The United Nations' aim to cease and reverse loss of biodiversity by 2030 is appearing to be increasingly challenging as the deadline approaches. A key bottleneck in fostering nature-positive investment is the absence of approaches that weave the value of natural assets into the decision making. These include lack of methods to accurately valuing natural capital, properly assessing risks and opportunities, obtaining relevant data etc. Consequently, nature has been largely missing in decision making.
In the recently published Asian Infrastructure Finance, we showcase the use of a recent tool, Natural Capital Valuation Model, developed by Arcadis for EBRD. The NCV Model assesses nature-related risks at a landscape scale, which allows for (a) identifying and prioritizing nature-positive investment opportunities and (b) assessing and improving a project’s nature performance. Particularly, the tool helps us to better understand the value of natural capital by quantifying various services provided by nature and how these can be optimized by infrastructure projects. We apply the tool to a project that AIIB is currently partnering with Government of China. The project. located in the Inner Mongolia region, aims to (a) improve the resilience of urban infrastructure around Ulanhot City by incorporating nature-based solutions, (b) harvest rainwater to improve groundwater level, (c) ecologically restore the Tao’er river and its wetland to improve biodiversity conservation and reduce flood and waterlogging risk and (d) support ecological treatment of abandoned quarries to reduce soil erosion and pollution.
The NCV model comprises of three main stages, with the first stage focusing on understanding the landscape by mapping the current landscape where the project is situated and how the landscape has changed over the last three decades. Not surprisingly, we find that the landscape has undergone a dramatic change, driven by strong economic growth and rapid urbanization. A sharp increase in urban area has been associated with a steady decline in wetlands, croplands, grasslands, shrublands, sparse vegetation and water bodies (Figure 1). This loss of natural and agricultural ecosystems led to a sizeable depletion of both biodiversity and the various ecosystem services provided by the landscape. The latter includes provisioning services like crop, meat and milk as well as regulating services like nutrient recycling, climate regulation and mitigation from natural hazards like floods. The volume and value of the ecosystem services is then computed through stakeholder consultations, surveys and existing literature.
By providing us with a detailed overview of the ecosystem services, the NCV model helps to identify interventions to be undertaken under the present project. For example, with an aim to reverse the decline in wetland and water areas, the project will restore riparian area along the Tao’er river and wetland, as well as increase the natural water storage capacity of the basin to reduce flood and water logging risk. The project also includes rainwater harvesting and storge systems that will utilize rainwater to recharge groundwater and enhance local ecological systems. Finally, the project seeks to amplify urban green spaces.
In the second stage, a natural capital risk assessment is undertaken highlighting the nature and the extent of risks in the landscape. This involves identifying the major risk areas and the degree to which they impact the natural capital and ecosystem services in the landscape as well as the local economy. The assessment shows that the region is highly vulnerable to a wide array of risks like reduced water availability, low water quality, rising temperature and changing precipitation patterns, land and soil degradation and habitat fragmentation and destruction (Figure 2). The risk assessment helps prioritize the interventions needed to augment natural capital under the current project. For example, with risks related to water availability and water quality being both very likely and having a significant impact, the interventions under the present project to harvest rainwater and improve storage systems to replenish ground water and increasing the natural water storage capacity of Tao’er river basin becomes vital. Similarly, the ecological treatment of abandoned quarries under the present project will also help mitigate risks related to land and soil degradation.
Once, the risk assessment is completed, the monetized value of the ecosystem is computed. This value is underpinned by estimating the net present value of the future stream of ecosystem services, which depends on the condition of the landscape and its ecosystems. Hence, to increase the value of ecosystem services, efforts should be made to increase the productivity, resilience, and lifetime of the various ecosystems.
Finally, in the third stage the model allows a comparison of alternate scenarios to be evaluated. Here we focus on four scenarios -- (a) the unsustainable scenario, which assumes a significant worsening of the ecosystem, (b) the baseline or business-as-usual (BAU) scenario, which assumes that the current project is not undertaken, (c) the project scenario, which includes the effect of the current project and (d) the sustainable or nature-positive scenario comprising all the necessary actions needed to achieve nature-positive outcomes at the landscape level.
A comparison between the Baseline and Project scenario indicates that the Inner Mongolia project would help in increasing the value of all ecosystem services (Figure 3). Majority of the benefits pertain to provisioning services with the value of crop, meat and milk provisioning services being 9% higher compared to the baseline. Water provisioning services, though small in quantitative terms, is most benefitted by the project, increasing by more than 30%. This is not surprising given the depletion in water and wetlands and the high risk-level associated with water availability and quality, identified in earlier stages. Various regulating services, although relatively smaller in scale compared to the provisioning services, also experience nearly doubling of value. The largest benefits result from improvement in flood and storm mitigation and soil quality regulation, which is expected given the project’s focus in these areas. Overall, the, NCV model finds that the Inner Mongolia project will result in ecosystem services being about 11% higher than the baseline scenario.
However, more can be done to augment the natural capital of the region. Additional investment to undertake the various necessary actions required to achieve nature-positive outcomes come under the sustainable scenario. In this scenario the value of the ecosystem services is about 10% higher than what would be achieved with the implementation of the Inner Mongolia project. Lastly, in the worst-case scenario, which is based on significant deterioration of landscape, the value of ecosystem services declines by 24.4% compared to the baseline.
Understanding the value of natural capital and assigning it the appropriate worth is essential to make informed assessments. This requires appropriate valuation, pricing and risk assessment tools. It is only then one can undertake decisions that would help in preserving and restoring the global stock of natural capital, in line with the nature-positive ambition.
Note: This blog is adapted from Chapter 5 of the Asian Infrastructure Finance 2023: Nature as Infrastructure, one of AIIB’s flagship publications. The full report can be downloaded here.
