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Supporting the transition towards a nature-based economy
Article published in L’Agefi Indices on 18 April 2024, with Marc Palahi, Chief Nature Officer at Lombard Odier Investment Managers, and Laura Garcia, Nature Specialist at Lombard Odier Investment Managers
Despite our growing dependence on nature, the condition of the natural world has been deteriorating steadily for decades. Since the 1990s, natural capital has declined by 40%, while produced capital, which includes roads and factories, has doubled in size.
This loss of nature and biodiversity is critically linked to the fight against climate change, as ecosystems remove over 60% of human-generated carbon emissions. In a negative feedback loop, climate change and its associated risks – such as forest fires, drought and parasites – reduce nature’s ability to mitigate and adapt to the climate. In some cases, they can even transform natural carbon sinks into substantial sources of greenhouse gases (GHGs).
Nature, our greatest asset, is in danger
In 2023, forest fires in Canada emitted 1,740 megatonnes of CO2, or around three times the country’s annual GHG emissions. Forest fires have devastating effects, notably in terms of the cost of extinguishing them, the material damage they cause and increasing claims for compensation, which total USD 10 billion a year. Climate change and its associated extreme events also threaten price stability. A recent scientific study estimated that rising temperatures could cause food prices to increase by 3.2% per year.
Read also: Defending nature – biodiversity funds promise end to the extinction crisis
Towards a nature-based economy
To guarantee sustainable well-being and economic prosperity for future generations, we must ensure a transition towards a regenerative economy that is nourished by nature and prospers in harmony with it: a nature-based economy. This is an economy that acknowledges nature as the most precious good on which our economic system depends; an economy based on healthy, biodiverse and resilient ecosystems, as well as on the ecosystem services associated with them: in other words, nature-based assets.
These are the basis for creating circular value chains in the bioeconomy that are positive for nature, people and the climate, present throughout the economy, and that connect the primary, secondary and tertiary sectors. A transition of this kind requires large-scale investment to transform the real assets of degraded natural capital into nature-based assets. It will be implemented through nature-based solutions and by creating a circular bioeconomy that holistically integrates the landscape throughout the value chain.
Nature-based solutions encompass activities that protect, restore and sustainably manage natural and modified ecosystems. They can be integrated within circular bioeconomy business models that improve natural capital and the flow of ecosystem services throughout the economic cycle. Advances in science and technology are making it possible to develop new circular bio-based solutions that are capable of replacing and outperforming non-renewable, fossil fuel-based products in environmental terms across most economic sectors: food, fashion, pharmaceuticals, construction, chemicals, energy, tourism, etc.
To achieve this nature-focussed transition, private capital must be significantly redeployed towards nature-based strategies in all asset categories and in all sectors of the economy. The private sector currently invests USD 5 trillion annually in activities that directly destroy nature, while investing only USD 35 billion in nature-based strategies.
Rethinking food systems
The world food system, valued at around USD 10 trillion, is at the centre of a vicious circle: it accounts for a third of the world’s annual GHG emissions and is the main driver of nature loss. This results in negative environmental, health and social externalities valued at between USD 13 trillion and USD 19.8 trillion a year. At the same time, food production is exposed to growing risks linked to climate change and its ensuing natural disturbances.
Food systems must shift from an extractive approach to a regenerative one that contributes to a reduction in climate effects and the restoration of nature, while still guaranteeing the resilience of the food sector in the face of growing climate risks. This transition requires a shift from conventional agriculture to nature-based food production through the use of nature-reliant solutions, regenerative practices and circular systems.
A food systems transition requires a rethinking of all value chains, to shorten them and make them more transparent and traceable; climate and nature must also be priced in, without increasing costs for the end consumer. Such vertical integration is essential for deploying financial capital upstream, where real nature-based assets – sustainably and resiliently supporting food value chains – can be created.
Read also: The rapid rise of nature-based investments
A wide-ranging revaluation of assets
We believe that nature is probably the world’s most undervalued asset class. The demand for climate-resilient land that has a positive impact on the planet will bring about the greatest asset revaluation of this century. Nature-based assets will become a new form of real estate, enabling:
1. The transformation of degraded landscapes into regenerative assets that are climate-resistant and protected from CO2 pricing, so their value can increase over time
2. Value gains in the prices of goods and products by developing specialised markets, eliminating intermediaries to obtain direct access to downstream markets, and benefiting from macro factors that will lead to structurally higher prices
3. Attractiveness for long-term investors, as it would offer risk-adjusted yields, portfolio diversification, low correlation with other asset classes, a hedge against inflation and a hedge against the impact of future CO2 regulation
We think that investing in nature is essential to support the transformation of our economy, rather than to compensate for its failures – to avoid the unmanageable, but also to manage the inevitable.
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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