From Financing Nature Loss to Financing Recovery: Greening the Flows and Why Banks Matter
Written by Jenny McInnes, Senior Fellow
Banks are major financiers of the systems that drive deforestation and nature loss – the trade, the supply chains, and the agriculture on the ground. Global banks and local banks sit at different points in the same system, but between them they touch the whole value chain of every commodity driving deforestation. Working with banks is, therefore, key to understanding the transition, to green these financial flows, and to support real-world outcomes. But the systems around this finance are fragmented, poorly coordinated, and rarely organised around real landscape outcomes.
That is the starting point for this work. Banks are not bystanders to nature loss – they are already deeply embedded in the systems that drive it. The real question is not whether banks are exposed to deforestation risk, or even whether they are willing to act on it. It is how we can galvanise the collective action and practical architecture needed to shift their finance flows in support of the transition to nature-positive, climate-resilient landscapes.
Global banks operate on global scales. While their portfolios reach virtually every region of the world, the place-based perspective is not always visible to banking HQ teams in London, Dubai, New York, Hong Kong. Banks are increasingly confident in providing finance and investment in new forms to support nature, but the decisions are largely agnostic on place, and the finance is rarely sufficient to drive the tipping points needed to enable change to be felt on the ground.
In industrial strategy and place-based policy we think about agglomeration – the clustering of interventions to create more seismic impact – and it is this thinking that is critical to generate the ecological, political and financial de-risking required to achieve landscape-level impacts. A large proportion of the finance required for the transition to climate-resilient and nature-positive landscapes, that support the livelihoods and wellbeing of local communities, will need to come from local banks. Local banks in Emerging Markets and Developing Economies often need support to build the capacity, the risk appetite, and the liquidity, to provide the new forms of finance required.
Much of the response to deforestation risk to date has focused on policy. Clear guardrails are important: they help define risk appetite and set expectations. But while policy is necessary, it is not sufficient. According to Forest500, the majority of financial institutions with the highest exposure to deforestation still lack the policies required to tackle the issue – and even where policy exists, it doesn’t build the practical capability to act on it. Policy is a blunt tool for a systemic and diffuse problem; on its own, it does not enable the structural shifts needed across finance and the real economy.
The missing piece is the practical capability to translate ambition into investable, coordinated, collective action: understanding real corporate demand, articulating it in financial terms, aggregating across supply chains, actors and financing modalities, and connecting global capital with the local institutions that can deploy finance in place.
Banks thrive on replicability, standardisation, and the rapid origination and distribution of capital. Without aggregation and scale, even well-intentioned solutions struggle to gain traction. For global banks, this is hard because demand rarely flows neatly from clients to banks. Financing solutions are often unclear, untested, or insufficiently attractive on a one-to-one basis, and bespoke solutions for individual clients are resource-intensive.
Ecosystem, or finance, orchestration is the critical function for catalysing the impacts we need to see on the ground. We can learn from its success in unlocking finance for sustainable infrastructure in EMDEs, through better coordination between pipeline development in the real economy and finance providers to achieve bankability. Nature is a harder case: it requires a more nuanced understanding of the political economy of the system – what motivates the actors involved, what drives decision-making, how we make opportunities bankable.
Nature tech, carbon markets and impact bonds all have an important part to play, but current flows to these interventions are dwarfed by the existing financial flows that currently drive nature loss and degradation. Adding new instruments on top of a system, while important for crowding in new forms of investment, will not be sufficient to address the deeper roots of the problem.
Fundamentally of course this is not simply a finance question. It is a question of how we move from fragmented action to collective capacity in place. Not just more nature finance, but a reimagining of how finance serves living systems, local economies, and the people closest to the land. And better connectivity between local outcomes and global drivers. That is the thread running through everything at Ostara, and it’s the thread running through this work.
This work is inherently messy. Productive landscapes are messy. But they represent a portfolio of opportunities, where collective action can achieve tipping points. Bringing commercial players to the table requires a stronger focus on the business case, and clarity on the pathways to scale that can support articulation of that demand in financial terms. It requires aggregation across supply chains, actors and financing modalities. I suggest that more work is needed to support the coordination of financing opportunities between the real economy (demand-side) sectors and the finance (supply-side) providers.
The analysis behind this piece provides an overview of the evidence base for this approach. It shows the relative importance of banks in the existing finance flows for commodity value chains. It tries to identify some of the motivations of the actors involved, learning lessons from where previous interventions have succeeded or failed. It’s only the first part of the story, but it makes a solid case for the practical action required to unlock and green the critical finance flows influencing nature outcomes and place-based impacts. Specifically by increasing our focus on unlocking finance from banks – alongside the current efforts focused on investors and others – building the confidence of local institutions to green existing finance flows, and identifying other routes to mobilise finance beyond the immediate commodities – for example through infrastructure.
Download the full research findings here
Image credit: Alex Diaz / Unsplash
