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Nature-based solutions can mitigate climate change effects on agricultural sector, but market imperfections persist

Nature-based solutions can play a crucial role in limiting the impact of climate change on the agricultural sector, which faces increasing pressures in both adaptation to and mitigation of climate change, according to a report by the Centre for Climate Finance & Investment (CCFI) at Imperial College Business School in partnership with Standard Chartered.

The analysis is the second of a two-part report exploring the risks and opportunities facing the global agricultural sector from climate change. The authors warn that poorly designed solutions could create adverse effects such as increasing competition for land, food prices and risks to food security.

The report outlines the primary challenges for the success of nature-based solutions, namely ensuring funding, delivery of proposed climate benefits, and an overall attractive proposition to project developers. Using a cost analysis on three types of nature-based solutions in Brazil, the research identified that ‘good’ projects do exist, but their true costs may be underestimated due to misconceptions, limited scope, hidden costs, and non-technical and non-economic challenges and constraints. Higher prices can also translate to a reduced estimate of deployment potential than currently perceived by markets.

Nature-based solutions currently dominate the voluntary carbon market. The voluntary carbon market is expected to exceed $1 billion this year as part of a growing trend. According to a report by Finance Earth, only $20.75 billion of private capital is estimated to have flowed to “nature-positive activity and conservation investments” as of 2019, while the requirement for nature investment is estimated at around $700 billion per annum.

The authors argue that uncertainty should not be an excuse for inaction, with the carbon market currently representing a reasonable attempt at valuing natural benefits whilst the private sector has the opportunity for improving the quantity and quality of transactions in these markets.

Dr Alexandre Köberle, Research Fellow, Centre for Climate Finance & Investment at Imperial College Business School said, “Nature-based solutions offer a genuinely promising way to counteract the impacts of climate change on agriculture, but they should not be seen as a silver bullet. Many types exist, but fewer are economically competitive and fewer still are attractive to investors. So, it’s important investors carry out more stringent due diligence, and demand quality from the offsets they buy. By setting a high bar and being willing to pay for quality, investors have the opportunity to drive the value of the market for nature-based solutions and deliver social and environmental benefits beyond emissions reduction.”

Chris Leeds, Head, Carbon Markets Development, Standard Chartered said, “Quality and integrity are imperative so that carbon credits can deliver on emissions savings, environmental co-benefits and to protect from greenwashing and the increasing reputational risk for investors looking to do the right thing. Our goal is to bring integrity, quality and standardisation to make carbon credits more investable, sustainable and do what we want them to do – reduce carbon emissions as quickly as possible.”

Michael Wilkins, Executive Director, Centre for Climate Finance & Investment at Imperial College Business School added, “The ongoing partnership with Standard Chartered has enabled a series of research reports of which this is a key part of. The topics of carbon markets, nature-based solutions and resilience remain growing areas of climate finance research that we are actively pursuing, enabling industry to have a collectively better understanding of the financial risks and opportunities within the capital markets.”

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