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ANDREW KAROLYI: Hello. Greetings to all who are listening around the world online and in person in Shanghai and Cape Town. My name is Andrew Karolyi. I'm a professor of finance here at Cornell University, Cornell SC Johnson College of Business. I'm also serving as the college dean.
It's an honor to be here at the eighth Shanghai, Edinburgh, London, Cape Town, Green Finance and Accounting Conference. I have been studying the actual program, and I'm heartened to see how this conversation is being convened here. It's growing. It's expanding. It's also incredibly important. Please extend my greatest thanks to our organizers Wen Xuan Hou, Jason Xiao, Xi Liang, Phillip De Jager, Wenjie Ma, and Xiaoju Zhao. Thank you very much. It takes great dedication to put on a conference like this.
The timeliness of this topic couldn't be more important. My topic is entitled "Biodiversity Finance, The Next Frontier?" This is the topic that I'd really like to talk to you about. Last year, at the World Economic Forum in Davos, a number of professionals gather, and they talk about the importance of the greatest risks that are facing the planet. In this particular survey, as you can see in this slide, they talk about the short-term, near-term, two-year risks, and then they also talk about the long-term risks, 10 years out.
Green means anything to do with green, the environment, and our natural setting. And you can see that there are, what, five different, in the top 10, issues facing the environment, the challenges, the topic of this conference. On the longer term, there is actually even more, including-- I don't know if you can see that-- listed number 4 is biodiversity loss as one of the greatest concerns that lie before our leading thought leaders of the world today.
And that's really what we're talking about. I call it the biodiversity finance imperative. We are here talking about accounting and finance, after all. What are we actually talking about here? When we talk about the concept of biodiversity-- and I know there will be other presentations during the conference focused on this.
Here is a formal definition. Biodiversity is a contraction, in English, of the two words "biological" and "diversity," which describes the diversity of life on the planet. It includes all organisms, species, populations, genetic variations among species, and then the complete assemblages of communities and ecosystems that are supported by these organisms.
What we are talking about here as part of the imperative is that we, in our planet today, are facing erosion of our biodiversity. We call it biodiversity loss risk. What are we talking about? People estimate, the World Economic Forum itself has estimated that about $40 trillion of global GDP, which is about half, maybe a little less than half of the GDP of the world, is moderately or highly dependent on nature and its services.
We're talking also about the fact that mammals, birds, fish, reptiles and amphibian populations, species populations are actually declining and have declined by about 60% in the last four decades alone. The United Nations Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services-- that's a mouthful-- IPBES, which is our biodiversity scientists, the brain power, have argued that it is, in fact, human beings that are a cause of the damage to a lot of this nature capital. It is being eroded at a pace that is faster than it can be renewed.
A 2020 study, which I'll tell you a little bit more, entitled-- it was sponsored by the Paulson Institute, the Nature Conservancy, and a unit here at Cornell University, the Atkinson Center for Sustainability, has estimated that financial flows into biodiversity conservation, as of 2019, is about $124 billion-- at between $124 and $143 billion. They argue that this falls short of what is needed to arrest and stop biodiversity loss by about $700 to $867 billion per year over the course of the next decade. That is what is needed to slow the erosion of the biosphere.
A lot of those statistics that I'm quoting are featured in these reports. I encourage you, if you're interested, to study this and review them. This is one of the studies, the World Economic Forum study, entitled Nature Risk Rising. And you can see that there are three columns in which biodiversity experts think. They think about the biosphere on land, terrestrial ecosystems. They think about the biosphere in water, which we call oceanic ecosystems. And then we also talk about species and species loss.
And you can see some of the statistics associated with the rapid degradation of the biosphere that these studies are pointing to directly and associating, in the case of the IPBES, with human activity. Here is the graph of that shortfall. This is the study called Financing Nature. That's the Paulson Institute, Nature Conservancy, and Atkinson report that documents the biodiversity financing gap, the shortfall of somewhere between $700 and $850 billion a year per year over the course of the next decade. That is dramatic.
Here's a really interesting-- see the bar on the far left, the $124 to $140 billion that is currently being spent around the world to deal with conservation. Here's another graph of that. This is broken down into basically three parts. The dark green represents domestic government financing as a fraction of that $124 to $140 billion a year.
You can see, dear friends, that governments themselves represent the overwhelming fraction of the financing supply to slow the actual degradation of the biosphere. Private capital, which is the pink, in the top right corner, through various sources, represents, unfortunately, a relatively small fraction.
So the biodiversity finance challenge that lies before us is to meet that $700 to $850 billion shortfall by mobilizing private capital, to that end, private capital being a relatively small fraction of the financing that exists to date. And you also know that, of course, governments are extremely tapped out in terms of the pressures that are on them.
Now, the good news is that there is movement afoot in countries like the United States. Subnational units like the state of Maryland has enacted legislation. They, as you know, are a state on the east side of the country around this beautiful Chesapeake Basin area.
Water systems and species related to the water systems are vital to the economy of the state of Maryland. So they went ahead and passed what we argue in this country, the United States, as the first conservation law focused on mobilizing private capital to deal with species loss and degradation of the water systems in the Chesapeake Bay.
The United Kingdom has passed into law their environmental bill. It's, arguably, the first comprehensive environmental law passed by a national government that deals with biodiversity loss specifically. And we now have a framework coming forward.
This is the copy of-- it's what we call its beta version by a new organization, relatively new organization, called the Task Force for Nature-Related Financial Disclosures, which is designed to help build a framework within which corporations, private corporations, will supply information of value to investors, or prospective investors, that will help mobilize that capital towards strategic investment in helping to deal with biodiversity loss, and those corporations and their contributions to biodiversity loss.
Now, another bright, bright light here is what we experienced last year in the Kunming Montreal Conference of Parties, the 15th biennial Conference of Parties, which has laid down for the world-- and these were 190 different countries that signed on to what is now referred to as the Kunming Montreal Global Biodiversity framework. And it basically established as core principles by this conference of parties on what commitments need to be taken with respect to dealing with conservation and reduction in biodiversity loss.
And it is a direct policy response to that IPBES report that came out in 2019. And there are about 30-plus targets that are stipulated there that they will compel each other towards action. For example, target 2 is to ensure by the year 2030 at least 30% of areas of degraded terrestrial inland water and coastal and marine ecosystems will be under effective restoration. We call this the 30 by 30 target that is target number 2.
Target 10 actually talks about the importance of removing un-harmful subsidies issued by governments, national governments, subnational governments, that hasten biodiversity loss. Target 19 explicitly lays out a financial commitment of $200 billion per year for direct flows towards conservation and mitigation of biodiversity loss. And as you know, with that Paulson, TNC, and Atkinson report, that is not quite all that we likely need, but it is still a significant improvement on relative to how much money is moving in this direction.
When this agreement in late '22 was signed by the Conference of Parties, many declared this as a historical deal to protect nature. And we saw that there was going to be a significant mobilization in the financial services sector towards dealing with this, towards mobilizing the private capital needed for mitigation and adaptation to deal with biodiversity loss. So it has ignited energy and attention from many in the financial services sector.
And that's very exciting. Many corporations, as well as governments, are now issuing new and innovative sustainability-linked financial innovations, bonds, that are dealing specifically with biodiversity loss. An example would be dealing with degradation of the coastal waterways off the coast of Belize in the form of a very successful bond offering, a national sovereign bond offering. And it was argued to be one of the first so-called blue bonds. You certainly heard about green bonds. This is one of the first blue bonds.
For African national parks have seen an erosion in the population of rhinos due to various reasons, including poaching, by visitors. And they know that they need to dedicate resources towards that and to hasten the poaching problem for the rhino population. And they have issued a very innovative sustainability-linked bond that is earmarking towards the regeneration of the population of rhinos. It's called a rhino bond. These are coming forward.
Framing the research. So I'm talking to an audience of scholars out there. We need a framework within which to understand how to think about how finance needs to address this challenge. We as scholars have a role and responsibility for framing. Last year, my colleague John Tobin and I wrote an article published in Financial Management that basically represents the opening clarion call to the academy to focus more research energy in this area.
And in this study, we actually provide a formal definition of the term "biodiversity finance." So here it is. I'm going to read it to you. I believe we are the first ones to coin this definition. To guide the practice of raising and managing capital and using financial tools and economic incentives to support sustainable biodiversity management. Biodiversity finance is about leveraging and effectively managing economic incentives, policies, and private capital, underlined, underlined, underlined, to achieve the long-term being of nature.
And in this article-- I encourage you to read this article at Financial Management-- we actually talk about tracing the roots of this new subdiscipline of finance, on biodiversity finance, to the actual disciplines from which it spawned, including biodiversity itself. This is a book here by Richard Rhodes celebrating the life of E.O Wilson, who is the scientist, the ecologist, who was the first to coin the phrase in this article, on the left, "the biological diversity crisis." He is actually, in the book on the right, was the first to coin the term "biodiversity," and it's only four decades old, this origin story.
And in case you're wondering, those of our colleagues in the economics field have actually spent considerable time thinking about the modeling of what the concept of diversity, diversity of species represents. A big, big credit to, sadly, passed away Marty Weitzman, who wrote some of the earliest thought leadership in this space in several articles.
And a number of our colleagues have been publishing. Geoff Heal has a wonderful book on nature and the marketplace, where he talks about how these ecosystems represent a capital stock from which dividends in the form of services, from the waterways, from the land that we live around, from the species from which we draw, those represent dividends on the stock of capital. And he frames it that way, a very good book, and some other articles related to all of that.
So in this call for new research, one logically might ask, what are the big open questions that we can pursue? We as financial economists. Well, one of the big challenges that lie before us is data. Many of us do empirical work, and to date, there has not been an effort to compile a complete comprehensive database of biodiversity-linked deals. Many of them are now coming forward, including those rhino bonds and blue bonds that I've mentioned before.
As these come to fruition to the marketplace, they are successfully placed. We need to build a database of this so we can really scour and study the terms and conditions under which the success and failures of these deals came to be, including their pricing, who took them up, who bought them, the post-issuance performance of these contracts, whether they're Muni contracts, subnational unit contracts, sovereign bonds. Anything that is biodiversity-linked in terms of its covenant restrictions, we need to build this database.
Measurement is a key. Unlike many that work in the climate finance area, which is an honorable vocation as well-- I'm very, very proud to see that featured at this conference-- there, we have a great advantage for having a understood metric of outcomes in terms of metric tons of carbon dioxide equivalent or greenhouse gas emissions as a metric of outcomes that are what we would call a science-based target around which to model and measure.
Unfortunately, we don't have similarly agreed upon biodiversity loss policy goals in the IPBES. There are multiple dimensions of these. And measurement becomes more complicated in a multi-dimensional framework. I know my financial economists out there can handle this challenge, and I issue that as a formal challenge to you.
Another big challenge and many commercial vendors of ratings that are interestingly focused on biodiversity are coming forward towards determining what is a corporation's exposure to biodiversity loss. And I mean that in the double materiality context. I mean, not only what is it that a corporation in terms of its natural capital footprint is doing to hasten biodiversity loss, but also how biodiversity loss out there in the world is adversely impacting its financial and operating performance, double materiality.
And we have a lot of open questions here for many scholars to link up corporate exposures, their geographic footprint, to the biosphere, land, water systems, species loss. A very interesting identification challenge that lies before. And finally, when and not whether, but when will we start to see evidence that investors actually care about those biodiversity risk exposures, whether it's in the form of the sustainability-linked bonds or into the corporations themselves?
And I say, if not yet, then when, and how best to measure. I know my financial economist friends out there can take on this challenge, and I encourage you to pursue it. Here is a perspective. This is the environmental pillar of the ESG ratings that many of you are familiar with and may be working with in your own research at Morgan Stanley Capital International.
So much of our research has naturally focused on the climate and climate change, which is the top four categories in the environmental pillar. In some sense, one way to think about what I am calling for now is a new renewed focus on the natural capital, which is this subpillar of the environmental pillar focused on, for example, biodiversity and land use and raw material sourcing and water stress that may be impacted upon by the corporations themselves. That's the new focus that we're offering.
And just in case you're wondering, I know many of my colleagues since I first issued this call a couple of years ago and published this wonderful study with John Tobin, we know that a number of colleagues are coming forward, and including a number of our colleagues listed here.
I encourage you, if you are interested in this, to now stand on the shoulders of these that have come before you towards building on the questions that they have been asking to ask the next set of new questions. It's important, it's timely, it's now. And I am so, so grateful for your attention to this matter.
So here are my final thoughts before I close out this presentation. And I know that our colleagues in this Green Finance and Accounting Conference around the world has gathered not only academic scholars, but also representatives from industry to speak. I want you to know, while there are some promising new research studies, they are still few. There is more work to be done.
And the barriers to these new research ideas are just as great as those to new financial innovations to manage the biodiversity loss risk. There are still people that are saying that this is a risky research venture. And I'm not sure I have the tolerance for that risk, says young scholar eager and willing, but hesitant.
What I want to challenge to my industry friends who are in the audience is that the pursuit of this type of research program can be mutually beneficial. This is important for industry and for corporates all around the world, in every country around the world. And I know that we can de-risk the pursuit of this research if we see more and more partnerships between academics and industry partners.
I am, by here, by this closing of this keynote talk, asking for you to take a positive action towards developing building an academic industry partnership to focus on the big questions that lie before in biodiversity finance. Thank you so much for your attention. Thank you for the opportunity to speak to you. All the best.
Andrew Karolyi, Charles Field Knight Dean of the Cornell SC Johnson College of Business, delivered this keynote address to the 2024 Eighth Annual Shanghai Green Finance Conference.
In this talk, Andrew Karolyi discusses global biodiversity loss risk. Providing data on species decline and sources measuring the dependency of GDP on nature and its services, Karolyi provides figures on the funding needed to prevent biodiversity loss, as well on the funding currently being employed. There’s a significant gap between the two. Karolyi points to specific targets and commitments that have been set mobilizing public and private capital. In 2024, Karolyi and colleague John Tobin-de la Puente published the paper A Call for Biodiversity Finance , showing the accelerating loss of biodiversity on earth and the growing need for financial flows to be directed toward arresting these losses. They document the financing gap and then provide a framework and open research questions for financial economists to pursue in supporting sustainable biodiversity management.
Read more about SC Johnson College of Business faculty and research here .