The first draft of this paper I thought would be great, perfect, very clear. And my wonderful, strong, funny and genius team said, this is completely illegible. Can you please improve this so that anyone can understand it? And I was like, of course I can say. Edwin Thompson, Joe Bull, Amy Dickman, Julia Jones, Siddharth Srikanth, and of course, Sophus and Urban Gassen. Thank you all. You have made this piece what it is.

Brilliant. Thank you, Harrison.

You've been listening to the Nature Recovery Podcast with me, Stephen Thomas. Please don't forget to subscribe wherever you get your podcasts. And if you can, please consider leaving us a review as it will really help other people to find us. Also, why not consider sharing this episode with someone you know? You never know, you might get them interested in the wonderful field of nature recovery.

If you want to find out more about the activities of the Leverhulme Centre for Nature Recovery, you can visit our website for more information. That's www.naturerecovery.ox.ac.uk.

Thanks so much for listening.