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ESG Focus: Taxes, COP and Biodiversity Schemes

ESG Focus | Oct 13 2022

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

ESG Focus: Taxes, COP And Biodiversity Schemes

FNArena's third and final installment on biodiversity gives investors a heads up to tax reforms to $1.8trn in harmful global tax subsidies; monetisation schemes; and the upcoming biodiversity COP.

-World leaders meet to adopt framework
-Sticking points: genetic sequences and payouts
-Deforestation and oceans guide debate
-Conventions and standards governing biodiversity
-Monetisation, taxes and schemes

By Sarah Mills

This is the third and final installment of FNArena’s Introduction to Biodiversity series. 

It examines the major milestones scheduled for FY23 and the main conventions and standards governing biodiversity and early institutional financing schemes.

It also looks at the global steps being taken to reform the tax system (which could hit as early as 2024) and tax subsidies to polluters, before taking a more in-depth look at schemes to monetize biodiversity.

COP15 – Fourth Time Lucky?

The first major milestone for FY23 is the UN Biodiversity Conference (COP15) at which world leaders are expected to adopt the “Post-2020 Global Biodiversity Framework”.

The conference has been delayed four times due to covid and geopolitics but is scheduled for December this year in Montreal, Canada, (presided over by China).

It is the first time China has presided over major intergovernmental negotiations on the environment.

The framework will set countries’ individual and collective “outcome-oriented” and milestone-driven goals for this decade and beyond, in order to achieve the UN vision of “living in harmony with nature” by 2050.

The framework’s four overarching goals aimed at protecting 30% of land and ocean biodiversity by 2030 are: conservation; sustainable use of biodiversity; fair benefit sharing; and adequate funding and technology support.

Most controversially, discussions are expected to broach an “apex” target similarly to that used for Climate Change.

COP15’s lesser targets are wide-ranging and include: expansion of protected areas; pollution reduction; sustainable food production; and the phasing out of billions of dollars of public subsidies that harm nature.

This would have a clear impact on fossil fuel energy stocks, which typically rely on subsidies for profitability, and one assumes it will also extend to the petrochemical industry.

Similarly, expansion of protected areas is also likely to affect mining, fishing and agricultural industries, and downstream markets from both.

Deforestation Rising At An Alarming Rate

COP discussions are likely to be guided by the twin themes of deforestation and ocean degradation.

The permanent clearing of forests and conversion to non-forest use represents one of the largest issues in global land-use change, estimated at 20% of greenhouse gas emissions.

Industries driving land clearing include soybeans, palm oil, beef, timber, rubber, cocoa and coffee, infrastructure expansion and mining.

These industries are likely to be the prime targets of biodiversity regulation, which will impact downstream markets.

Key themes for Ocean degradation

Oceans are also a key focus area for biodiversity. 

Oceans have taken a back seat to land-based decarbonisation (and have been consigned to the boot since the Ukraine conflict started), but are likely to come into sharper focus in the second half of this decade.

Here the No.1 enemy is considered to be reusable plastic, and others include ocean gas extraction and aquaculture.

The lifetime cost of plastic produced in 2019 has been estimated at US$3.7trn, US$3.1trn of which relates to marine plastic pollution.

Europe, the UK and the US have introduced taxes/levies targeting producers or sellers of finished plastic packaging products to incentivise plastic collection and recycled markets and disincentivise single-use plastic.

Asian countries have also taken strong steps to deal with plastic pollution but not much is expected on this front near term.

COP Sticking Points – Genetic Sequences And Pay-Outs

According to, two of the major sticking points for the COP are likely to be: digitally stored information on genetic sequences, and “resource mobilisation”.

A failure on these fronts could render the protocol useless.

On genetic sequences, the website says:

“Companies could profit from such information, such as by developing new medicines without needing physical access to the species in question. 

“This means they could avoid having to comply with Convention on Biological Diversity rules on sharing with the country of origin the benefits arising from the use of genetic resources.”

This would be a major theme for the Pharmaceuticals industry.

Resource mobilization, meanwhile, refers to the funding of the Global Biodiversity Framework’s implementation.

Similar to the Climate COP, this boils down to how much richer countries are prepared to pay poorer countries to conserve biodiversity. 

To date, it has proved a major sticking point given there is little incentive for wealthy countries to do so.

Rush To Outpace The New Regime

Climate change appears to be being used as a convenient scapegoat to explain what appears to be an all-out land-clearing grab ahead of the new climate and biodiversity regimes (keeping in mind more money appears to be being allocated to rebuilding habitats than to protecting existing habitats).

Until some compensation is put in place to protect existing habitats, the world can expect more land clearing and man-made bush fires until biodiversity’s rollout (at which time most of the world’s corporations are likely to implement land-clearing cut-off dates for products to qualify) as poorer countries in particular move to secure cleared land.

Even businesses and landowners in the West (fires have been popping up all over Europe) have likely been active, arsonists hiding under the screen of high temperatures (no doubt aided by run of the mill firebugs). 

Many of the areas burnt were renowned for their biodiversity and rich bird life, reports The Guardian.

On the Greek island of Crete, locals bemoaned the fact that fire services “let them burn”, despite having access to helicopters and plenty of water.

In Indonesia, for example, fire has been used to clear land for palm oil. 

In South America, Barron’s reports farmers in the Amazon and other areas are using fire to clear land primarily for soybean crops and cattle grazing.

This could impact insurers and reinsurers but overall, the impact on financial markets of such fires and land clearing is minimal, and may even improve sentiment in some quarters, illustrating the intransigence of the problem.

Southern hemisphere nations with large biodiversity and forest masses appear to have a strong bargaining point but closer examination suggests not. 

Smaller countries are calling for US$100bn a year every year until 2030 – nothing in the bigger scheme of things. 

However, given combined industries could easily fund that off their own back (and the direct impact of land clearing on global capital markets is minimal), it is all a bit of a moot point.

This is particularly the case given the higher incentives likely to be given big capital to rebuild habitats than protect them, and given it is standard practice for big capital to create a problem to which it can then sell a solution.

So far the wealthier countries have refused to cough up.

Much depends on the direction in which Asia swings on sanctions, given the size of their food consumption markets, particularly the Chinese market.

But given the economic realities, COP15, like its climate equivalent, is likely to be primarily a public relations exercise and a platform to score geopolitical points to feed domestic media outlets.

It is unlikely to yield much other than the already widely mooted adoption of the Global Diversity Framework.

Conventions And Standards Governing Biodiversity

The global governing convention covering this area is the Convention on Biological Diversity and according to its website, its scope includes ecosystems, species and genetic resource.

Biotechnology also falls under its remit as do all areas directly or indirectly related to biodiversity and its role on development “ranging from science, politics and education to agriculture, business, culture and much more”.

Biodiversity adopts similar models used climate-change, boasting equivalent initiatives and standards to which companies are expected to subscribe.

These include:

-The Science Based Target Network (SBTN), which is basically an extension of the Science Based Target Initiative (SBTI) extended to nature;
-The Task Force on Nature related Financial Disclosures (TNFD), which is the biodiversity equivalent to the Task Force for Climate Related Financial Disclosure (It is expected to deliver its final report in the 2023 December half); 
-Nature +, which is the equivalent of Climate Action 100+; and 
-The Net Positive Project – the biodiversity equivalent to Net Zero.

As mentioned in previous articles, biodiversity certification is a key tool in the biodiversity transition kit and covers many data sets to accommodate the diverse biodiversity challenges of different industries and geographies.

To receive certification, products are generally assessed for environmental and social performance across five critical sustainability categories: material health, material reuse, renewable energy and carbon management, water stewardship and social fairness.

Biodiversity Financing Innovations

This section looks at early and more recent thinking around monetizing biodiversity.

The OECD’s 2013 publication titled Scaling Up Finance Mechanisms For Biodiversity canvasses biodiversity financing options from six “innovative financial mechanisms”, which include:

Environmental fiscal reform – shifting subsidies from one industry to another; taxing transgressors, introducing resource rents, charging for the use of natural resources and pollution, and border tax adjustment mechanisms.

Under a “polluter pays” principle, biodiversity-related taxes and charges and are likely to target pesticides and fertilisers, wastewater discharge, natural resource extraction and fees to enter natural parks. 

The Guardian reports the world spends $1.8trn a year on subsidies to companies that harm the environment so reforms are likely to send shock waves through capital markets, even if they are gradually instituted.

The Australian Tax Office has already moved on the fossil fuel giants, removing about $40bn in interest deductions from oil and gas companies following a legal case with Chevron, and more are expected to follow.

Meanwhile, Australia is involved with the G20’s two-pillar tax-reform process, which aims to institute a global minimum corporate tax rate of 15% as early as 2024.

Payments for ecosystem services (PES) – voluntary programs incentivising the provisions of ecosystem services between one seller and one buyers (a form of compensation for resource usage).

As an example of PES, NRDC points to a collaboration between the International Institute for Environment and Development and the Chimpanzee Sanctuary and Wildlife Conservation Trust which incentivizes local farmers and landowners to conserve and restore chimpanzee habitats in a bid to counter deforestation for cash crops.

Biodiversity offsets – certificates for meeting certain environmental standards can be traded, allowing a continuation of development so long as there is no net loss to the broader biodiversity system.

Markets for green products – think green detergent, certified plantation timber, etc.

Biodiversity in climate-change funding – this refers to the leverage of biodiversity co-benefits with climate change, allowing biodiversity to access the large climate-change funding pool. This might refer to reducing emissions from deforestation, or planting new trees.

For example, New Forests Asset Management has launched its Tropical Asia Forest Fund 2 (TAFF2), which garners US$120m in capital to invest in sustainable plantation logging in Southeast Asia, using blended finance (mainstream capital and impact capital). Corporations, government and endowments all chipped in.

Biodiversity in international development finance – which refers to joint global projects and government trade funding.

Other options include green loans (these have been popular in China), sustainability linked loans (one of the world’s Big Four commodities traders Bunge has been active here) and impact loans, debt for nature swaps, and carbon credits.

Other Financing Options

Similar to “polluter pays” schemes, there are “beneficiary pays” schemes where those that sign voluntary compliance agreements take a small hit in order to gain certification for example, or green subsidies, in order to gain favoured suppliers status, etc.

These particularly advantage those with deep pockets and diverse investments.

Then there’s “financing green”, which relates to projects that generate cash flow and also contribute to conservation (the World Bank recommends governments support the application of financial instruments that blend commercial and concessional finance and create investment opportunities).

One suggestion has been to monetize cash flows by “stacking” multiple revenue streams from ecosystem generated goods and services. 

In 2020, the World Bank reports that stacking revenue streams allowed the Alaska-based Sealaska corporation to post its most profitable year of operation, while also conserving a large swathe of forest, by conserving some old growth forest to sell carbon credits alongside traditional logging.

Early days yet

It’s early days yet and, outside of carbon markets, the biodiversity market still lacks bankable options.

Water use and genetic materials are the two most bankable options isolated to date, outside of carbon insets and offsets, but more will come, and big capital is poised.

That wraps up FNArena’s “Introduction to Biodiversity” series. 

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

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