Unbankable Transitions

In a bucolic corner of Greater Manchester, England, an unusual financial experiment is underway. Not so long ago, the owners of Yate Fold Farm near Bolton primarily earned their income from dairy production. The eighty cows that grazed the land were herded each morning by a father-and-son duo who often found themselves working seventy-hour weeks; the pasture was low grade, and the market for organic goods was becoming increasingly unstable and unreliable.

Today, Yate Fold Farm is home to one of the twenty-five “habitat banks” developed by the UK-based asset management firm Gresham House. The arrival of what the company’s managing director defines as a “new infrastructure asset class” came following the adoption of the Environment Act in 2021, which mandates developers to demonstrate that they have improved the biodiversity of the land they are building on by at least 10 percent—the technical term is Biodiversity Net Gain (BNG). Instead of doing this directly on the construction site, habitat banks allow developers to buy “Biodiversity Units” that enable them to meet their obligations off-site.

As part of the scheme, Environment Bank, a portfolio company within Gresham House’s British Sustainable Infrastructure Fund, agrees to lease low yield, high effort farmland for a period of thirty years to create new biodiversity habitats, like woodland or wetland. Its ecologists are shipped out to the habitat bank sites to work with and advise the landowners on how to manage the restoration process. In the case of Yate Fold Farm, a new breed of cattle will arrive to graze the land sustainably, for conservation, and “also enabling premium prices for the beef,” as the farm’s owner describes the new business model.

Meanwhile, companies like Aldi, Everton Football Club, and the National Grid are seeking planning permission from local authorities to turn to Environment Bank with the view to purchase Biodiversity Units, which will enable them to meet the new BNG requirements where it is not possible (or, perhaps, less cost-effective) to restore biodiversity on the new construction site. As the biodiversity of the habitat bank improves, so does the number of Biodiversity Units that the site is worth, meaning that Environment Bank can sell more of them, and the value of the “biodiversity asset” that Gresham House owns increases.

What’s not to like? Everyone makes a buck—or saves a few, in the case of the developers—and flora and fauna, which the over-farmed land hasn’t seen for centuries, return. Unfortunately, things are not so simple. There is every reason to predict that such attempts to render nature initiatives “investable” will be even less successful than they have been at pursuing decarbonization in energy and transport, not just because of the relatively nominal scale of financing efforts in the former vis-a-vis the latter, but also because of the particular uncertainties embedded within them. It is only by looking at the whole picture of climate financing flows—and the other sectors and material demands of the green transition—that we can begin to reckon with the fundamental limitations of our existing climate governance regime, and what alternatives to it might look like. 

Banking on investability

Habitat banks are the latest in a series of policy tools and financial instruments that have been developed over the past decade. They are underpinned by an approach to pursuing green transitions that have taken governments and economic commentators by storm.

The watchword of this new regime is “investability.” Under it, the choice to engage in a particular activity or implement a policy is guided by a simple question: Will this project succeed in attracting finance from the private sector? Wielding a plethora of instruments, governments and some multilateral and state development banks have sought to ease financial markets’ perception of risk when it comes to investing in infrastructure deemed critical to decarbonization, from wind farms and solar projects in renewable energy to electric battery systems in transport. These can include monetary and fiscal policy tools, such as the provision of public subsidies, loan guarantees, and tax credits, as well as regulatory policies that create more favorable or stable market conditions, such as guaranteed electricity grid access. The goal is invariably the same—in the words of the economist Daniela Gabor: “To ‘escort’ financial capital into de-risked asset classes.”

The investability regime is, in many ways, a continuation of earlier market-based governance approaches premised on the idea that internalizing future environmental and ecological damage into cost calculations would drive market actors to buy, sell, and invest in ways that were less harmful to the planet. But it also reflects the transformation of finance capital and the distribution of ownership in global markets since the 2008 financial crisis, characterized by the ascendancy of “asset manager capitalism” and, concomitantly, a shift in the state’s role in the economy—from fixing markets to actively creating and securing their conditions. Understanding the likely costs of environmental and ecological externalities is no longer thought to be enough; investors want to know that an investment is not only cheaper but more profitable relative to other opportunities. 

In the world of renewable energy, we can point to many instances where government efforts to de-risk infrastructure investments have yielded their desired effect of mobilizing private sector sources of financing. While it is not accurate to claim that this approach never works on these terms in practice, its realization more often entrenches existing power asymmetries between developers, utilities, and the public sector, exacerbating inequalities between the global North owners of infrastructure assets and the communities in which those assets are based.

Still, the investability regime in the electricity and energy transition is not working at the scale and pace required to save the planet. For all the triumphant cases that governments and multilateral development banks point to in their industrial strategies and annual reports, there are many others that failed to attract any interest from investors. This is all the more common in cases where direct subsidies are absent, even if other regulatory conditions and financial terms reduce the risks—and increase the potential profits—that would otherwise exist without any state intervention.

The whole picture

The enduring “net zero financing gap”—and the rate at which it has grown each year—is perhaps the biggest indictment of this regime, which consolidated in the years after the Paris Agreement’s adoption in 2015. In 2022, the Intergovernmental Panel on Climate Change concluded that investment requirements to limit global warming to below 1.5°C by 2050 were a factor of three to six greater than current levels. The Climate Policy Institute estimates that USD $6.2 trillion is required annually between 2023 and 2030, and USD $7.3 trillion by 2050, to achieve “net zero” globally—a total of almost USD $200 trillion. Total investments in climate finance only passed USD $1 trillion for the first time in 2022. Paradoxically, the financing gap remains the most common justification for pursuing green transitions through de-risking.

Beyond the scale of investments that are still needed is the stark unevenness of climate finance across sectors critical to not only decarbonization, but also climate change adaptation and biodiversity restoration, which is also inextricably linked to mitigation. 

When we take a look at the totality of climate change mitigation finance across the economy, using data from the Climate Policy Initiative, we see that private sector resources have been overwhelmingly channeled toward just two sectors—energy and transport—at 44 percent and 29 percent of the global total in 2021/2022, respectively. In contrast, less than 4 percent of the total in this same period was directed toward the next-largest emitting sectors, agriculture and industry, even though, according to the Intergovernmental Panel on Climate Change, these two industries hold more potential to contribute to mitigation than energy and transport. Perhaps most damningly, where an estimated USD $1.15 trillion of climate finance was spent on mitigation in 2021/2022, just one tenth of this figure—USD $114 billion—was dedicated to activities for adaptation or that had “dual” benefits, which includes native forestry measures. The private sector contributed just 2 percent of the total tracked adaptation finance.

In the realm of biodiversity, failure to achieve global targets has similarly been laid at the chasm between required financing and actual spending, with investment in nature purported to be five to seven times lower than required to reverse biodiversity loss. Increasingly, as the ecological economists Katie Kedward, Sophus zu Ermgassen, and colleagues highlight, the investability regime has also come to dominate governance approaches to conservation. But here, too, there is an inherent conflict between what conservation requires—small scale, patient stewardship, where returns (if they exist at all) have long horizons—and what finance capital prioritizes—certainty of short-term returns, ideally at scale. 

If, as Brett Christophers argues in the case of wind and solar energy, it is the absence of attractive profits relative to other potential investments that have undermined the success of the renewables transition, these dynamics are only more redoubtable in other sectors, and in the pursuit of objectives beyond mitigation. Fundamentally, this explains why experiments like the habitat bank scheme in the UK will likely remain peripheral within private finance—and will not be the silver bullet in biodiversity that its proponents promise.

Indeed, carbon capture initiatives in native forestry, agricultural transitions, and nature restoration projects are also beset by radical uncertainties, not least those associated with the breakdown of our ecosystems themselves. Even in countries like the United Kingdom, far from the most affected by planetary crisis, it is impossible to know how a patch of land will respond to ecologists’ attempts at rewilding, given its delicate relationship with changing weather, temperature, and species migration patterns. Perhaps most critically, unlike in renewable energy and transport, there is no real commodity at the end of a biodiversity asset investment. The value of the credit—or the number of Biodiversity Units, in the case of the habitat banks—depends entirely on the endurance of the governance system within which it is embedded. How this value is measured is, therefore, always at risk of total overhaul and social contestation. In a world where backsliding on climate commitments has become a feature of the global political landscape, regulators’ promises to stick to current frameworks are likely to ring hollow on Wall Street.

Often, the expansion of initiatives in areas such as native forestry and agriculture requires the displacement of incumbent, ecologically harmful actors on a temporal and spatial horizon that is much shorter and wider than in, for example, energy and transport.¹ It is an existential problem that fossil fuel production can continue and even expand as renewable energy capacity also increases. But where renewable energy infrastructure does not require the immediate displacement of fossil fuel assets—the construction of a new wind farm and a new fracking site can begin in two different areas of the same US state—finance capital does not view the former as an immediate threat to the latter. At least in theory, the decline of fossil fuel capacity can be “managed,” gradually and over time, and markets will have time to prepare. The same cannot be said for green transition initiatives that compete with existing uses of the same land and infrastructure. Many native forestry expansion projects, for example, require the cessation of plantation pulping and logging by powerful and often oligopolistic firms. Similar dynamics can exist in sectors like agriculture and mining, where the “transition risks” that repel potential investors include the upfront costs of retrofitting or replacing existing technologies and production processes that are spatially bound, the process of which also reduces output in the short term. 

Investability is a scale where investors’ interests are contingent on a multitude of material uncertainties and risks, their ability to manage them, and governments’ ability to signal that they have been or can be reduced. 

Learning from unbankable sectors

Notwithstanding some important critical voices, researchers and policy analysts interested in the political economy of green transitions in the global North have overwhelmingly focused on energy and transport sectors. The same cannot be said for many countries in the global South, where the role of the natural world in planetary breakdown and resistance to it has long been at the heart of environmental scholarship.

Analyzing differences in the level and nature of climate finance flows across different sectors is also critical for helping us to make sense of the limitations of the investability regime within specific sectors. My own research has attempted to do something like this, beginning from the premise that sectoral initiatives within the domestic, economy-wide green transition strategies that many governments have developed since the Paris Agreement are characterized by varying degrees of investability. In most cases, achieving carbon neutrality would require the implementation of every policy in these plans,  but regardless of how significant their contribution to decarbonization was projected to be, the extent of efforts to develop state capacity for their implementation differed widely. In some policy areas—notably green hydrogen—governments had invested huge sums in recruiting new specialist teams that were well equipped to manage and coordinate public investments and infrastructure projects. In other policy areas, like afforestation with native trees in Chile and alternative agriculture in Denmark, however, progress had been comparatively weaker and slower, even though domestically these were the most critical mitigation sectors. Governments were investing in and strategically developing state capacity where it could help to render initiatives and sectoral transitions investable insofar as it could provide assurance to potential financiers, underwriting a particular form of finance capital accumulation-based growth in the process.

The uneven development of state capacity across planet-critical sectors is concerning not just in terms of what it implies for the pursuit of carbon neutrality today, but for how it helps to lock in contemporaneous transition pathways and growth models into the future. State capacity is of course not set in stone; the assemblage of organizations that make up contemporary governments are always evolving and adapting in various ways. But there is a degree of path dependence; what governments do or don’t do today matters for what they will be able to do tomorrow. An agriculture ministry that only develops the capacity to distribute EU farming subsidies effectively in the 2020s will struggle to drive sectoral transformation using both carrots and sticks—market incentives as well as discipline—in the 2030s. 

Beyond deepening our understanding of how green transitions are unfolding, a political economy of these other planet-critical sectors may also enable us to see more clearly what alternative governance approaches and modes of statehood could and should look like—ways of organizing our economies that also benefit the transition of the more investable sectors. What resources do we need to restore the low-grade farmland of Greater Manchester, or Patagonia’s native forests? How can we do so, at scale, in the absence of finance capital’s contingent flirtations? Where the lure of investability doesn’t exist—and where our states’ pursuits of it only end in lament—finance capital can’t trap us.