AIIB: natural capital is the future of investment

Balancing the need to preserve biodiversity with the growth aspirations of lower and middle income economies remains a global challenge. The urgency of the situation calls for a critical re-evaluation, according to the Asian Investment Infrastructure Bank (AIIB), which calls for a shift in perspective that views nature itself as infrastructure.

Traditionally, development has seen the transformation of green landscapes into grey infrastructure. As economies increasingly place climate and nature considerations at the forefront, Erik Berglöf, chief economist at the AIIB, says it is not enough to be nature positive, or to take a ‘do no harm’ approach.

As such, the AIIB looks to lead a paradigm shift by redefining nature as infrastructure, releasing a report on its concept ‘Nature as Infrastructure’ at COP28 about what this means for future investments.

Nature as infrastructure

The AIIB takes a radical view on infrastructure, highlighting its inextricable connection with nature. Critically, it is about going beyond typical ideas about nature-based solutions or countering the impact of human development on nature, Mr Berglöf says.

On a macro scale, the AIIB reports the need to understand how the economic activity of countries and sectors depends on nature. At the micro level, there is a need to understand the intricacies of local ecosystems and the typically “unpriced” services they offer in all development decisions, Jang Ping Thia, principal economist in the Strategy, Policy and Budget department at the AIIB, says.

Building on the importance of nature itself lies in the understanding of nature’s potential as infrastructure. Where nature can provide infrastructure-like services, grey infrastructure should be carefully considered, and investments in nature’s restoration should be the norm rather than the exception, the report says.

It adds that where grey infrastructure may be necessary for development, there is a need to “design grey better”, regulate and minimise impact on nature.

Changing landscape of investment

Developing the right investment tools is critical, the AIIB reports. There is already a lot of investor interest in this space, Mr Berglöf says, “the problem is that we don't have real financial instruments yet.”

This involves improved pricing of nature’s services at the micro level, including usage charges, taxes on damages and permits, supported by adaptive local regulations. “Incentives and regulations must be improved to drive the right action and to develop the nature financing market,” Mr Thia says.

This paves the way for the development of wider financial instruments and markets, such as performance-linked bonds, policy-based lending, debt-for-nature swaps and nature credit markets.

“We must create a matrix to at least quantify sustainable nature practices,” Mr Thia says. “That needs to come into policy-maker and investor consciousness and slowly shift the market.” Regulation must drive it, he adds, although fundamentally this relies on “society’s willingness to change”. As such, informing countries and sectors at large to develop and gain support for regulation is important, Mr Thia says.

“Regulation and taxes stress behaviour, but this change is fundamentally underpinned by social attitudes towards the need. Without the right social attitudes, there will not be political support for the types of regulation or taxes required.”

Working with nature as infrastructure offers an “important opportunity” for countries with higher debt levels after following the Covid-19 pandemic, Mr Berglöf says. “If we start valuing the contributions that natural assets are making in these countries, that will enhance their creditworthiness and lower their lending costs.”

Multilateral development banks (MDBs) play a key role here, especially to assist lower-income countries, Mr Thia says.

Better governance, more capital

Developing private capital and institutional capital is critical to sustainable, nature-led growth, Mr Thia says; building the right financial instruments and metrics will help address existing institutional capital challenges.

Much of the transformational change behind the AIIB’s vision will “have to happen through private-sector investments — alone or in partnerships with the public sector,” Mr Thia says.

He adds that success relies on providing the tools that allow MDBs, investors and governments to measure the contribution to nature, using metrics that properly value natural capital.

MDBs can play an important role in supporting the development of enabling biodata infrastructure required to assess the state of nature and its management, Mr Berglöf says. 

Providing data on public and private investments to assess and inform on the impact on nature, as well as information on scientific and technological development that can be harnessed for projects, MDBs can catalyse new nature markets and lay the foundations for effective policies, regulations and standards.

Mr Berglöf points to specific investment and policy engagement to build this. “We are looking to do policy-based lending in the climate and nature space. That gives us another tool to work with governments to enact the proper regulation and help to develop local markets for carbon and nature credits.”

MDBs must work to develop opportunities for bankable nature projects across countries and sectors, Mr Thia says. “But it requires both sides of the same coin,” he adds. “You need the countries to create the bankable projects and you need a private sector willing to provide finances towards these bankable projects. If either side fails, the market will not take off.”

Alongside a combination of policy incentives, like short-term fiscal support and commercial investments, harnessing nature as infrastructure requires scientific research, effective implementation and engagement with local communities.

Ultimately, the report says, valuing nature as infrastructure will enable countries to undo the “crisis of our own doing”.