Hello from London where all eyes are on the Budget, which is expected to be one of the biggest tax-raising plans in a generation, as chancellor Rachel Reeves looks to stimulate growth against a challenging fiscal backdrop. The government’s plans for the warm homes scheme to insulate inefficient houses will be closely watched, as will the UK’s target for international climate finance — a crucial signal ahead of COP29 in Baku.
But Labour’s push to deliver economic revival will also carry lessons beyond Britain. Can this government create a macroeconomic environment broadly supportive of investment, and what specific vehicles for the energy transition will it prioritise? We’ll explore those plans — as well as lessons about the outlook for green growth in advanced democracies — later this week.
First, Simon has a report on two of the hottest topics at the ongoing UN COP16 biodiversity summit in Colombia: over payment for the use of genetic data, and the nascent field of biodiversity credits. — Lee Harris
The impact investing sector has been growing, with fund launches from the biggest private equity firms — but it still accounts for a small portion of the asset management industry. Can it gain much greater scale — and can it achieve competitive returns alongside social and environmental benefits? That will be the subject of our next Moral Money Forum deep dive report, and we want to hear your views. Have your say here.
digital sequencing
To protect nature, should it cost more to develop life-saving drugs?
Of all the moral dilemmas we’ve covered in this newsletter, few have been as fascinating as the one being thrashed out at COP16 over so-called “digital sequence information” (DSI).
This wonky term refers to genetic data gathered by researchers around the world, and typically made available on public open-source databases. Pharmaceutical, biotechnology and agricultural technology companies have free access to this information, which they use extensively to make products that can tackle disease and boost food production (and yield tidy profits).
Sounds like a win-win? Not if you’re among the many developing-nation governments and communities who are protesting the large-scale use of genetic data sourced from their ecosystems, without any sharing of the increasingly lucrative proceeds.
At the last biodiversity COP in Montreal, nations agreed to create a global mechanism to enable fair sharing of benefits from DSI. At COP16 this week, they’re trying to figure out how this will work. And some of the measures under discussion could have major implications for big business.
With just three days of the conference to go, a rough draft agreement emerged yesterday that gave a sense of the direction of travel. It included a range of options, including a new proposal with details of how companies should contribute to the new multilateral fund.
“Large companies” — which could have as little as $50mn in annual sales or $5mn in assets — would be expected to contribute 1-2 per cent of their profits or 0.1-0.2 per cent of their revenue, if they’re in a sector that benefits from DSI. The draft makes clear that negotiators are still debating whether these contributions would be voluntary, or mandatory requirements to be enforced by governments. Talks to hammer out these details were still ongoing late last night. (Readers keen for a deeper dive into some of the key issues should check out this handy new five-pager from a team at the London School of Economics, whose work has been influential in these negotiations.)
Companies in the relevant sectors have been pushing back hard. The global trade body for the pharmaceutical industry warned that a mandatory levy “would increase costs across the board, disproportionately impacting cutting-edge sectors that may rely on efficient access to DSI to drive innovation”.
A 1 per cent levy on corporate profits would be “completely prohibitive” for companies seeking to do research in this area, claimed Dominic Muyldermans, a lawyer representing CropLife International, a lobby group for agricultural companies.
He and other industry representatives say that this measure would deter companies from engaging in research that could help save lives or promote food security, to the overall detriment of mankind.
There’s no question that this data is a potent tool for the development of new drugs and crop varieties. The possibilities for research using DSI are already being dramatically expanded by artificial intelligence, as is explained in this interesting paper from Basecamp Research, a pioneer in that space.
There’s also the fact that the US — uniquely among UN members, except for the Holy See — is not a party to the UN biodiversity convention under which these talks are being held. That’s raising worries that the new rules could give US pharmaceutical groups like Pfizer a slight competitive boost against European rivals such as AstraZeneca.
But none of this seems to deal a knockout blow to the argument that, as companies’ profits from this area soar, they should share a small proportion of those earnings with the countries whose ecosystems they rely on for genetic data. By funding continued protection of biodiversity, that money could help preserve those genetic resources, to the long-term benefit of us all (not least Big Pharma). (Simon Mundy)
biodiversity credit market
The case for regulating biodiversity credits
“No offsets!” read the sign brandished by one protester at a small demonstration at COP16 on Monday. The protest took place shortly before an International Advisory Panel on Biodiversity Credits (IAPB) event that unveiled its new framework on how these nature-focused instruments should be developed and used.
It’s not hard to see why some people don’t like the sound of this. The market in carbon credits — which are mostly linked to projects that aim to prevent carbon emissions — has been a source of relentless controversy over the past couple of years, with allegations that many projects have exaggerated their impact.
To carbon credit sceptics, biodiversity credits — which are linked to projects that protect and restore natural ecosystems — might sound like an even worse idea. Will we end up with companies wiping out a herd of rhino in one country, and “offsetting” it by protecting a band of gorillas somewhere else?
Absolutely not, I was told yesterday in a conversation with Sylvie Goulard and Amelia Fawcett, co-chairs of the IAPB, a multi-stakeholder body set up with funding from the French and UK governments. The new framework makes clear that companies should seek to avoid negative impacts on nature as much as possible, using credits for offsetting only as a last resort. It also specifies that this use of credits should be “local-to-local and like-for-like” — supporting projects in the same area, to benefit the same type of ecosystem that was damaged.
Crucially — in contrast with many in the carbon credit market — the IAPB stresses that biodiversity credits should not be considered fungible, and are not suitable for trading in a secondary market. Instead, buyers should treat this as a long-term investment and build a deep understanding of the projects that provide their credits.
“This is infrastructure finance — nature infrastructure finance,” Fawcett said. “It’s primary deployment of capital, not secondary.”
Still, what will incentivise companies to buy these credits — especially after the controversy that has prompted many to steer away from the carbon credit market?
Goulard and Fawcett noted the increasing interest among companies in “nature-positive” practices, as well as the growing adoption of the Taskforce for Nature-related Financial Disclosures’ reporting framework, which asks companies to disclose their impacts on nature.
But mandatory requirements could prove a bigger source of growth. A minority of countries including the US and UK already require companies to make nature-positive investments to compensate for damage to ecosystems from the construction of buildings or infrastructure.
Properly certified and regulated biodiversity credits, Goulard and Fawcett argued, could provide an efficient way of deploying these mandatory investments — which are likely to grow significantly as other countries introduce similar requirements. If governments drag their feet on regulating this market — as they have with carbon credits — that will be a problem, they added.
“If this is a financial instrument, it should be treated like one,” Goulard said. “What we’re proposing for this market is the way markets are usually controlled.” (Simon Mundy)
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