COP26: NATURE-BASED SOLUTIONS TO CLIMATE CHANGE
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COP26: NATURE-
BASED SOLUTIONS
TO CLIMATE
CHANGE
JULY 2021
COP26: NATURE-BASED SOLUTIONS TO
CLIMATE CHANGE
COP26 – the United Nations' 26th conference on climate change
is expected to focus not only on the global climate crisis, but
also to highlight the interconnected loss of biodiversity. These
issues will have a huge impact on all of us – including
businesses. At a recent Clifford Chance event, a panel of experts
discussed nature-based solutions and the crucial role nature
plays in combating climate change and sustaining national
economies, as well as examining how state and private sector
nature-based solutions could be financed.
The Dasgupta Review, an independent deforestation, protecting and restoring
global review on the Economics of ecosystems (with developed countries
Biodiversity, commissioned by the UK providing at least US$100 billion per
Treasury, says that fundamental change is year in finance to deal with these issues),
needed to the way in which we think and creating a robust system of
about economics and biodiversity if we carbon credits.
are to protect our prosperity. It says
significant declines in biodiversity are "Nature plays an important role in tackling
putting our economies and livelihoods at the climate crisis," says Martin Berg, head
risk and that we must transform our of natural capital impact strategy at
institutions and systems – particularly HSBC Pollination, Climate Asset
finance and education, by increasing Management, and a guest speaker at
public and private financial flows that Clifford Chance's COP26 event. "We are
enhance our natural assets and reduce taking the value of nature for our well-
those that degrade them – and by being and for the economy for granted,
empowering citizens to make informed and are losing biodiversity at an
choices and demand change. unprecedented level. While the focus is
currently on climate change, biodiversity
"The depth of international consensus on will become a policy issue."
tackling climate change has accelerated
since the Paris Agreement in 2015, but Clifford Chance Partner Deborah
even more so over this past year or so, Zandstra, who works in the capital
as we've seen China and the US, in markets practice, says that biodiversity
particular, really picking up the pace," loss is not just an issue for governments:
says Roger Leese, a Clifford Chance "Policymakers, industry and finance
Partner and Co-Head of the Global really need to turn their focus as to what
Business and Human Rights practice. can be done to address biodiversity
"COP26 could lead to significant loss, because it will have a
advances in the international consensus devastating impact."
and significant commitments to action by
the world's governments, all of which is Whilst there are potential technology-
highly significant to businesses across all based carbon capture solutions – for
sectors and regions." example, carbon capture and storage in
oil wells beneath the North Sea – there
The interconnection of are also nature-based solutions for
storing carbon. These include forests,
climate and biodiversity woodlands and peat lands, and kelp
The focus of COP26 has shifted in recent forests in the oceans. "Blue carbon" also
weeks and, while there is no longer a plays a vital role. The oceans are the
Nature "theme" for the conference, world's largest store of carbon, where an
nature-based solutions are amongst the estimated 83% of the global carbon cycle
goals of COP26 including curtailing is circulated through marine waters.
2 CLIFFORD CHANCE
COP26: NATURE-BASED SOLUTIONS
TO CLIMATE CHANGE
"Well-functioning ecosystems with all the functioning ecosystems. Monetising, and
key species present will fulfil carbon being able to present the capabilities of
sequestration much better than degraded natural systems in a way that financiers,
systems and that’s for me why the global accountants and e-commerce specialists
reduction in biodiversity and the climate can understand and integrate into their
crisis are so intimately linked," says normal planning and systems, is crucial."
another guest speaker, Robert Spencer,
Business Line Director for ESG Data is therefore crucial. Gathering
at infrastructure consultancy, information on the ground from ecologists
AECOM. and environmental economists is labour-
intensive and time-consuming, but the
Defining and measuring digitisation of environmental assessment
is speeding up the process. "Technology
nature-based solutions is helping us understand and calibrate the
The definitions of nature-based solutions state of natural systems remotely, using
are very broad. The British Ecological satellite data, and integrating that into
Society recently produced a report on geographical information systems to
nature-based solutions, defining them as enable the identification and verification of
solutions that deliver benefits for any improvements that are taking place,"
biodiversity, climate change mitigation Spencer says. "AI and machine learning
and climate change adaptation. Robert are also enabling us to calculate how
Spencer says that "green infrastructure" nature-based solutions are working."
can help create more resilient places for
humans and nature to interact, but they
Assessing the risks
also mitigate climate change by locking in
carbon. Practical examples include Deborah Zandstra says that financial
creating reed beds at water treatment institutions, for example, need to employ
plants, where any contamination is ecologists, nature specialists and
"sucked up" by the reeds, and biodiversity experts who can assess the
encouraging sheep farmers to plant more risks of a loss of biodiversity "and help to
trees to prevent heavy rains eroding monetise and create innovative finances
hillsides. Martin Berg adds that nature- and structures that investors can
based solutions also work very effectively really understand."
in cities. "Athens, for example, received a
European Investment Bank loan to create Historically, family offices have been very
green spaces for resilience and cooling, active in investing in nature-related
which was highly cost-effective. Engineers projects and have often used "lender
will always tell you that you need to build finance" – they look for private or for
something, but very often you can public donors to provide some loss
achieve the same results with protection or some technical assistance
nature-based solutions at lower costs and in order to make projects viable. "Many of
often with additional benefits." these investments have been very small,
but interest is rising and we are seeing
However, for nature-based solutions to more investors coming through," says
make a significant impact, their Martin Berg. He adds that climate-related
effectiveness needs to be measured, says financial disclosures are driving many
Robert Spencer: "We need to be able to large institutions to assess their portfolios.
count, visualise, and explain nature-based The Taskforce on Nature-related Financial
solutions in financial terms. We've seen Disclosures (TNFD), a new global initiative
some shifts in terms of practice, which aims to give financial institutions
academic rigour and scientific references and companies a complete picture of
for how to quantify the benefits we get their environmental risks, received the
from nature from things such as air and backing of the G7 at its recent summit,
water quality, flood alleviation, pollination, and its wider adoption is likely to
sound and noise, cooling, warming, and encourage more investors to examine the
the attributes that we obtain from well- risks they face. "I think investors will look
CLIFFORD CHANCE 3
ECOP26: NATURE-BASED SOLUTIONS
TO CLIMATE CHANGE
first at the risk and ask where am I debt servicing costs of the foreign
exposed in my supply chain and my currency debt which is purchased and
portfolio? Where are the hidden risks? extinguished. Clearly, the discount from
Once that data is available and the face value applicable to the foreign
picture becomes very clear, then they will currency debt which is purchased is a
focus on opportunities." relevant factor and this can present an
additional challenge in such transactions.
Blue bonds and debt-for- But where a country has, for example,
Paris Club debt, or private sector
nature swaps
creditors who would be able to support
"Blue bonds – which specifically focus on such a transaction and potentially some
ocean projects – have not received the additional donor or risk mitigation
attention they deserve," says Deborah support, debt-for-nature swaps are worth
Zandstra. "This is reflected in part by the exploring. "As we move into an
fact the International Capital Market understanding that nature should be seen
Association (ICMA) does not have Blue as an asset, it should also be possible to
Bond Principles, albeit there are some monetise its ability to generate value,
water categories in the Green Bond including through income generation or
Principles. But blue bonds should for the carbon offsets," says Zandstra.
most part sit squarely in the nature-based
solutions box." She adds that the Firm is
getting a lot of enquiries about blue
Private investment in
bonds since working on the 2018 nature-based solutions
Seychelles Blue Bond, which raised With the Biden Administration rejoining
US$15 million to support the expansion the Paris Agreement and recently
of marine protected areas, improved announcing that it would by 2030 cut
governance of priority fisheries and the emissions by half, greater attention is
development of the Seychelles blue being paid to nature-based solutions in
economy. The deal was small in size, but the US. "We are expecting to see a pretty
had a big impact. It benefited from a significant growth of public spending in
World Bank guarantee and a green initiatives and mobilisation of
concessional loan from the Global private investment in the green economy,"
Environmental Facility, and was privately says Dan Drabkin, a New York-based
placed. "Other small island nations would Partner specialising in funds and
benefit greatly from such transactions, investment management. "What is
but there is the issue of pricing and interesting in President Biden's latest
scalability and some templating/pooling of proposal is that it specifically mentions
deals could be considered. Especially nature-based solutions and carbon sinks.
now, with debt challenges, incurring new We are definitely seeing greater public
debt and increasing debt to GDP levels recognition of the role of nature-based
means it is not so attractive to some solutions, and US corporate entities and
countries," she says. financial institutions focusing on ESG and
the fight against climate change, which is
Alternatives such as debt-for-nature a step in the
swaps are being explored. These are right direction."
transactions which relieve a portion of a
developing country's debt in exchange for He adds that larger asset management
local investment into environmental and firms are beginning to be active in this
conservation projects. The purchase of space and on a much larger scale, using
existing debt is a key component, as that ways to blend private and public capital.
debt relief releases payment capacity to "Specifically, we've seen some funds that
be redirected to pursue the conservation are focused on regenerative agriculture,
milestones. The outcome should be that sustainable forestry, some marine
the debt servicing costs of the new projects and fisheries. It's a question of
composite arrangement used to finance whether or not you can put it into a
the purchase is lower than the contractual model that's for profit."
4 CLIFFORD CHANCE
COP26: NATURE-BASED SOLUTIONS
TO CLIMATE CHANGE
In Europe, a driver in the funds arena is Developed nations also aim to make
the EU disclosure regulation. "This will US$100 billion dollars a year available.
require managers that are caught by "How that is spent is key – some of that
those regulations to determine whether could be debt relief-related, but some
they classify their products and say could be directly employed in nature-
whether they are a non-ESG product, a based solutions such as protecting or
product that promotes environmental creating forests in other countries, but the
social characteristics, or the darkest extent to which any of this will be used to
green category, which is a product that catalyse private for-profit investment
invests in sustainable investments," says remains to be seen," says Leese.
Lily Marcel, a Senior Associate in Clifford
Chance's London Private Funds. Developing carbon markets is another
key ingredient. " Finding a solution on
She adds that the introduction of the EU carbon markets, by creating a robust
Taxonomy Regulation, which sets out system of carbon credits that supports
categories of economic activities that are the move to net zero is an explicit goal for
considered environmentally sustainable, COP26, which is right, but a properly
"means more asset managers are functioning carbon market has to build in
focusing on how to launch products that biodiversity because there have been
can be sold as taxonomy aligned." issues in the past with the carbon market
that incentivised bad behaviour, leading to
Corporations, entities and organisations biodiversity loss," says Leese.
that are dependent on nature-based
solutions to function – such as water Martin adds: "We should not forget that
utilities – are at the forefront of integrating carbon is probably the most obvious
natural capital accounting into their impact that can be measured, but which
asset portfolio investment and can also monetised. At COP26, the
management cycles. discussions on Article 6 of the Paris
Agreement (covering rules for carbon
What can COP26 achieve markets), will be important because
currently there is no incentivisation to stop
on investment in nature-
deforestation. The recognition that nature
based solutions? can play a role could act as an incentive."
"The starting point is who is it that's going He adds that many corporates have set
to pay?" says Roger Leese. "To date, ambitious targets and that nature-based
there have been a number of successful solutions are a good way of helping them
nature-based projects, but money has to achieve those targets.
essentially come largely from philanthropic
NGO sources, or in some cases from It's clear that for there to be real
governments. How you also tap into progress, private sector funding will be
private finance is something that we're all needed. "In future, blended finance and
grappling with." He adds that one of the innovative transactions with credit
biggest experiments in this area is the enhancements and other sorts of partial
UK's switch from the common agricultural credit guarantees will buttress the market,
policy to the Environmental Land but it really needs banks and others to
Management scheme (ELMs), through make someone within an organisation
which land owners will be paid for responsible for investment and
preventing floods, planting woods and transaction execution in this space," says
protecting wildlife. As well as drastically Zandstra, adding: "I think multilaterals
changing the public subsidy regime, this need to expand their ESG standards to
could make restoration programmes an include biodiversity, as well to
investible asset for private investment. support some of the activity in the
regulatory space."
CLIFFORD CHANCE 5
ECOP26: NATURE-BASED SOLUTIONS
TO CLIMATE CHANGEMany large infrastructure organisations in What is happening with
the UK are committing to either no net
COP15?
loss of biodiversity or biodiversity net
gain. "Increasingly, large schemes, such COP26 is not the only summit planned
as new roads, railways and tunnels, are for this Autumn – COP15 is the UN
under a lot more scrutiny. It is easy for Convention on Biological Diversity, which
stakeholders and activists to access vital is due to take place in China in October.
information around projects, so large The G7 has put biodiversity at the top of
infrastructure schemes need to be its agenda and says that COP15 will be a
transparent about how they are key event. However, unlike tackling
approaching some of these hot topics climate change, there is no one clear
around climate and biodiversity," action to deal with the reduction in
says Robert. biodiversity. "I think we will see some
progress. With climate change, we know
what we have to do to deal with the
climate emergency, the question now is
what do we do about biodiversity?"
says Martin.
6 CLIFFORD CHANCE
COP26: NATURE-BASED SOLUTIONS
TO CLIMATE CHANGECONTACTS
Deborah Zandstra Roger Leese Daniel Drabkin
Partner Partner Partner
London London New York
T: +44 207006 8234 T: +44 207006 8710 T: +1 212 878 8255
E: deborah.zandstra@ E: roger.leese@ E: daniel.drabkin@
cliffordchance.com cliffordchance.com cliffordchance.com
Lily Marcel
Senior Associate
London
T: +44 207006 4158
E: lily.marcel@
cliffordchance.com
CLIFFORD CHANCE 7
ECOP26: NATURE-BASED SOLUTIONS
TO CLIMATE CHANGEThis publication does not necessarily deal with every important
topic or cover every aspect of the topics with which it deals.
It is not designed to provide legal or other advice.
www.cliffordchance.com
Clifford Chance, 10 Upper Bank Street, London, E14 5JJ
© Clifford Chance 2021
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